MANAGEMENT’S
DISCUSSION AND ANALYSIS



March 6, 2013 – The following
Management’s Discussion and Analysis of financial results (“MD&A”) as provided by the management of Bellatrix
Exploration Ltd. (“Bellatrix” or the “Company”) should be read in conjunction with the audited consolidated
financial statements of the Company for the years ended December 31, 2012 and 2011. This commentary is based on information available
to, and is dated as of, March 6, 2013. The financial data presented is in Canadian dollars, except where indicated otherwise.



CONVERSION: The term barrels of oil
equivalent (“boe”) may be misleading, particularly if used in isolation. A boe conversion ratio of six thousand cubic
feet of natural gas to one barrel of oil equivalent (6 mcf/bbl) is based on an energy equivalency conversion method primarily
applicable at the burner tip and does not represent a value equivalency at the wellhead. Given that the value ratio based on the
current price of crude oil as compared to natural gas is significantly different from the energy equivalency of 6:1, utilizing
a conversion on a 6:1 basis may be misleading as an indication of value. All boe conversions in this report are derived from converting
gas to oil in the ratio of six thousand cubic feet of gas to one barrel of oil.



INITIAL PRODUCTION RATES: Initial production
rates disclosed herein may not necessarily be indicative of long-term performance or ultimate recovery.



ADDITIONAL GAAP MEASURES: This Management’s
Discussion and Analysis and the accompanying report to shareholders and financial statements contain the term “funds flow
from operations” which should not be considered an alternative to, or more meaningful than “cash flow from operating
activities” as determined in accordance with generally accepted accounting principles (“GAAP”) as an indicator
of the Company’s performance. Therefore reference to funds flow from operations or funds flow from operations per share
may not be comparable with the calculation of similar measures for other entities. Management uses funds flow from operations
to analyze operating performance and leverage and considers funds flow from operations to be a key measure as it demonstrates
the Company’s ability to generate the cash necessary to fund future capital investments and to repay debt. The reconciliation
between cash flow from operating activities and funds flow from operations can be found in this Management’s Discussion
and Analysis. Funds flow from operations per share is calculated using the weighted average number of shares for the period.



This Management’s Discussion and
Analysis and the accompanying report to shareholders and financial statements also contain the term total net debt and net debt.
Total net debt is calculated as long-term debt plus the liability component of the convertible debentures and the net working
capital deficiency (excess) before short-term commodity contract assets and liabilities and current finance lease obligations.
Net debt is calculated as long-term debt plus the net working capital deficiency (excess) before short-term commodity contract
assets and liabilities and current finance lease obligations. Management believes these measures are useful supplementary measures
of the total amount of current and long-term debt.



NON-GAAP MEASURES: This Management’s
Discussion and Analysis and the accompanying report to shareholders also contains other terms such as net profit before certain
non-cash items and operating netbacks, which are not recognized measures under GAAP. Net profit before certain non-cash items
is calculated as net profit (loss) per the Consolidated Statement of Comprehensive Income, excluding the non-cash impairment loss,
net unrealized gain or loss on commodity contracts, gain on property acquisition, and gain or loss on property dispositions net
of the deferred tax impact on these adjustments. Operating netbacks are calculated by subtracting royalties, transportation, and
operating expenses from revenues before other income. Management believes these measures are useful supplemental measures of firstly,
the amount of net profit before certain non-cash items, and secondly, the amount of revenues received after transportation, royalties
and operating expenses. Readers are cautioned, however, that these measures should not be construed as an alternative to net income
determined in accordance with GAAP as measures of performance. Bellatrix’s method of calculating these measures may differ
from other entities, and accordingly, may not be comparable to measures used by other companies.



Additional information relating to the
Company, including the Bellatrix’s Annual Information Form, is available on SEDAR at www.sedar.com.



1







FORWARD LOOKING STATEMENTS: Certain
information contained herein and in the accompanying report to shareholders may contain forward looking statements including management’s
assessment of future plans and operations, drilling plans and the timing thereof, commodity price risk management strategies,
2013 capital expenditure budget, the nature of expenditures and the method of financing thereof, expected 2013 average production
and exit rate, anticipated liquidity of the Company and various matters that may impact such liquidity, expected 2013 operating
expenses and general and administrative expenses, expected costs to satisfy drilling commitments and method of funding drilling
commitments, commodity prices and expected volatility thereof, estimated amount and timing of incurring decommissioning liabilities,
plans to utilize pad drilling and effect thereof, use of funds from property dispositions, timing of closing of joint venture
agreement, the effect of certain acquisitions, and plans for facility construction may constitute forward-looking statements under
applicable securities laws and necessarily involve risks including, without limitation, risks associated with oil and gas exploration,
development, exploitation, production, marketing and transportation, loss of markets, volatility of commodity prices, currency
fluctuations, risks related to satisfaction of conditions precedent to closing of joint venture agreement, imprecision of reserve
estimates, environmental risks, competition from other producers, inability to retain drilling rigs and other services, incorrect
assessment of the value of acquisitions, failure to realize the anticipated benefits of acquisitions, delays resulting from or
inability to obtain required regulatory approvals and ability to access sufficient capital from internal and external sources.
Events or circumstances may cause actual results to differ materially from those predicted, as a result of the risk factors set
out and other known and unknown risks, uncertainties, and other factors, many of which are beyond the control of Bellatrix. In
addition, forward-looking statements or information are based on a number of factors and assumptions which have been used to develop
such statements and information but which may prove to be incorrect and which have been used to develop such statements and information
in order to provide shareholders with a more complete perspective on Bellatrix’s future operations. Such information may
prove to be incorrect and readers are cautioned that the information may not be appropriate for other purposes. Although the Company
believes that the expectations reflected in such forward-looking statements or information are reasonable, undue reliance should
not be placed on forward-looking statements because the Company can give no assurance that such expectations will prove to be
correct. In addition to other factors and assumptions which may be identified herein, assumptions have been made regarding, among
other things: the impact of increasing competition; the general stability of the economic and political environment in which the
Company operates; the timely receipt of any required regulatory approvals; the ability of the Company to obtain qualified staff,
equipment and services in a timely and cost efficient manner; drilling results; the ability of the operator of the projects which
the Company has an interest in to operate the field in a safe, efficient and effective manner; the ability of the Company to obtain
financing on acceptable terms; field production rates and decline rates; the ability to replace and expand oil and natural gas
reserves through acquisition, development of exploration; the timing and costs of pipeline, storage and facility construction
and expansion and the ability of the Company to secure adequate product transportation; future commodity prices; currency, exchange
and interest rates; the regulatory framework regarding royalties, taxes and environmental matters in the jurisdictions in which
the Company operates; and the ability of the Company to successfully market its oil and natural gas products. Readers are cautioned
that the foregoing list is not exhaustive of all factors and assumptions which have been used. As a consequence, actual results
may differ materially from those anticipated in the forward-looking statements. Additional information on these and other factors
that could effect Bellatrix’s operations and financial results are included in reports on file with Canadian and US securities
regulatory authorities and may be accessed through the SEDAR website (www.sedar.com), and at Bellatrix’s website
(www.bellatrixexploration.com). Furthermore, the forward-looking statements contained herein are made as at the date hereof
and Bellatrix does not undertake any obligation to update publicly or to revise any of the included forward-looking statements,
whether as a result of new information, future events or otherwise, except as may be required by applicable securities laws.



The reader is further cautioned that
the preparation of financial statements in accordance with GAAP requires management to make certain judgments and estimates that
affect the reported amounts of assets, liabilities, revenues and expenses. Estimating reserves is also critical to several accounting
estimates and requires judgments and decisions based upon available geological, geophysical, engineering and economic data. These
estimates may change, having either a negative or positive effect on net earnings as further information becomes available, and
as the economic environment changes.



2







Overview and Description of the Business



Bellatrix Exploration Ltd. (“Bellatrix”
or the “Company”) is a Western Canadian based growth oriented oil and gas company engaged in the exploration for,
and the acquisition, development and production of oil and natural gas reserves in the provinces of Alberta, British Columbia
and Saskatchewan.



Bellatrix’s common shares and convertible
debentures are listed on the Toronto Stock Exchange under the symbols BXE and BXE.DB.A, respectively, and the common shares of
Bellatrix trade on the NYSE MKT under the symbol BXE.



Cardium Joint Venture



Bellatrix has entered into a joint venture
agreement with a Seoul Korea based company (“JV Partner”), to accelerate development of Bellatrix’s extensive
undeveloped Cardium land holdings in west-central Alberta. Under the terms of the agreement, the JV Partner will contribute 50%,
or CDN$150 million, to a $300 million joint venture (the “Joint Venture”) to participate in an expected 83 Cardium
well program. Under the agreement, the JV Partner will earn 33% of Bellatrix’s working interest in the Cardium well program
until payout (being recovery of the JV Partner’s capital investment plus an 8% return on investment) on the total program,
which is expected to occur prior to a maximum of 7 years, reverting to a 20% working interest after payout. The effective date
of the agreement is April 1, 2013 but with the ability of the JV Partner to elect to invest in the wells drilled between January
1 and up to April 30, 2013. Certain conditions precedent are expected to be satisfied or waived by April 22, 2013 which is expected
to enable closing to occur on or before April 30, 2013. Bellatrix will be required to provide a guarantee of the return of the
JV Partner’s capital investment of up to $30 million if not recovered within 7 years.



Fourth Quarter 2012



|HIGHLIGHTS                                         |  | Three months ended December 31, |       
|-------------------------------------------------- |  | ------------------------------- | ------
|(CDN$000s except share and per share amounts)      |  | 2012                            |       
|FINANCIAL                                          |  |                                 |       
|Revenue (before royalties and risk management (1)) |  |                                 | 62,283
|                                                   |  |                                 |       
|Funds flow from operations (2)                     |  |                                 | 29,865
|Per basic share (6)                                |  | $                               | 0.28  
|Per diluted share (6)                              |  | $                               | 0.26  
|Cash flow from operating activities                |  |                                 | 32,007
|Per basic share (6)                                |  | $                               | 0.30  
|Per diluted share (6)                              |  | $                               | 0.28  
|Net profit before certain non-cash items (5)       |  |                                 | 7,299 
|Per basic share (6)                                |  | $                               | 0.07  
|Per diluted share (6)                              |  | $                               | 0.07  
|Net profit (loss)                                  |  |                                 | 9,251 
|Per basic share (6)                                |  | $                               | 0.09  
|Per diluted share (6)                              |  | $                               | 0.08  
|Exploration and development                        |  |                                 | 32,083
|Corporate and property acquisitions                |  |                                 | 20,965
|Capital expenditures – cash                        |  |                                 | 53,048
|Property dispositions – cash                       |  |                                 | 10    
|Non-cash items                                     |  |                                 | 27,487
|Total capital expenditures – net                   |  |                                 | 80,545



3







|                                                                                                             |  |          |  | Three months ended December 31, |            
|------------------------------------------------------------------------------------------------------------ |  | -------- |  | ------------------------------- | -----------
|(CDN$000s except share and per share amounts)                                                                |  |          |  | 2012                            |            
|OPERATING                                                                                                    |  |          |  |                                 |            
|Average daily sales volumes                                                                                  |  |          |  |                                 |            
|Crude oil, condensate and NGLs                                                                               |  | (bbls/d) |  |                                 | 5,730      
|Natural gas                                                                                                  |  | (mcf/d)  |  |                                 | 78,195     
|Total oil equivalent                                                                                         |  | (boe/d)  |  |                                 | 18,763     
|Average prices                                                                                               |  |          |  |                                 |            
|Light crude oil and condensate                                                                               |  | ($/bbl)  |  |                                 | 82.58      
|NGLs (excluding condensate)                                                                                  |  | ($/bbl)  |  |                                 | 38.84      
|Heavy oil                                                                                                    |  | ($/bbl)  |  |                                 | 65.30      
|Crude oil, condensate and NGLs                                                                               |  | ($/bbl)  |  |                                 | 69.55      
|Crude oil, condensate and NGLs (including risk management (1))                                               |  | ($/bbl)  |  |                                 | 72.11      
|Natural gas                                                                                                  |  | ($/mcf)  |  |                                 | 3.46       
|Natural gas (including risk management (1))                                                                  |  | ($/mcf)  |  |                                 | 3.67       
|Total oil equivalent                                                                                         |  | ($/boe)  |  |                                 | 35.67      
|Total oil equivalent (including risk management(1))                                                          |  | ($/boe)  |  |                                 | 37.30      
|Statistics                                                                                                   |  |          |  |                                 |            
|Operating netback (4)                                                                                        |  | ($/boe)  |  |                                 | 19.20      
|Operating netback (4) (including risk management (1))                                                        |  | ($/boe)  |  |                                 | 20.83      
|Transportation                                                                                               |  | ($/boe)  |  |                                 | 0.70       
|Production expenses                                                                                          |  | ($/boe)  |  |                                 | 8.91       
|General & administrative                                                                                     |  | ($/boe)  |  |                                 | 2.54       
|Royalties as a % of sales after transportation                                                               |  |          |  |                                 | 20         
|DILUTED WEIGHTED AVERAGE SHARES                                                                              |  |          |  |                                 |            
|Diluted weighted average shares – net profit (loss) (6)                                                      |  |          |  |                                 | 118,931,047
|Diluted weighted average shares – funds flow from operations and cash flow from operating activities (2) (6) |  |          |  |                                 | 118,931,047
|SHARE TRADING STATISTICS                                                                                     |  |          |  |                                 |            
|TSX and Other(7)(CDN$, except volumes) based on intra-day trading                                            |  |          |  |                                 |            
|High                                                                                                         |  |          |  |                                 | 4.47       
|Low                                                                                                          |  |          |  |                                 | 3.59       
|Close                                                                                                        |  |          |  |                                 | 4.27       
|Average daily volume                                                                                         |  |          |  |                                 | 842,840    
|NYSE MKT(8)(US$, except volumes) based on intra-day trading                                                  |  |          |  |                                 |            
|High                                                                                                         |  |          |  |                                 | 4.54       
|Low                                                                                                          |  |          |  |                                 | 3.69       
|Close                                                                                                        |  |          |  |                                 | 4.28       
|Average daily volume                                                                                         |  |          |  |                                 | 39,079     



(1)The
Company has entered into various commodity price risk management contracts which are considered to be economic hedges. Per unit
metrics after risk management includes only the realized portion of gains or losses on commodity contracts.



The Company does not apply hedge accounting
to these contracts. As such, these contracts are revalued to fair value at the end of each reporting date. This results in recognition
of unrealized gains or losses over the term of these contracts which is reflected each reporting period until these contracts
are settled, at which time realized gains or losses are recorded. These unrealized gains or losses on commodity contracts are
not included for purposes of per share metrics calculations disclosed.



(2)The
highlights section contains the term “funds flow from operations” which should not be considered an alternative to,
or more meaningful than cash flow from operating activities as determined in accordance with generally accepted accounting principles
(“GAAP”) as an indicator of the Company’s performance. Therefore reference to additional GAAP terms of diluted
funds flow from operations or funds flow from operations per share may not be comparable with the calculation of similar measures
for other entities. Management uses funds flow from operations to analyze operating performance and leverage and considers funds
flow from operations to be a key measure as it demonstrates the Company’s ability to generate the cash necessary to fund
future capital investments and to repay debt. The reconciliation between cash flow from operating activities and funds flow from
operations can be found further in the MD&A. Funds flow from operations per share is calculated using the weighted average
number of common shares for the period.



4







(3)  Net
debt and total net debt are considered additional GAAP terms. The Company’s calculation of total net debt includes the liability
component of convertible debentures and excludes deferred liabilities, long-term commodity contract liabilities, decommissioning
liabilities, long-term finance lease obligations and the deferred tax liability. Net debt and total net debt include the net working
capital deficiency (excess) before short-term commodity contract assets and liabilities and current finance lease obligations.
Net debt also excludes the liability component of convertible debentures. A reconciliation between total liabilities under GAAP
and total net debt and net debt as calculated by the Company is found further in the MD&A.



(4)  Operating
netbacks is considered a non-GAAP term. Operating netbacks are calculated by subtracting royalties, transportation, and operating
costs from revenues before other income.



(5)  Net
profit before certain non-cash items is considered a non-GAAP term. Net profit before certain non-cash items is calculated as
net profit (loss) per the Consolidated Statement of Comprehensive Income, excluding the impairment loss (reversal) on property,
plant and equipment, the unrealized gain or loss on commodity contracts, the gain on property acquisition, and the gain or loss
on property dispositions, net of deferred tax impacts on each item. The Company’s reconciliation between the net profit
and net profit before certain non-cash items is found in this MD&A.



(6)  Basic
weighted average shares for the three months ended December 31, 2012 were 107,734,134 (2011: 107,397,265).



In computing weighted
average diluted earnings per share for the three months ended December 31, 2012, a total of 1,375,484 common shares were added
to the denominator as a consequence of applying the treasury stock method to the Company’s outstanding share options and
a total of 9,821,429 common shares issuable on conversion of convertible debentures were also added to the denominator as they
were dilutive, resulting in diluted weighted average common shares of 118,931,047. In computing weighted average diluted earnings
per share for the three months ended December 31, 2011, a total of 1,951,780 common shares were added to the denominator as a
consequence of applying the treasury stock method to the Company’s outstanding share options and a total of 9,821,429 common
shares issuable on conversion of convertible debentures were excluded from the denominator as they were not dilutive, resulting
in diluted weighted average common shares of 107,397,265.



In computing weighted average diluted
net profit before certain items per share for the three months ended December 31, 2012, a total of 1,375,484 (2011: 1,951,780)
common shares were added to the denominator as a consequence of applying the treasury stock method to the Company’s outstanding
share options as they were dilutive, and a total of 9,821,429 (2011: 9,821,429) common shares issuable on conversion of convertible
debentures were excluded from the denominator as they were not dilutive, resulting in diluted weighted average common shares of
109,109,618 (2011:109,349,045).



In computing weighted average diluted
cash flow from operating activities and funds flow from operations per share for the three months ended December 31, 2012, a total
of 1,375,484 (2011: 1,951,780) common shares were added to the denominator as a consequence of applying the treasury stock method
to the Company’s outstanding share options and a total of 9,821,429 (2011: 9,821,429) common shares issuable on conversion
of convertible debentures were also added to the denominator as they were dilutive, resulting in diluted weighted average common
shares of 118,931,047 (2011: 119,170,474). As a consequence, a total of $0.8 million (2011: $0.8 million) for interest accretion
expense (net of income tax effect) was added to the numerator.



(7)TSX
and Other includes the trading statistics for the Toronto Stock Exchange and other Canadian trading markets.



(8)The
Company’s common shares commenced trading on the NYSE MKT on September 24, 2012.



As detailed previously in this Management’s
Discussion and Analysis, funds flow from operations is a term that does not have any standardized meaning under GAAP. Funds flow
from operations is calculated as cash flow from operating activities before asset retirement costs incurred and changes in non-cash
working capital incurred.



Reconciliation of Cash Flow from Operating
Activities to Funds Flow from Operations

|                                    |  | Three months ended December 31, |       
|----------------------------------- |  | ------------------------------- | ------
|($000s)                             |  | 2012                            |       
|Cash flow from operating activities |  |                                 | 32,007
|Decommissioning costs incurred      |  |                                 | 76    
|Change in non-cash working capital  |  |                                 | (2,218
|Funds flow from operations          |  |                                 | 29,865



Funds flow from operations during the fourth
quarter of 2012 was $29.9 million, a decrease of 0.9% compared to $30.1 million for the fourth quarter of 2011. The decrease in
funds flow from operations between the periods was due primarily to lower pricing for light and heavy oil, condensate, and NGL’s,
largely offset by higher production volumes and slightly higher natural gas prices in the 2012 fourth quarter. Fluctuations in
oil and gas prices during the fourth quarter of 2012 resulted in an increase in net realized gains on commodity risk management
contracts by approximately $2.3 million compared to the fourth quarter of 2011. Cash flow from operating activities during the
fourth quarter of 2012 was $32.0 million, compared to $30.6 million for the fourth quarter of 2011. The increase in cash flow
from operating activities between the periods was reflective of an increase in cash from changes in working capital, and a minor
decrease in decommissioning costs incurred.



5







In the fourth quarter of 2012, Bellatrix
realized a net profit of $9.3 million compared to a net loss of $13.6 million in the fourth quarter of 2011. The net profit recorded
in the fourth quarter of 2012 compared to the net loss in the fourth quarter of 2011 is primarily a consequence of a $1.3 million
non-cash unrealized gain on commodity risk management compared to a $17.7 million loss in the 2011 period, and a $16.2 million
non-cash gain on property acquisition recognized in the 2012 fourth quarter, offset by a higher non-cash impairment loss on oil
and gas properties, slightly increased depletion and depreciation expenses, and a deferred income tax expense of $3.3 million
in the 2012 fourth quarter compared to a $4.0 million recovery in the 2011 period.



As previously noted in this MD&A, net
profit before certain non-cash items is a non-GAAP measure. A reconciliation between this measure and net profit per the Consolidated
Statement of Comprehensive Income is provided below.



For the fourth quarter of 2012, net profit
before certain non-cash items, net of associated deferred tax impacts, was $7.3 million compared to $7.9 million in 2011.



Reconciliation of Net Profit (Loss) to Net Profit Before
Certain Non-Cash Items

|                                                 |  | Three months ended December 31, |        
|------------------------------------------------ |  | ------------------------------- | -------
|($000s)                                          |  | 2012                            |        
|Net profit (loss) per financial statements       |  |                                 | 9,251  
|Items subject to reversal                        |  |                                 |        
|Impairment loss on property, plant and equipment |  |                                 | 14,820 
|Unrealized (gain) loss on commodity contracts    |  |                                 | (1,313 
|Gain on property acquisition                     |  |                                 | (16,160
|Loss on property dispositions                    |  |                                 | 50     
|Deferred tax impact of above items               |  |                                 | 651    
|Net profit before certain non-cash items         |  |                                 | 7,299  



Sales Volumes

|                                     |  |          |  | Three months ended December 31, |       
|------------------------------------ |  | -------- |  | ------------------------------- | ------
|                                     |  |          |  | 2012                            |       
|Light oil and condensate             |  | (bbls/d) |  |                                 | 3,910 
|NGLs (excluding condensate)          |  | (bbls/d) |  |                                 | 1,631 
|Heavy oil                            |  | (bbls/d) |  |                                 | 189   
|Total crude oil, condensate and NGLs |  | (bbls/d) |  |                                 | 5,730 
|                                     |  |          |  |                                 |       
|Natural gas                          |  | (mcf/d)  |  |                                 | 78,195
|                                     |  |          |  |                                 |       
|Total boe/d                          |  | (6:1)    |  |                                 | 18,763



Sales volumes for the three months ended
December 31, 2012 averaged 18,763 boe/d, an increase of 32% from the 14,209 boe/d sold in the fourth quarter of 2011. The weighting
toward crude oil, condensate and NGLs sales volumes decreased to 31% in the 2012 fourth quarter, compared to 38% in the corresponding
period in 2011. Fourth quarter 2012 natural gas, NGL, and total overall sales volumes were higher than the same period in 2011
primarily due to the continued success achieved from the Company’s liquids rich drilling program.



Natural gas sales averaged 78.2 Mmcf/d
during the fourth quarter of 2012, compared to 52.7 Mmcf/d in the fourth quarter of 2011. The weighting toward natural gas sales
volumes averaged 69% in the fourth quarter of 2012, an increase over the 62% weighting realized in the corresponding period in
2011. Crude oil, condensate and NGL sales volumes increased to 5,730 bbls/d in the fourth quarter of 2012 compared to 5,420 bbls/d
during the same period of 2011.



6







Revenue

|                                                   |  | Three months ended December 31, |       
|-------------------------------------------------- |  | ------------------------------- | ------
|($000s)                                            |  | 2012                            |       
|Light crude oil and condensate                     |  |                                 | 29,702
|NGLs (excluding condensate)                        |  |                                 | 5,829 
|Heavy oil                                          |  |                                 | 1,136 
|Crude oil and NGLs                                 |  |                                 | 36,667
|Natural gas                                        |  |                                 | 24,904
|Total revenue before other                         |  |                                 | 61,571
|Other (1)                                          |  |                                 | 712   
|Total revenue before royalties and risk management |  |                                 | 62,283



(1)Other revenue primarily consists of
processing and other third party income.



Revenue before other income, royalties
and commodity price risk management contracts for the fourth quarter of 2012 was $61.6 million, an increase of 6% from $58.2 million
in the fourth quarter of 2011. The increase in revenues between the periods was due to increased sales volumes and slightly higher
natural gas prices in the 2012 period, partially offset by lower crude oil, condensate, and NGL prices.



Light oil and condensate revenues for the
fourth quarter of 2012 were down 14% from the same period in 2011 due to lower prices. For light oil and condensate, Bellatrix
recorded an average $82.58/bbl before commodity price risk management contracts during the fourth quarter of 2012, 13% lower than
the average price of $95.18/bbl received in the comparative 2011 period. In comparison, the Edmonton par price decreased by 14%
over the same period. The average WTI crude oil benchmark price decreased by 6% in fourth quarter of 2012 compared to the same
period in 2011. The average US$/CDN$ foreign exchange rate was 1.0093 for the three months ended December 31, 2012, an increase
of 3% compared to an average rate of 0.9773 in the same period in 2011.



NGL revenues for the fourth quarter of
2012 were comparable to the 2011 period as a result of higher sales volumes offset by lower prices. For NGLs (excluding condensate),
Bellatrix recorded an average $38.84/bbl during the fourth quarter of 2012, a 28% decrease from the $54.31/bbl received in the
comparative 2011 period. The decrease in NGL pricing between the 2012 and 2011 periods is largely attributable to changes in NGL
market supply conditions between the periods.



The decrease in heavy oil revenue from
the fourth quarter of 2011 to the same period in 2012 is reflective of lower sales volumes and reduced prices. Bellatrix sold
its Wainwright heavy oil property, with 59 bbls/d of current production, in the third quarter of 2012. For heavy crude oil, Bellatrix
received an average price before commodity risk management contracts of $65.30/bbl in the 2012 fourth quarter, a decrease of 12%
from the $74.30/bbl realized in the fourth quarter of 2011. In comparison, the Bow River reference price decreased by 19%, and
the Hardisty Heavy reference price decreased by 21% between the fourth quarter of 2011 and the fourth quarter of 2012. The majority
of Bellatrix’s heavy crude oil density ranges between 11 and 16 degrees API, consistent with the Hardisty Heavy reference
price.



Natural gas revenues in the fourth quarter
of 2012 were up 56% from the same period in 2011 as a result of a 48% increase in sales volumes and a slight increase in natural
gas prices between the periods. Bellatrix’s natural gas sales are priced with reference to the daily or monthly AECO indices.
Bellatrix’s natural gas sold has a higher heat content than the industry average, which results in slightly higher prices
per mcf than the daily AECO index. During the fourth quarter of 2012, the AECO daily reference price increased by 1%, and the
AECO monthly reference price decreased by approximately 12% compared to the fourth quarter of 2011. Bellatrix’s natural
gas average sales price before commodity price risk management contracts for the fourth quarter of 2012 increased by 5% to $3.46/mcf
compared to the $3.30/mcf realized in the same period in 2011. The more significant increase in Bellatrix’s realized natural
gas prices compared to the daily AECO index between the periods was primarily due to the weighting of sales volumes realized at
increased prices during the fourth quarter of 2012. Bellatrix’s natural gas average price after including commodity price
risk management contracts for the three months ended December 31, 2012 was $3.67/mcf, compared to $3.62/mcf for the three months
ended December 31, 2011.



In the fourth quarter of 2012, average
sales volumes increased 21% from the third quarter 2012 average volumes of 15,503 boe/d. The increase was due to the success achieved
from the Company’s drilling program in 2012.



7







During the fourth quarter of 2012, Bellatrix
spent $32.1 million on capital projects, excluding corporate and asset acquisitions and dispositions, compared to $47.1 million
in 2011. In the fourth quarter of 2012, Bellatrix drilled or participated in 10 gross wells (6.17 net), all of which were Cardium
light oil horizontal wells. In the fourth quarter of 2011, Bellatrix drilled or participated in 12 (7.64 net) wells including
8 gross (6.68 net) oil wells, 3 gross (0.95 net) natural gas wells, and participated in 1 gross (0.007 net) dry hole that was
drilled in a non-operated oil unit.



In the fourth quarter of 2012, the Company
paid $11.8 million in royalties, compared to $8.8 million in the same period in 2011. As a percentage of pre-commodity price risk
management sales (after transportation costs), royalties were 20% in the fourth quarter of 2012 compared to 15% in the same period
in 2011. Royalties for the fourth quarter of 2011 were reduced by $1.5 million in adjustments relating to previous quarter estimates,
primarily for wells under the recent Alberta royalty programs. Excluding these adjustments, the average royalty rate percentage
for the fourth quarter of 2011 would be 18%. Certain light oil wells are now incurring higher royalty rates as they come off the
initial royalty incentive rates. The Company’s heavy oil properties are minor, and consist of principally the Frog Lake
Alberta assets which are subject to high crown royalty rates. The Company’s royalty percentage for natural gas royalties
continues to decline due to increased production from recently drilled wells which take advantage of Alberta royalty incentive
programs.



In the fourth quarter of 2012, operating
costs totaled $15.4 million, compared to $14.1 million recorded in the same period of 2011. During the fourth quarter of 2012,
operating costs averaged $8.91/boe, down from the $10.78/boe incurred during the fourth quarter of 2011. The decrease was primarily
due to increased production from recent drilling in areas with lower production expenses and the Company’s continued efforts
to streamline operations and field optimization projects. In comparison, operating costs for the third quarter of 2012 averaged
$7.96/boe. The increase between the third and fourth quarters of 2012 was primarily due to additional chemical well treating,
compressor rentals, and other maintenance expenses.



During the fourth quarter of 2012, the
Company’s field operating netbacks before commodity risk management contracts decreased by 26% to $19.20/boe compared to
$26.00/boe in the comparative 2011 period, driven primarily by a 20% decrease in overall commodity prices and a slight 2% increase
in royalties, partially offset by a 17% reduction in production expenses and a 41% reduction in transportation costs. In comparison,
the Company’s field operating netback before commodity risk management contracts for the third quarter of 2012 was $18.29/boe.



Field operating netbacks for natural gas
before commodity price risk management contracts during the fourth quarter of 2012 of $1.85/mcf were 52% higher than the $1.22/mcf
recorded in the same period in 2011. The increase was primarily a result of slightly higher gas prices, as well as lower transportation,
royalties, and production expenses. In comparison, the field operating netback for natural gas before commodity risk management
contracts for the third quarter of 2012 was $1.12/mcf.



Field operating netbacks before commodity
price risk management contracts for crude oil, condensate and NGLs during the fourth quarter of 2012 averaged $37.60/bbl, a decrease
of 33% from the $56.26/bbl realized during the fourth quarter of 2011. The decrease between the periods was primarily as a result
of weaker commodity prices and increased royalties, offset partially by decreases in production and transportation expenses. In
comparison, the field operating netback for crude oil, condensate and NGLs for the third quarter of 2012 was $41.12/bbl.



In the fourth quarter of 2012, general
and administrative expenses (“G&A”), net of capitalized G&A and recoveries, were $4.4 million, compared to
$3.8 million in the comparable 2011 period. The increase to net G&A was primarily attributable to increases in staffing costs
between the periods. The overall increase in G&A expenses was offset slightly by higher capitalized G&A and recoveries
as a result of the increase in capital activity in the fourth quarter of 2012 compared to the fourth quarter of 2011.



Depletion, depreciation and accretion expense
for the fourth quarter of 2012 was $18.6 million ($10.77/boe), compared to $17.6 million ($13.48/boe) in 2011. The increase in
depletion, depreciation and accretion expense from the 2011 fourth quarter to that in 2012 is reflective of the 32% increase in
sales volumes between the same comparative periods, offset by the additional reserves achieved through the Company’s drilling
success.



8







2012 Annual Financial and Operational
Results



Acquisition and Dispositions



Effective November 1, 2012, Bellatrix acquired
Cardium and Notikewin/Falher lands and production in the Willesden Green area adjacent to Bellatrix’s core area in the Ferrier/Willesden
Green Cardium light oil resource play in West Central Alberta. The assets acquired included then current production capability
of approximately 500 boe/d (32% oil and liquids and 68% natural gas), 16 gross (11.95 net) sections of Cardium and Mannville prospective
lands, 25 net Cardium development locations, 4 net Notikewin/Falher development locations, and a 25% working interest in an operated
compressor station and gathering system. Bellatrix acquired these assets for a net purchase price of $21 million, which was funded
using the Company’s existing credit facilities.



On December 14, 2012, Bellatrix acquired
an additional 11 gross and net sections of highly prospective Cardium and Notikewin/Falher lands in the Ferrier area of west-central
Alberta, subject to the receipt of land permits anticipated in Q1 2013. This acquisition is anticipated to provide an additional
37 net drilling locations in the Cardium, 9 net locations in the Notikewin/Falher, and an additional 66 net locations in the Duvernay
formation. The Company continues to focus on adding Cardium and Notikewin prospective lands.



During the third quarter of 2012, Bellatrix
closed on the disposition of a minor non-core property interest in the Wainwright area, Alberta for $4.25 million after adjustments.
This non-operated unit heavy oil property had production of approximately 59 boe/d. The net proceeds from the disposition were
initially used to reduce the Company’s bank indebtedness, and ultimately were directed towards the development of the Company’s
Cardium oil resource program.



During the second quarter of 2012, Bellatrix
closed on the disposition of the Girouxville property in Alberta, a minor non-core property interest. The property was sold for
$0.6 million after adjustments.



Additionally, in the second quarter of
2012, Bellatrix closed on the disposition of the Cypress-Chowade property in British Columbia, a minor non-core property interest.
The property was sold for $1.4 million after adjustments. There was no current production from the Cypress-Chowade property.



Bellatrix had other minor property dispositions
in 2012 resulting in total cumulative property dispositions of $6.7 million.



Sales Volumes



Sales volumes for the year ended December
31, 2012 averaged 16,686 boe/d compared to 11,954 boe/d for the 2011 year, representing a 40% increase. Total crude oil, condensate
and NGLs averaged approximately 34% of sales volumes for the year ended December 31, 2012, compared to 38% of sales volumes in
the 2011 year. The increase in sales was primarily a result of a year over year increased capital program and the associated drilling
success achieved in the Cardium and Notikewin resource plays. Capital expenditures for the year ended December 31, 2012 were $185.3
million, compared to $179.6 million for the 2011 year.



9







Sales Volumes

|                                     |  |          |  | Years ended December 31, |       
|------------------------------------ |  | -------- |  | ------------------------ | ------
|                                     |  |          |  | 2012                     |       
|Light oil and condensate             |  | (bbls/d) |  |                          | 3,996 
|NGLs (excluding condensate)          |  | (bbls/d) |  |                          | 1,441 
|Heavy oil                            |  | (bbls/d) |  |                          | 280   
|Total crude oil, condensate and NGLs |  | (bbls/d) |  |                          | 5,717 
|                                     |  |          |  |                          |       
|Natural gas                          |  | (mcf/d)  |  |                          | 65,812
|                                     |  |          |  |                          |       
|Total boe/d                          |  | (6:1)    |  |                          | 16,686



During the 2012 year, Bellatrix posted
a 100% success rate drilling and/or participating in 34 gross (26.32 net) wells, resulting in 28 gross (21.32 net) Cardium oil
wells, 2 gross (2.0 net) Cardium condensate-rich gas wells, 1 gross (1.0 net) Duvernay gas well, and 3 gross (2.0 net) Notikewin/Falher
liquids-rich gas wells.



By comparison, Bellatrix drilled or participated
in 54 gross (34.84 net) wells during the 2011 year, including 39 gross (29.04 net) oil wells, 14 gross (5.79 net) liquids-rich
natural gas wells, and 1 gross (0.007 net) dry hole that was drilled in a non-operated oil unit.



For the year ended December 31, 2012, crude
oil, condensate and NGL sales volumes increased by approximately 26%, averaging 5,717 bbl/d compared to 4,540 bbl/d in the 2011
year. For the year ended December 31, 2012, sales volumes for crude oil, condensate and NGLs averaged approximately 34% of total
sales volumes compared to approximately 38% of total sales volumes in the 2011 year. The reduction in liquids weighting between
the years was a direct result of adding the dry gas producing Duvernay well during the second quarter of 2012, as well as bringing
on several other high-productivity gas wells throughout the 2012 year.



Sales of natural gas averaged 65.8 Mmcf/d
for the year ended December 31, 2012, compared to 44.5 Mmcf/d in the 2011 year, an increase of approximately 48%. The weighting
towards natural gas sales volumes averaged approximately 66% for the year ended December 31, 2012, compared to 62% in the 2011
year.



For 2013, Bellatrix will utilize pad drilling,
involving the drilling of multiple horizontal wells from single surface locations, enhancing resource development efficiency,
minimizing the Company’s environmental footprint, and improving cost and on-stream efficiencies. An initial capital expenditure
budget of between $230 to $240 million has been set for fiscal 2013. Based on the timing of proposed expenditures, downtime for
scheduled and unscheduled plant turnarounds, completion of required infrastructure, and normal production declines, execution
of the 2013 capital expenditure plan is anticipated to provide average daily production of approximately 24,000 to 25,000 boe/d
and an exit rate of approximately 30,000 boe/d to 31,000 boe/d.



10







Commodity Prices



Average Commodity Prices

|                                                                  |  | Years ended December 31, |       
|----------------------------------------------------------------- |  | ------------------------ | ------
|                                                                  |  | 2012                     |       
|                                                                  |  |                          |       
|Average exchange rate (US$/Cdn$)                                  |  |                          | 1.0009
|                                                                  |  |                          |       
|Crude oil:                                                        |  |                          |       
|WTI (US$/bbl)                                                     |  |                          | 94.14 
|Edmonton par – light oil ($/bbl)                                  |  |                          | 86.53 
|Bow River – medium/heavy oil ($/bbl)                              |  |                          | 74.30 
|Hardisty Heavy – heavy oil ($/bbl)                                |  |                          | 64.99 
|Bellatrix’s average prices ($/bbl)                                |  |                          |       
|Light crude oil and condensate                                    |  |                          | 86.47 
|NGLs (excluding condensate)                                       |  |                          | 38.88 
|Heavy crude oil                                                   |  |                          | 68.51 
|Total crude oil and NGLs                                          |  |                          | 73.59 
|Total crude oil and NGLs (including risk management (1))          |  |                          | 72.65 
|                                                                  |  |                          |       
|Natural gas:                                                      |  |                          |       
|NYMEX (US$/mmbtu)                                                 |  |                          | 2.83  
|AECO daily index (CDN$/mcf)                                       |  |                          | 2.39  
|AECO monthly index (CDN$/mcf)                                     |  |                          | 2.40  
|Bellatrix’s average price ($/mcf)                                 |  |                          | 2.62  
|Bellatrix’s average price (including risk management (1)) ($/mcf) |  |                          | 3.17  



(1)Per unit metrics including risk management
include realized gains or losses on commodity contracts and exclude unrealized gains or losses on commodity contracts.



During 2012, the differential between West
Texas Intermediate (“WTI”) and Edmonton par price widened, whereas for 2011 the differential was nearly non-existent.
North America has seen significant increases in light oil production as a result of the rapid pace of development in the shale
oil reservoirs. These volumes have displaced Canadian production resulting in lower demand for Edmonton light oil. This factor,
along with higher incidences of refinery maintenance in 2012 and continued refinery conversions to run heavier streams, has resulted
in the widening of the price differential between WTI and Edmonton par. For light oil and condensate, Bellatrix recorded an average
$86.47/bbl before commodity price risk management contracts during the year ended December 31, 2012, 7% lower than the average
price received in the 2012 year. In comparison, the Edmonton par price decreased by 9% over the same period. The average WTI crude
oil benchmark price decreased by 1% in the year ended December 31, 2012 compared to the 2011 year. The average US$/CDN$ foreign
exchange rate was 1.0009 for the year ended December 31, 2012, a decrease of 1% compared to an average rate of 1.0111 in the 2011
year.



For NGLs (excluding condensate), Bellatrix
recorded an average $38.88/bbl during the year ended December 31, 2012, a 27% decrease from the $53.54/bbl received in the 2011
year. The decrease in NGL pricing between the 2012 and 2011 years is largely attributable to changes in NGL market supply conditions
between the years.



For heavy crude oil, Bellatrix received
an average price before commodity risk management contracts of $68.51/bbl in the 2012 year, consistent with the average price
of $68.23/bbl realized in the 2011 year. In comparison, the Bow River reference price decreased by 5%, and the Hardisty Heavy
reference price decreased by 6% between the 2012 and 2011 years. The majority of Bellatrix’s heavy crude oil density ranges
between 11 and 16 degrees API, consistent with the Hardisty Heavy reference price.



Bellatrix’s natural gas sales are
priced with reference to the daily or monthly AECO indices. Bellatrix’s natural gas sold has a higher heat content than
the industry average, which results in slightly higher prices per mcf than the daily AECO index. During the 2012 year, the AECO
daily reference price decreased by 34%, and the AECO monthly reference price decreased by approximately 35% compared to the 2011
year. Bellatrix’s natural gas average sales price before commodity price risk management contracts for the 2012 year decreased
by 31% to $2.62/mcf compared to $3.77/mcf in the 2011 year. The lower decrease in Bellatrix’s realized natural gas prices
compared to the daily AECO index between the years was primarily due to the weighting of additional sales volumes realized at
increasing prices throughout the 2012 year. Bellatrix’s natural gas average price after including commodity price risk management
contracts for the year ended December 31, 2012 was $3.17/mcf, compared to $4.05/mcf for the year ended December 31, 2011.



11







Revenue



Revenue before other income, royalties
and commodity price risk management contracts for the year ended December 31, 2012 was $217.1 million, 8% higher than the $200.2
million in the 2011 year. The increase in revenues between the years was due to increased sales volumes between the years, partially
offset by reduced liquids and natural gas prices experienced in the 2012 year.



Revenue before other income, royalties
and commodity price risk management contracts for crude oil and NGLs for the year ended December 31, 2012 increased by 11% from
the 2011 year, resulting from higher sales volumes, partially offset by lower light crude oil, condensate and NGL prices when
compared to the 2011 year. In the 2012 year, total crude oil, condensate and NGL revenues contributed 71% of total revenue (before
other) compared to 69% in the 2011 year. Light crude oil, condensate and NGL revenues in the year ended December 31, 2012 comprised
95% of total crude oil, condensate and NGL revenues (before other) for those periods, compared to 94% in the 2011 year.



Natural gas revenue before other income,
royalties and commodity price risk management contracts for the year ended December 31, 2012 increased by approximately 3% compared
to the 2011 year as a result of an approximate 48% increase in sales volumes between the years, largely offset by a 31% decrease
in realized gas prices before risk management.



|                                                   |  | Years ended December 31, |        
|-------------------------------------------------- |  | ------------------------ | -------
|($000s)                                            |  | 2012                     |        
|Light crude oil and condensate                     |  |                          | 126,468
|NGLs (excluding condensate)                        |  |                          | 20,504 
|Heavy oil                                          |  |                          | 7,023  
|Crude oil and NGLs                                 |  |                          | 153,995
|Natural gas                                        |  |                          | 63,143 
|Total revenue before other                         |  |                          | 217,138
|Other (1)                                          |  |                          | 2,176  
|Total revenue before royalties and risk management |  |                          | 219,314



(1)Other revenue primarily consists of
processing and other third party income.



Commodity Price Risk Management



The Company has a formal commodity price
risk management policy which permits management to use specified price risk management strategies including fixed price contracts,
collars and the purchase of floor price options and other derivative financial instruments and physical delivery sales contracts
to reduce the impact of price volatility for a maximum of eighteen months beyond the transaction date. The program is designed
to provide price protection on a portion of the Company’s future production in the event of adverse commodity price movement,
while retaining significant exposure to upside price movements. By doing this, the Company seeks to provide a measure of stability
to funds flow from operations, as well as to ensure Bellatrix realizes positive economic returns from its capital development
and acquisition activities. The Company plans to continue its commodity price risk management strategies focusing on maintaining
sufficient cash flow to fund Bellatrix’s capital expenditure program. Any remaining production is realized at market prices.



A summary of the financial commodity price
risk management volumes and average prices by quarter currently outstanding as of March 6, 2013 is shown in the following tables:



12







Natural gas

Average Volumes (GJ/d)

|      |  | Q1 2013 |       |  | Q2 2013 |  |        | Q3 2013 |  |  | Q4 2013 | 
|----- |  | ------- | ----- |  | ------- |  | ------ | ------- |  |  | ------- | 
|Fixed |  |         | 6,556 |  |         |  | 55,000 |         |  |  | 55,000  | 



|      |  | Q1 2014 |        |  | Q2 2014 |  |        | Q3 2014 |  |  | Q4 2014 | 
|----- |  | ------- | ------ |  | ------- |  | ------ | ------- |  |  | ------- | 
|Fixed |  |         | 15,000 |  |         |  | 15,000 |         |  |  | -       | 



Average Price ($/GJ AECO C)

|      |  | Q1 2013 |      |  | Q2 2013 |  |      | Q3 2013 |  |  | Q4 2013 | 
|----- |  | ------- | ---- |  | ------- |  | ---- | ------- |  |  | ------- | 
|Fixed |  |         | 3.05 |  |         |  | 3.06 |         |  |  | 3.06    | 



|      |  | Q1 2014 |      |  | Q2 2014 |  |      | Q3 2014 |  |  | Q4 2014 | 
|----- |  | ------- | ---- |  | ------- |  | ---- | ------- |  |  | ------- | 
|Fixed |  |         | 3.05 |  |         |  | 3.05 |         |  |  | -       | 



Crude oil and liquids



Average Volumes (bbls/d)

|             |  | Q1 2013 |       |  | Q2 2013 |  |       | Q3 2013 |  |  | Q4 2013 | 
|------------ |  | ------- | ----- |  | ------- |  | ----- | ------- |  |  | ------- | 
|Call option  |  |         | 3,000 |  |         |  | 3,000 |         |  |  | 3,000   | 
|Fixed        |  |         | 1,500 |  |         |  | 1,500 |         |  |  | 1,500   | 
|Total bbls/d |  |         | 4,500 |  |         |  | 4,500 |         |  |  | 4,500   | 



|            |  | Q1 2014 |       |  | Q2 2014 |  |       | Q3 2014 |  |  | Q4 2014 | 
|----------- |  | ------- | ----- |  | ------- |  | ----- | ------- |  |  | ------- | 
|Call option |  |         | 3,000 |  |         |  | 3,000 |         |  |  | 3,000   | 



Average Price ($/bbl WTI)

|                                      |  | Q1 2013 |        |  | Q2 2013 |  |        | Q3 2013 |  |  | Q4 2013 | 
|------------------------------------- |  | ------- | ------ |  | ------- |  | ------ | ------- |  |  | ------- | 
|Call option (ceiling price) (US$/bbl) |  |         | 110.00 |  |         |  | 110.00 |         |  |  | 110.00  | 
|Fixed price (CDN$/bbl)                |  |         | 94.50  |  |         |  | 94.50  |         |  |  | 94.50   | 



|                                      |  | Q1 2014 |        |  | Q2 2014 |  |        | Q3 2014 |  |  | Q4 2014 | 
|------------------------------------- |  | ------- | ------ |  | ------- |  | ------ | ------- |  |  | ------- | 
|Call option (ceiling price) (US$/bbl) |  |         | 105.00 |  |         |  | 105.00 |         |  |  | 105.00  | 



As of December 31, 2012, the fair value
of Bellatrix’s outstanding commodity contracts is a net unrealized asset of $0.2 million as reflected in the financial statements.
The fair value or mark-to-market value of these contracts is based on the estimated amount that would have been received or paid
to settle the contracts as at December 31, 2012 and will be different from what will eventually be realized. Changes in the fair
value of the commodity contracts are recognized in the Consolidated Statements of Comprehensive Income within the financial statements.



13







The following is a summary of the gain
(loss) on commodity contracts for the years ended December 31, 2012 and 2011 as reflected in the Consolidated Statements of Comprehensive
Income in the financial statements:



Commodity contracts



|($000s)                                |  | Crude Oil& Liquids |        |   | NaturalGas |  |        | 2012Total | 
|-------------------------------------- |  | ------------------ | ------ | - | ---------- |  | ------ | --------- | 
|Realized cash gain (loss) on contracts |  |                    | (1,976 | ) |            |  | 13,245 |           | 
|Unrealized gain on contracts (1)       |  |                    | 6,267  |   |            |  | 4,539  |           | 
|Total gain on commodity contracts      |  |                    | 4,291  |   |            |  | 17,784 |           | 



Commodity contracts

|($000s)                                  |  | Crude Oil& Liquids |         |   | NaturalGas |  |       | 2011Total | 
|---------------------------------------- |  | ------------------ | ------- | - | ---------- |  | ----- | --------- | 
|Realized cash gain (loss) on contracts   |  |                    | (4,015  | ) |            |  | 4,582 |           | 
|Unrealized gain (loss) on contracts (1)  |  |                    | (9,879  | ) |            |  | 2,979 |           | 
|Total gain (loss) on commodity contracts |  |                    | (13,894 | ) |            |  | 7,561 |           | 





| | (1) | Unrealized gain
                                                                       (loss) on commodity contracts represents non-cash adjustments
                                                                       for changes in the fair value of these contracts during
                                                                       the period.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Royalties



For the year ended December 31, 2012, total
royalties were $38.8 million compared to $34.7 million incurred in the 2011 year. Overall royalties as a percentage of revenue
(after transportation costs) in the 2012 year were 18%, compared with 18% in the 2011 year.



Certain light oil wells are now incurring
higher royalty rates as they come off the initial royalty incentive rates. The Company’s heavy oil properties are minor,
and consist of principally the Frog Lake Alberta assets which are subject to high crown royalty rates. The Company’s royalty
percentage for natural gas royalties continues to decline due to increased production from recently drilled wells which take advantage
of Alberta royalty incentive programs. Natural gas royalties and total royalties recognized in 2012 were reduced by $1.5 million
and $1.7 million, respectively, in adjustments relating to prior period estimates, primarily for Ferrier area wells for Indian
Oil and Gas Canada royalties under recent royalty incentive programs. Excluding these adjustments, the average natural gas and
overall corporate royalty rate percentages for 2012 would be 6% and 19%, respectively.



|Royalties by Commodity Type                                   |  | Years ended December 31, |       
|------------------------------------------------------------- |  | ------------------------ | ------
|($000s, except where noted)                                   |  | 2012                     |       
|Light crude oil, condensate and NGLs                          |  |                          | 33,607
|$/bbl                                                         |  |                          | 16.89 
|Average light crude oil, condensate and NGLs royalty rate (%) |  |                          | 23    
|                                                              |  |                          |       
|Heavy Oil                                                     |  |                          | 3,496 
|$/bbl                                                         |  |                          | 34.11 
|Average heavy oil royalty rate (%)                            |  |                          | 52    
|                                                              |  |                          |       
|Natural Gas                                                   |  |                          | 1,653 
|$/mcf                                                         |  |                          | 0.07  
|Average natural gas royalty rate (%)                          |  |                          | 3     
|                                                              |  |                          |       
|Total                                                         |  |                          | 38,756
|$/boe                                                         |  |                          | 6.35  
|Average total royalty rate (%)                                |  |                          | 18    



14







Royalties, by Type

|                                    |  | Years ended December 31, |       
|----------------------------------- |  | ------------------------ | ------
|($000s)                             |  | 2012                     |       
|Crown royalties                     |  |                          | 11,518
|Indian Oil and Gas Canada royalties |  |                          | 8,038 
|Freehold & GORR                     |  |                          | 19,200
|Total                               |  |                          | 38,756



Expenses

|                                  |  | Years ended December 31, |       
|--------------------------------- |  | ------------------------ | ------
|($000s)                           |  | 2012                     |       
|Production                        |  |                          | 53,316
|Transportation                    |  |                          | 4,978 
|General and administrative        |  |                          | 14,272
|Interest and financing charges(1) |  |                          | 9,834 
|Share-based compensation          |  |                          | 3,219 

(1)Does not include financing charges in relation
to the Company’s accretion of decommissioning liabilities.



Expenses per boe

|                               |  | Years ended December 31, |     
|------------------------------ |  | ------------------------ | ----
|($ per boe)                    |  | 2012                     |     
|Production                     |  |                          | 8.73
|Transportation                 |  |                          | 0.82
|General and administrative     |  |                          | 2.34
|Interest and financing charges |  |                          | 1.61
|Share-based compensation       |  |                          | 0.53



Production Expenses



For the year ended December 31, 2012, production
expenses totaled $53.3 million ($8.73/boe), compared to $50.3 million ($11.53/boe) in the 2011 year. For the year ended December
31, 2012, production expenses increased overall, while decreasing on a per boe basis when compared to the 2011 year. The decrease
in production expenses on a boe basis in the 2012 year was primarily due to increased production, which is a result of drilling
in both 2011 and 2012 in areas with lower production expenses, as well as reduced processing fees in certain areas and continued
field optimization projects.



Bellatrix is targeting operating costs
of approximately $73.6 million ($8.00/boe) in the 2013 year, which is a reduction from the $8.73/boe operating costs incurred
for the 2012 year. This is based upon assumptions of estimated 2013 average production of approximately 24,000 boe/d to 25,000
boe/d, continued field optimization work and planned capital expenditures in producing areas which are anticipated to have lower
operating costs.



Production Expenses, by Commodity Type

|                                                              |  | Years ended December 31, |       
|------------------------------------------------------------- |  | ------------------------ | ------
|($000s, except where noted)                                   |  | 2012                     |       
|Light crude oil, condensate and NGLs                          |  |                          | 21,840
|$/bbl                                                         |  |                          | 10.97 
|                                                              |  |                          |       
|Heavy oil                                                     |  |                          | 1,555 
|$/bbl                                                         |  |                          | 15.17 
|                                                              |  |                          |       
|Natural gas                                                   |  |                          | 29,921
|$/mcf                                                         |  |                          | 1.24  
|                                                              |  |                          |       
|Total                                                         |  |                          | 53,316
|$/boe                                                         |  |                          | 8.73  
|                                                              |  |                          |       
|Total                                                         |  |                          | 53,316
|Processing and other third party income (1)                   |  |                          | (2,176
|Total after deducting processing and other third party income |  |                          | 51,140
|$/boe                                                         |  |                          | 8.37  



| | (1) | Processing and other third
                                                                       party income is included within petroleum and natural gas
                                                                       sales on the Consolidated Statements of Comprehensive Income.
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



15







Transportation



Transportation expenses for the year ended
December 31, 2012 were $5.0 million ($0.82/boe), compared to $5.7 million ($1.31/boe) in the 2011 year. The decrease in overall
and per boe costs is reflective of a higher volume of oil production being shipped through pipelines rather than through trucking
at a higher cost, as well as reduced gas transportation fees resulting from the acquisition of an ownership interest in certain
gathering and processing facilities in the first half of 2011.



Operating Netback



Field Operating Netback – Corporate (before risk management)

|                        |  | For the years ended December 31, |      
|----------------------- |  | -------------------------------- | -----
|($/boe)                 |  | 2012                             |      
|Sales                   |  |                                  | 35.56
|Transportation          |  |                                  | (0.82
|Royalties               |  |                                  | (6.35
|Production expense      |  |                                  | (8.73
|Field operating netback |  |                                  | 19.66



For the year ended December 31, 2012, the
corporate field operating netback (before commodity price risk management contracts) was $19.66/boe compared to $25.09/boe in
the 2011 year. The reduced netback was primarily the result of reduced commodity prices, offset by reduced transportation, royalty
and production expenses. After including commodity price risk management contracts, the corporate field operating netback for
the 2012 year was $21.51/boe compared to $25.22/boe in the 2011 year. Per unit metrics including risk management include realized
gains or losses on commodity contracts and exclude unrealized gains or losses on commodity contracts.



Field Operating Netback – Crude Oil, Condensate and
NGLs (before risk management)

|                        |  | Years ended December 31, |       
|----------------------- |  | ------------------------ | ------
|($/bbl)                 |  | 2012                     |       
|Sales                   |  |                          | 73.59 
|Transportation          |  |                          | (0.98 
|Royalties               |  |                          | (17.73
|Production expense      |  |                          | (11.18
|Field operating netback |  |                          | 43.70 



Field operating netback for crude oil,
condensate and NGLs averaged $43.70/bbl for the year ended December 31, 2012, a decrease of 16% from $52.01/bbl realized in the
2011 year. In the 2012 year, Bellatrix’s combined crude oil and NGLs average price (before risk management) decreased by
approximately 12% compared to the 2011 year. The commodity price decrease in conjunction with a slight increase in royalties was
partially offset by reductions in production and transportation expenses, resulting in the overall decrease to the field operating
netback for crude oil, condensate and NGLs. After including commodity price risk management contracts, field operating netback
for crude oil and NGLs for the year ended December 31, 2012 decreased to $42.76/boe compared to $49.58/boe in the 2011 year.



Field Operating Netback – Natural Gas (before risk
management)

|                        |  | Years ended December 31, |      
|----------------------- |  | ------------------------ | -----
|($/mcf)                 |  | 2012                     |      
|Sales                   |  |                          | 2.62 
|Transportation          |  |                          | (0.12
|Royalties               |  |                          | (0.07
|Production expense      |  |                          | (1.24
|Field operating netback |  |                          | 1.19 



16







Field operating netback for natural gas
in the year ended December 31, 2012 year decreased by 17% to $1.19/mcf, compared to $1.44/mcf realized in the 2011 year, reflecting
depressed natural gas prices, offset somewhat by lower production, transportation and royalty expenses. After including commodity
price risk management contracts, field operating netback for natural gas for the year ended December 31, 2012 increased to $1.74/mcf,
which compared to $1.72/mcf in the 2011 year.



General and Administrative



General and administrative (“G&A”)
expenses (after capitalized G&A and recoveries) for the year ended December 31, 2012 were $14.3 million ($2.34/boe), compared
to $12.4 million ($2.83/boe) for the 2011 year. G&A expenses in the 2012 year were higher in comparison to the 2011 year,
which is reflective of higher compensation costs and slightly reduced recoveries, offset partially by higher capitalized G&A.
On a boe basis, G&A for the year ended December 31, 2012 decreased by approximately 17% when compared to the 2011 year. The
decrease was primarily as a result of higher average sales volumes in the 2012 year, despite higher overall costs.



For 2013, the Company is anticipating G&A
expenses after capitalization to be approximately $23.0 million ($2.50/boe) based on estimated 2013 average production volumes
of approximately 24,000 boe/d to 25,000 boe/d.



General and Administrative Expenses

|                               |  | Years ended December 31, |       
|------------------------------ |  | ------------------------ | ------
|($000s, except where noted)    |  | 2012                     |       
|Gross expenses                 |  |                          | 21,170
|Capitalized                    |  |                          | (4,335
|Recoveries                     |  |                          | (2,563
|G&A expenses                   |  |                          | 14,272
|G&A expenses, per unit ($/boe) |  |                          | 2.34  



Interest and Financing Charges



Bellatrix recorded $9.8 million ($1.61/boe)
of interest and financing charges related to bank debt and its debentures for the year ended December 31, 2012, compared to $7.0
million ($1.61/boe) in the 2011 year. The overall increase in interest and financing charges between the years was primarily due
to greater interest and accretion charges in relation to the Company’s outstanding debentures in conjunction with higher
interest charges related to the Company’s long-term debt as the Company carried a higher average debt balance in the 2012
year compared to the 2011 year. Bellatrix’s total net debt at December 31, 2012 of $189.6 million includes the $50.7 million
liability portion of its $55 million principal amount of 4.75% convertible unsecured subordinated debentures (the “4.75%
Debentures”), $133.0 million of bank debt and the net balance of the working capital deficiency. The 4.75% Debentures have
a maturity date of April 30, 2015.



17







Debt to Funds Flow from Operations Ratio

|                                                                                          |  | Years ended December 31, |        
|----------------------------------------------------------------------------------------- |  | ------------------------ | -------
|($000s, except where noted)                                                               |  | 2012                     |        
|                                                                                          |  |                          |        
|Shareholders’ equity                                                                      |  |                          | 381,106
|                                                                                          |  |                          |        
|Long-term debt                                                                            |  |                          | 133,047
|Convertible debentures (liability component)                                              |  |                          | 50,687 
|Working capital deficiency (2)                                                            |  |                          | 5,843  
|Total net debt (2) at year end                                                            |  |                          | 189,577
|                                                                                          |  |                          |        
|Debt to funds flow from operations(1)ratio (annualized)(3)                                |  |                          |        
|Funds flow from operations (1) (annualized)                                               |  |                          | 119,460
|Total net debt (2) at year end                                                            |  |                          | 189,577
|Total net debt to periods funds flow from operations ratio (annualized) (3)               |  |                          | 1.6x   
|                                                                                          |  |                          |        
|Net debt (2)(excluding convertible debentures) at year end                                |  |                          | 138,890
|Net debt to periods funds flow from operations ratio (annualized) (3)                     |  |                          | 1.2x   
|                                                                                          |  |                          |        
|Debt to funds flow from operations (1)ratio                                               |  |                          |        
|Funds flow from operations (1)  for the year                                              |  |                          | 111,038
|Total net debt (2)to funds flow from operations for the year                              |  |                          | 1.7x   
|                                                                                          |  |                          |        
|Net debt (2)(excluding convertible debentures) to funds flow from operations for the year |  |                          | 1.3x   



| | (1) | As detailed previously
                                                                       in this Management’s Discussion and Analysis, funds
                                                                       flow from operations is a term that does not have any standardized
                                                                       meaning under GAAP. Funds flow from operations is calculated
                                                                       as cash flow from operating activities, less decommissioning
                                                                       costs incurred and changes in non-cash working capital
                                                                       incurred. Refer to the reconciliation of cash flow from
                                                                       operating activities to funds flow from operations appearing
                                                                       elsewhere herein.
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (2) | Net debt and total net
                                                                       debt are considered additional GAAP measures. The Company’s
                                                                       calculation of total net debt includes the liability component
                                                                       of convertible debentures and excludes deferred liabilities,
                                                                       long-term commodity contract liabilities, decommissioning
                                                                       liabilities, long-term finance lease obligation and the
                                                                       deferred tax liability. Net debt and total net debt include
                                                                       the net working capital deficiency (excess) before short-term
                                                                       commodity contract assets and liabilities and current finance
                                                                       lease obligation. Net debt also excludes the liability
                                                                       component of convertible debentures. Total net debt and
                                                                       net debt are additional GAAP measures; refer to the following
                                                                       reconciliation of total liabilities to total net debt and
                                                                       net debt.
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (3) | Total net debt and net
                                                                       debt to periods funds flow from operations ratio (annualized)
                                                                       is calculated based upon fourth quarter funds flow from
                                                                       operations annualized.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Reconciliation of Total Liabilities to Total Net Debt and
Net Debt

|                                                                |  | As at December 31, |        
|--------------------------------------------------------------- |  | ------------------ | -------
|($000s)                                                         |  | 2012               |        
|Total liabilities per financial statements                      |  |                    | 300,315
|Current liabilities included within working capital calculation |  |                    | (53,327
|Commodity contract liability                                    |  |                    | (6,214 
|Decommissioning liabilities                                     |  |                    | (43,909
|Finance lease obligation                                        |  |                    | (13,131
|                                                                |  |                    |        
|Working Capital                                                 |  |                    |        
|Current assets                                                  |  |                    | (52,447
|Current liabilities                                             |  |                    | 53,327 
|Current portion of finance lease                                |  |                    | (1,425 
|Net commodity contract asset (liability)                        |  |                    | 6,388  
|                                                                |  |                    | 5,843  
|Total net debt                                                  |  |                    | 189,577
|Convertible debentures                                          |  |                    | (50,687
|Net debt                                                        |  |                    | 138,890



18







Share-Based Compensation



Non-cash share-based compensation expense
for the year ended December 31, 2012 was an expense of $3.2 million compared to $2.9 million in the 2011 year. The overall increase
in non-cash share-based compensation expense between the years is primarily a result of a larger number of outstanding share options
expensed during the year and greater Deferred Share Unit Plan expenses of $1.0 million (2011: $0.8 million), offset partially
by higher capitalized share-based compensation of $1.6 million (2011: $1.4 million).



Depletion and Depreciation



Depletion and depreciation expense for
the year ended December 31, 2012 was $75.7 million ($12.40/boe), compared to $63.4 million ($14.53/boe) recognized in the 2011
year. The decrease in depletion and depreciation expense between the years, on a per boe basis, was primarily a result of an increase
in the reserve base used for the depletion calculation, partially offset by a higher cost base and increased future development
costs.



For the year ended December 31, 2012 Bellatrix
has included a total of $524.6 million (2011: $376.8 million) for future development costs in the depletion calculation and excluded
from the depletion calculation a total of $37.2 million (2011: $35.1 million) for estimated salvage.



Depletion and Depreciation



|                            |  | Years ended December 31, |       
|--------------------------- |  | ------------------------ | ------
|($000s, except where noted) |  | 2012                     |       
|Depletion and Depreciation  |  |                          | 75,720
|Per unit ($/boe)            |  |                          | 12.40 



Property Acquisition



Effective November 1, 2012, Bellatrix acquired
production and working interest in certain facilities, as well as undeveloped land in the Willesden Green area of Alberta for
a cash purchase price of $20.9 million after adjustments. In accordance with IFRS, a property acquisition is accounted for as
a business combination when certain criteria are met, such as the acquisition of inputs and processes to convert those inputs
into beneficial outputs. Bellatrix assessed the property acquisition and determined that it constitutes a business combination
under IFRS. In a business combination, acquired assets and liabilities are recognized by the acquirer at their fair market value
at the time of purchase. Any variance between the determined fair value of the assets and liabilities and the purchase price is
recognized as either a gain or loss in the statement of comprehensive income in the period of acquisition.



The estimated fair value of the property,
plant and equipment acquired was determined using both internal estimates and an independent reserve evaluation. The decommissioning
liabilities assumed were determined using the timing and estimated costs associated with the abandonment, restoration and reclamation
of the wells and facilities acquired. A summary of the acquired property is provided below:



|                                     |  | ($000s) |       
|------------------------------------ |  | ------- | ------
|Estimated fair value of acquisition: |  |         |       
|Oil and natural gas properties       |  |         | 29,530
|Exploration and evaluation assets    |  |         | 8,525 
|Decommissioning liabilities          |  |         | (973  
|                                     |  |         | 37,082
|                                     |  |         |       
|Cash consideration                   |  |         | 20,922
|                                     |  |         |       
|Gain on property acquisition         |  |         | 16,160



19









Impairment of Assets



In accordance with IFRS, the Company calculates
an impairment test when there are indicators of impairment. The impairment test is performed at the asset or cash generating unit
(“CGU”) level. IAS 36 – “Impairment of Assets” (“IAS 36”) is a one step process for
testing and measuring impairment of assets. Under IAS 36, the asset or CGU’s carrying value is compared to the higher of:
value-in-use and fair value less costs to sell. Value in use is defined as the present value of the future cash flows expected
to be derived from the asset or CGU.



When performed, the impairment test is
based upon the higher of value-in-use and estimated fair market values for the Company’s properties, including but not limited
to an updated external reserve engineering report which incorporates a full evaluation of reserves on an annual basis or internal
reserve updates at quarterly periods, and the latest commodity pricing deck. Estimating reserves is very complex, requiring many
judgments based on available geological, geophysical, engineering and economic data. Changes in these judgments could have a material
impact on the estimated reserves. These estimates may change, having either a negative or positive effect on net earnings as further
information becomes available and as the economic environment changes.



2012 Impairment



Bellatrix engaged an external reserve evaluator
to prepare an updated company reserve report effective December 31, 2012. Overall corporate proved and probable reserve volumes
increased significantly at December 31, 2012 compared to evaluated reserves at December 31, 2011. However, the fair values of
two largely natural gas-weighted CGUs and one CGU with significant natural gas and heavy oil weightings were reduced, largely
as a result of suppressed commodity prices.



As at December 31, 2012, Bellatrix performed
an impairment test using VIU values in accordance with IAS 36, resulting in an excess of the carrying value of three CGUs over
their recoverable amount, resulting in a non-cash $14.8 million impairment loss. In performing the test, future cash flows at
between a 10% and 20% discount rate were used for the Company’s largely gas weighted North East Alberta, South East Alberta,
and British Columbia CGUs. The Company’s core West Central Alberta CGU had no indicators of impairment. Discounted salvage
values and discounted future associated general and administrative costs were also incorporated into the VIU calculation. The
$14.8 million impairment loss was comprised of $11.4 million recognized in the Company’s North East Alberta CGU, $2.9 million
in the South East Alberta CGU, and $0.5 million in the British Columbia CGU. The reduction in the fair values of these CGUs between
December 31, 2011 and December 31, 2012 was predominantly due to weak natural gas prices.



2011 Impairment



During the year ended December 31, 2011,
Bellatrix performed an impairment test in accordance with IAS 36 resulting in an excess of the carrying value of three CGUs over
their recoverable amount, resulting in a non-cash $25.6 million impairment loss.



IAS 36 requires impairment losses to be
reversed when there has been a subsequent increase in the recoverable amount. In the case of an impairment loss reversal, the
carrying amount of the asset or CGU is limited to the original carrying amount less depreciation, depletion and amortization as
if no impairment had been recognized for the asset or CGU for prior periods. In 2011, a partial reversal of impairment was recognized
relating to a previous impairment for the Company`s South East Alberta CGU. As a result of the reversal, impairment expense for
the 2011 year was reduced by $2.7 million.



The impairment test is based upon fair
market values for the Company’s properties, including but not limited to an updated external reserve engineering report
which incorporates a full evaluation of reserves on an annual basis or internal reserve updates at quarterly periods, and the
latest commodity pricing deck. Estimating reserves is very complex, requiring many judgments based upon available geological,
geophysical, engineering and economic data. Changes in these judgments could have a material impact on the Company’s estimated
reserves. These estimates may change, having either a negative or positive impact on net earnings as further information becomes
available and as the economic environment changes.



20







Income Taxes



Deferred income taxes arise from differences
between the accounting and tax basis of the Company’s assets and liabilities. For the year ended December 31, 2012, the
Company recognized a deferred income tax expense of $10.1 million compared to $0.8 million in the 2011 year.



At December 31, 2012, the Company had a
total deferred tax asset balance of $1.0 million. IFRS requires that a deferred tax asset be recorded when the tax pools exceeds
the book value of assets, to the extent the amount is probable to be realized.



At December 31, 2012, Bellatrix had approximately
$584 million in tax pools available for deduction against future income as follows:



|($000s)                                  |  | Rate % |                                                                                     |  | 2012 |  |         | 2011 | 
|---------------------------------------- |  | ------ | ----------------------------------------------------------------------------------- |  | ---- |  | ------- | ---- | 
|Intangible resource pools:               |  |        |                                                                                     |  |      |  |         |      | 
|Canadian exploration expenses            |  |        | 100                                                                                 |  |      |  | 56,200  |      | 
|Canadian development expenses            |  |        | 30                                                                                  |  |      |  | 358,700 |      | 
|Canadian oil and gas property expenses   |  |        | 10                                                                                  |  |      |  | 40,400  |      | 
|Foreign resource expenses                |  |        | 10                                                                                  |  |      |  | 800     |      | 
|Attributed Canadian Royalty Income       |  |        | (Alberta) 100                                                                       |  |      |  | 16,100  |      | 
|Undepreciated capital cost (1)           |  |        | 6 – 55                                                                              |  |      |  | 98,000  |      | 
|Non-capital losses (expire through 2027) |  |        | 100                                                                                 |  |      |  | 10,000  |      | 
|Financing costs                          |  |        | 20
                                                                            S.L. |  |      |  | 3,300   |      | 
|                                         |  |        |                                                                                     |  |      |  | 583,500 |      | 

(1) Approximately $91 million of
undepreciated capital cost pools are class 41, which is claimed at a 25% rate.



Cash Flow from Operating Activities,
Funds Flow from Operations and Net Profit (Loss)



As detailed previously in this MD&A,
funds flow from operations is a term that does not have any standardized meaning under GAAP. Funds flow from operations is calculated
as cash flow from operating activities before decommissioning costs incurred and changes in non-cash working capital incurred.



Reconciliation of Cash Flow from Operating Activities and
Funds Flow from Operations

|                                    |  | Years ended December 31, |        
|----------------------------------- |  | ------------------------ | -------
|($000s)                             |  | 2012                     |        
|Cash flow from operating activities |  |                          | 109,328
|Decommissioning costs incurred      |  |                          | 635    
|Change in non-cash working capital  |  |                          | 1,075  
|Funds flow from operations          |  |                          | 111,038



Bellatrix’s cash flow from operating
activities of $109.3 million ($1.02 per basic share and $0.95 per diluted share) for the year ended December 31, 2012 increased
approximately 11% from the $98.2 million ($0.95 per basic share and $0.87 per diluted share) generated in the 2011 year. Bellatrix
generated funds flow from operations of $111.0 million ($1.03 per basic share and $0.96 per diluted share) for the year ended
December 31, 2012, an increase of 18% from $94.2 million ($0.91 per basic share and $0.84 per diluted share) for the 2011 year.



21







The increase in funds flow from operations
between the 2012 and 2011 years was principally due to higher funds from operating netbacks, despite significantly reduced commodity
prices, as well as higher net realized gains on the Company’s commodity risk management contracts, and offset partially
by increased financing expenses and slightly higher general and administrative expenses in 2012 compared to 2011.



Bellatrix maintains a commodity price risk
management program to provide a measure of stability to funds flow from operations. Unrealized mark–to–market gains
or losses are non-cash adjustments to the current fair market value of the contract over its entire term and are included in the
calculation of net profit.



As previously noted in this MD&A, net
profit before certain non-cash items is a non-GAAP measure. A reconciliation between this measure and net loss per the Consolidated
Statement of Comprehensive Income is provided below.



For the year ended December 31, 2012, net
profit before certain non-cash items, net of associated deferred tax impacts, was $21.7 million compared to a net profit of $17.1
million in the 2011 year.



Reconciliation of Net Profit (Loss) to Net Profit Before
Certain Non-Cash Items

|                                                 |  | Years ended December 31, |        
|------------------------------------------------ |  | ------------------------ | -------
|($000s)                                          |  | 2012                     |        
|Net profit (loss) per financial statements       |  |                          | 27,771 
|Items subject to reversal                        |  |                          |        
|Impairment loss on property, plant and equipment |  |                          | 14,820 
|Unrealized (gain) loss on commodity contracts    |  |                          | (10,806
|Loss (gain) on property dispositions             |  |                          | 4,113  
|Gain on property acquisition                     |  |                          | (16,160
|Deferred tax impact of above items               |  |                          | 2,008  
|Net profit before certain non-cash items         |  |                          | 21,746 



A net profit of $27.8 million ($0.26 per
basic share and $0.25 per diluted share) was recognized for the year ended December 31, 2012, compared to a net loss of $5.9 million
($0.06 per basic share and $0.06 per diluted share) in the 2011 year. The net profit recorded in the year ended December 31, 2012
compared to the net loss recorded in the 2011 year is primarily a consequence of higher cash flows as noted above, a $16.2 million
gain on property acquisition recognized in 2012, a net unrealized gain on commodity contracts in the 2012 year compared to a loss
in 2011, and a lower non-cash impairment loss on oil and gas properties, offset somewhat by a higher depletion and depreciation
expense, a total net loss on property dispositions compared to a minor gain on property dispositions in the comparative 2011 year,
and a higher deferred tax expense.



Cash Flow from Operating Activities, Funds Flow from Operations
and Net Profit (Loss)

|                                    |  | Years ended December 31, |        
|----------------------------------- |  | ------------------------ | -------
|($000s, except per share amounts)   |  | 2012                     |        
|Cash flow from operating activities |  |                          | 109,328
|Basic   ($/share)                   |  |                          | 1.02   
|Diluted ($/share)                   |  |                          | 0.95   
|Funds flow from operations          |  |                          | 111,038
|Basic   ($/share)                   |  |                          | 1.03   
|Diluted ($/share)                   |  |                          | 0.96   
|Net  profit (loss)                  |  |                          | 27,771 
|Basic   ($/share)                   |  |                          | 0.26   
|Diluted ($/share)                   |  |                          | 0.25   



22







Capital Expenditures



Bellatrix invested $185.3 million in capital
expenditures, including a $21.0 million property acquisition, during the year ended December 31, 2012, compared to $179.6 million
in the 2011 year.



Capital Expenditures

|                                              |  | Years ended December 31, |        
|--------------------------------------------- |  | ------------------------ | -------
|($000s)                                       |  | 2012                     |        
|Lease acquisitions and retention              |  |                          | 8,303  
|Geological and geophysical                    |  |                          | 290    
|Drilling and completion costs                 |  |                          | 118,783
|Facilities and equipment                      |  |                          | 36,811 
|                                              |  |                          | 164,187
|Drilling incentive credits                    |  |                          | -      
|Exploration and development (1)               |  |                          | 164,187
|Corporate (2)                                 |  |                          | 195    
|Property acquisition                          |  |                          | 20,966 
|Total capital expenditures – cash             |  |                          | 185,348
|Property dispositions – cash                  |  |                          | (6,660 
|Total net capital expenditures – cash         |  |                          | 178,688
|Capital lease additions – non-cash            |  |                          | 10,000 
|Adjustment on property acquisition – non-cash |  |                          | 16,160 
|Other – non-cash (3)                          |  |                          | (285   
|Total non-cash                                |  |                          | 25,875 
|Total net capital expenditures                |  |                          | 204,563



| | (1) | Excludes capitalized costs related to decommissioning liabilities
                                                                 expenditures incurred during the year.
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (2) | Corporate includes office furniture, fixtures and equipment.
| | --- | ------------------------------------------------------------

| | (3) | Other includes non-cash adjustments for the current year’s
                                                                 decommissioning liabilities and share based compensation.
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



During the 2012 year, Bellatrix posted
a 100% success rate drilling and/or participating in 34 gross (26.32 net) wells, resulting in 28 gross (21.32 net) Cardium oil
wells, 2 gross (2.0 net) Cardium condensate-rich gas wells, 1 gross (1.0 net) Duvernay gas well, and 3 gross (2.0 net) Notikewin/Falher
liquids-rich gas wells.



By comparison, Bellatrix drilled or participated
in 54 gross (34.84 net) wells during the year ended December 31, 2011, including 39 gross (29.04 net) oil wells, 14 gross (5.79
net) liquids-rich natural gas wells, and 1 gross (0.007 net) dry hole that was drilled in a non-operated oil unit.



The $185.3 million capital program for
the year ended December 31, 2012 was financed from funds flow from operations and bank debt.



Based on the current economic conditions
and Bellatrix’s operating forecast for 2013, the Company budgets a capital program between $230 to $240 million funded from
the Company’s cash flows and to the extent necessary, bank indebtedness. The 2013 capital budget is expected to be directed
primarily towards horizontal drilling and completions activities in the Cardium and Notikewin areas.



Decommissioning Liabilities



At December 31, 2012, Bellatrix has recorded
decommissioning liabilities of $43.9 million, compared to $45.1 million at December 31, 2011, for future abandonment and reclamation
of the Company’s properties. For the year ended December 31, 2012, decommissioning liabilities decreased by a net $1.2 million
as a result of a reduction of $3.0 million for liabilities reversed on dispositions, a $0.7 million decrease for changes in estimates,
and a $0.6 million decrease for liabilities settled during the year, offset by $2.4 million incurred on property acquisitions
and development activities, and $0.7 million as a result of charges for the unwinding of the discount rates used for fair valuing
the liabilities. The $0.7 million decrease as a result of changes in estimates is primarily due to a discount rate variations
at December 31, 2012 compared to 2011, in addition to other abandonment liability revisions.



23







Liquidity and Capital Resources



As an oil and gas business, Bellatrix has
a declining asset base and therefore relies on ongoing development and acquisitions to replace production and add additional reserves.
Future oil and natural gas production and reserves are highly dependent on the success of exploiting the Company’s existing
asset base and in acquiring additional reserves. To the extent Bellatrix is successful or unsuccessful in these activities, cash
flow could be increased or reduced.



Bellatrix is focused on growing oil and
natural gas production from its diversified portfolio of existing and emerging resource plays in Western Canada. Bellatrix remains
highly focused on key business objectives of maintaining financial strength, optimizing capital investments – attained through
a disciplined approach to capital spending, a flexible investment program and financial stewardship. Natural gas prices are primarily
driven by North American supply and demand, with weather being the key factor in the short term. Bellatrix believes that natural
gas represents an abundant, secure, long-term supply of energy to meet North American needs. Bellatrix’s results are affected
by external market and risk factors, such as fluctuations in the prices of crude oil and natural gas, movements in foreign currency
exchange rates and inflationary pressures on service costs. Market conditions have resulted in Bellatrix experiencing primarily
downward trends in crude oil pricing for 2012 compared to 2011, and a more significant downward trend in natural gas pricing,
although natural gas prices started to recover in the second half of 2012.



Liquidity risk is the risk that Bellatrix
will not be able to meet its financial obligations as they become due. Bellatrix actively manages its liquidity through daily
and longer-term cash, debt and equity management strategies. Such strategies encompass, among other factors: having adequate sources
of financing available through its bank credit facilities, estimating future cash generated from operations based on reasonable
production and pricing assumptions, analysis of economic risk management opportunities, and maintaining sufficient cash flows
for compliance with operating debt covenants. Bellatrix is fully compliant with all of its operating debt covenants.



Bellatrix generally
relies on operating cash flows and its credit facilities to fund capital requirements and provide liquidity. Future liquidity
depends primarily on cash flow generated from operations, existing credit facilities and the ability to access debt and equity
markets. From time to time, the Company accesses capital markets to meet its additional financing needs and to maintain flexibility
in funding its capital programs. There can be no assurance that future debt or equity financing, or cash generated by operations
will be available or sufficient to meet these requirements or for other corporate purposes or, if debt or equity financing is
available, that it will be on terms acceptable to Bellatrix.



Credit risk is
the risk of financial loss to Bellatrix if a customer or counterparty to a financial instrument fails to meet its contractual
obligations, and arises principally from Bellatrix’s trade receivables from joint venture partners, petroleum and natural
gas marketers, and financial derivative counterparties.



A substantial
portion of Bellatrix’s accounts receivable are with customers and joint interest partners in the petroleum and natural gas
industry and are subject to normal industry credit risks. Bellatrix sells substantially all of its production to seven primary
purchasers under standard industry sale and payment terms. The most significant 60 day exposure to a single counterparty is currently
approximately $12.6 million. Purchasers of Bellatrix’s natural gas, crude oil and natural gas liquids are subject to a periodic
internal credit review to minimize the risk of non-payment. Bellatrix has continued to closely monitor and reassess the creditworthiness
of its counterparties, including financial institutions. This has resulted in Bellatrix reducing or mitigating its exposures to
certain counterparties where it is deemed warranted and permitted under contractual terms.



Bellatrix may be exposed to third party
credit risk through its contractual arrangements with its current or future joint venture partners, marketers of its petroleum
and natural gas production, derivative counterparties and other parties. In the event such entities fail to meet their contractual
obligations to Bellatrix, such failures may have a material adverse effect on the Company’s business, financial condition,
results of operations and prospects. In addition, poor credit conditions in the industry and of joint venture partners may impact
a joint venture partner’s willingness to participate in Bellatrix’s ongoing capital program, potentially delaying
the program and the results of such program until Bellatrix finds a suitable alternative partner.



Total net debt levels of $189.6 million
at December 31, 2012 have increased by $70.3 million from $119.3 million at December 31, 2011, primarily as a consequence of an
increase in a working capital deficiency and bank debt as the Company executed its 2012 capital program. Total net debt includes
the liability component of the 4.75% Debentures and excludes unrealized commodity contract assets and liabilities, deferred taxes,
finance lease obligations, deferred liabilities and decommissioning liabilities.



24







Funds flow from operations represents 60%
of the funding requirements for Bellatrix’s capital expenditures for the year ended December 31, 2012.



Effective December 13, 2012, the Company’s
borrowing base was increased from $200 million to $220 million through to the next scheduled borrowing base determination to be
completed on or before May 31, 2013. Effective May 31, 2012, the revolving period of the credit facility was extended from June
26, 2012 to June 25, 2013. The Company’s credit facilities consist of a $25 million demand operating facility provided by
a Canadian bank and a $195 million extendible revolving term credit facility provided by two Canadian banks and a Canadian financial
institution. Amounts borrowed under the credit facility bear interest at a floating rate based on the applicable Canadian prime
rate, U.S. base rate, the LIBOR margin rate, or the bankers’ acceptance stamping fee, plus between 1.00% and 3.50%, depending
on the type of borrowing and the Company’s debt to cash flow ratio. The credit facilities are secured by a $400 million
debenture containing a first ranking charge and security interest. Bellatrix has provided a negative pledge and undertaking to
provide fixed charges over its properties in certain circumstances. A standby fee is charged of between 0.50% and 0.875% on the
undrawn portion of the credit facilities, depending on the Company’s debt to cash flow ratio.



The revolving period for the revolving
term credit facility will end on June 25, 2013, unless extended for a further 364 day period. Should the facility not be extended
it will convert to a non-revolving term facility with the full amount outstanding due 366 days after the last day of the revolving
period of June 25, 2013. The borrowing base will be subject to re-determination on May 31 and November 30 in each year prior to
maturity, with the next semi-annual redetermination occurring on May 31, 2013.



As at December 31, 2012, approximately
$87.0 million or 40% of unused and available bank credit under its credit facilities was available to fund Bellatrix’s ongoing
capital spending and operational requirements.



Bellatrix currently has commitments associated
with its credit facilities outlined above and the commitments outlined under the “Commitments” section. Bellatrix
continually monitors its capital spending program in light of the recent volatility with respect to commodity prices and Canadian
dollar exchange rates with the aim of ensuring the Company will be able to meet future anticipated obligations incurred from normal
ongoing operations with funds flow from operations and draws on Bellatrix’s credit facility, as necessary. Bellatrix has
the ability to fund its 2013 capital program of $230 to $240 million by utilizing cash flow, and to the extent necessary, bank
indebtedness.



As at February 25, 2013, Bellatrix had
outstanding a total of 9,334,894 options exercisable at an average exercise price of $3.45 per share, $55.0 million principal
amount of 4.75% Debentures convertible into common shares (at a conversion price of $5.60 per share) and 107,880,996 common shares.



Related Party Transactions



Previous to 2012, the Company entered into
agreements to obtain financing in the amount of $5.3 million for the construction of certain facilities.



Members of the Company’s management
team and entities affiliated with them provided financing of $900,000. The terms of the transactions with those related parties
were the same as those with arms-length participants.



Commitments



As at December 31, 2012, Bellatrix committed
to drill 3 gross (1.7 net) wells pursuant to farm-in agreements. Bellatrix expects to satisfy these drilling commitments at an
estimated cost of approximately $6.5 million.



25







In addition, Bellatrix entered into two
joint venture agreements during the 2011 year and an additional joint venture agreement during 2012. The agreements include a
minimum commitment for the Company to drill a specified number of wells each year over the term of the individual agreements.
The details of these agreements are provided in the table below:





|Joint Venture Agreement                       |  | Feb. 1, 2011 |              |  | Aug. 4, 2011 |   |              | Dec. 14, 2012 | 
|--------------------------------------------- |  | ------------ | ------------ |  | ------------ | - | ------------ | ------------- | 
|Agreement Term                                |  |              | 2011 to 2015 |  |              |   | 2011 to 2016 |               | 
|Minimum wells per year (gross and net)        |  |              | 3            |  |              |   | 5 to 10      |               | 
|Minimum total wells (gross and net)           |  |              | 15           |  |              |   | 40           |               | 
|Estimated total cost  ($000s)                 |  | $            | 52.5         |  |              | $ | 140.0        |               | 
|Remaining wells to drill at December 31, 2012 |  |              | 8            |  |              |   | 32           |               | 
|Remaining estimated total cost ($000s)        |  | $            | 28.0         |  |              | $ | 112.0        |               | 



The Company has the following liabilities
as at December 31, 2012:



|Liabilities ($000s)                          |  | Total |         |  | < 1 Year |   |        | 1-3 Years |  |   | 4-5 Years |  |  | More than 5 years |      
|-------------------------------------------- |  | ----- | ------- |  | -------- | - | ------ | --------- |  | - | --------- |  |  | ----------------- | -----
|Accounts payable and accrued liabilities (1) |  | $     | 50,771  |  |          | $ | 50,771 |           |  | $ | -         |  |  | $                 | -    
|Long-term debt – principal (2)               |  |       | 133,047 |  |          |   | -      |           |  |   | 133,047   |  |  |                   | -    
|Convertible debentures – principal           |  |       | 55,000  |  |          |   | -      |           |  |   | 55,000    |  |  |                   | -    
|Convertible debentures – interest (3)        |  |       | 6,085   |  |          |   | 2,613  |           |  |   | 3,472     |  |  |                   | -    
|Commodity contract liability                 |  |       | 7,345   |  |          |   | 1,131  |           |  |   | 6,214     |  |  |                   | -    
|Decommissioning liabilities (4)              |  |       | 43,909  |  |          |   | -      |           |  |   | 7,187     |  |  |                   | 5,796
|Finance lease obligation                     |  |       | 14,556  |  |          |   | 1,425  |           |  |   | 3,069     |  |  |                   | 3,172
|Total                                        |  | $     | 310,713 |  |          | $ | 55,940 |           |  | $ | 207,989   |  |  | $                 | 8,968



| | (1) | Includes $0.4 million of accrued coupon interest payable
in relation to the 4.75% Debentures and $0.2 million of accrued interest payable in relation to the credit facilities is included
in Accounts Payable and Accrued Liabilities.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (2) | Bank debt is based on a revolving term which is reviewed
annually and converts to a 366 day non-revolving facility if not renewed. Interest due on the bank credit facility is calculated
based upon floating rates.
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (3) | The 4.75% Debentures outstanding at December 31, 2012
bear interest at a coupon rate of 4.75%, which currently requires total annual interest payments of $2.6 million.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (4) | Amounts represent the inflated, discounted future abandonment
and reclamation expenditures anticipated to be incurred over the life of the Company’s properties (between 2013 and 2053).
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Bellatrix will also have drilling commitments
associated with its recently announced joint venture agreement in January, 2013 with a South Korean based company. Closing of
this agreement is expected to occur on or before April 30, 2013. Refer to the details discussed earlier herein.



Off-Balance Sheet Arrangements



The Company has certain fixed term lease
agreements, including primarily office space leases, which were entered into in the normal course of operations. All leases have
been treated as operating leases whereby the lease payments are included in operating expenses or G&A expenses depending on
the nature of the lease. The lease agreements do not currently provide for early termination. No asset or liability value has
been assigned to these leases in the balance sheet as of December 31, 2012.



26







The Company is committed to payments under
fixed term operating leases which do not currently provide for early termination. The Company’s commitment for office space
as at December 31, 2012 is as follows:





|($000s) |  | Gross  |       |  | Expected   |   |     |            | 
|------- |  | ------ | ----- |  | ---------- | - | --- | ---------- | 
|Year    |  | Amount |       |  | Recoveries |   |     | Net amount | 
|2013    |  | $      | 2,254 |  |            | $ | 947 |            | 
|2014    |  |        | 1,520 |  |            |   | 641 |            | 





Subsequent to year end, Bellatrix entered
into a fixed term operating lease agreement for corporate office space in a new location, commencing September 1, 2013. Bellatrix
is currently pursuing subleasing options for the remaining term of its existing corporate office space. A summary of the Company’s
commitment for the new office space is as follows:



|($000s)           |  |              |       
|----------------- |  | ------------ | ------
|Year              |  | Total amount |       
|2013              |  | $            | 388   
|2014              |  |              | 2,153 
|2015              |  |              | 2,243 
|2016              |  |              | 2,243 
|2017              |  |              | 2,243 
|More than 5 years |  |              | 14,449



Business Prospects and 2013 Year Outlook



Bellatrix continues to develop its core
assets and conduct exploration programs utilizing its large inventory of geological prospects. As at December 31, 2012, Bellatrix
has approximately 206,638 net undeveloped acres and including all opportunities has in excess of 1,700 net exploration drilling
opportunities identified.



As a result of the recently announced joint
venture with a Seoul Korea based company, Bellatrix’s 2013 capital expenditure budget has been increased to between $230
and $240 million. A total capital program of $365 million is anticipated including the capital expected to be invested by the
joint venture partner. Based on the timing of proposed expenditures, downtime for scheduled and unscheduled plant turnarounds,
completion of required infrastructure, and normal production declines, execution of the 2013 capital expenditure plan is expected
to provide average daily production of approximately 24,000 boe/d to 25,000 boe/d, and an exit rate of approximately 30,000 boe/d
to 31,000 boe/d.



The Company has initiated the 2013 program
by instituting drilling of multiple horizontal wells from single surface locations. Pad drilling enhances the opportunity to efficiently
develop the resource while minimizing the environmental footprint and improving our cost and on-stream efficiencies. Pad drilling
also facilitates drilling through the spring breakup months of Q2. As a result the Company plans to run 3 rigs throughout the
second quarter ramping up to 7 or 8 rigs for the second half of 2013.



27







Financial Reporting Update



Future Accounting Pronouncements



The following pronouncements from the IASB
are applicable to Bellatrix and will become effective for future reporting periods, but have not yet been adopted:



IFRS 9 - “Financial Instruments”,
which is the result of the first phase of the IASB’s project to replace IAS 39, “Financial Instruments: Recognition
and Measurement”. The new standard replaces the current multiple classification and measurement models for financial assets
and liabilities with a single model that has only two classification categories: amortized cost and fair value. This standard
is effective for annual periods beginning on or after January 1, 2015 with different transitional arrangements depending on the
date of initial application. The extent of the impact of the adoption of IFRS 9 has not yet been determined.



IFRS 10 - “Consolidated Financial
Statements” (“IFRS 10”), which requires an entity to consolidate an investee when it is exposed, or has rights,
to variable returns from its involvement with the investee and has the ability to affect those returns through its power over
the investee. Under existing IFRS, consolidation is required when an entity has the power to govern the financial and operating
policies of an entity so as to obtain benefits from its activities. This standard replaces SIC-12 – “Consolidation—Special
Purpose Entities” and parts of IAS 27 – “Consolidated and Separate Financial Statements.” Bellatrix intends
to adopt IFRS 10, including the amendments issued in June 2012, in its financial statements for the annual period beginning on
January 1, 2013. The adoption of IFRS 10 is currently not anticipated to impact the Company’s financial statements.



IFRS 11 – “Joint Arrangements”
(“IFRS 11”), requires a venturer to classify its interest in a joint arrangement as a joint venture or joint operation,
each having its own accounting model. Joint ventures will be accounted for using the equity method of accounting, whereas for
a joint operation the venture will recognize its share of the assets, liabilities, revenue and expenses of the joint operation.
The standard provides for a more substance based reflection of joint arrangements by focusing on the rights and obligations of
the arrangement, rather than its legal form. IFRS 11 replaces IAS 31 – “Interests in Joint Ventures” and SIC-13
– “Jointly Controlled Entities—Non-monetary Contributions by Venturers” and establishes principles for
accounting for all joint arrangements. Bellatrix intends to adopt IFRS 11, including the amendments issued in June 2012, in its
financial statements for the annual period beginning on January 1, 2013. The adoption of IFRS 11 is currently not anticipated
to have a significant impact on the Company’s financial statements.



IFRS 12 – “Disclosure of Interests
in Other Entities” (“IFRS 12”), establishes disclosure requirements for interests in other entities, such as
joint arrangements, associates, special purpose vehicles and off balance sheet vehicles. The standard carries forward existing
disclosures and also introduces significant additional disclosure requirements that address the nature of, and risks associated
with, an entity’s interests in other entities. Bellatrix intends to adopt IFRS 12, including the amendments issued in June
2012, in its financial statements for the annual period beginning on January 1, 2013. The adoption of IFRS 12 is currently not
anticipated to have a significant impact on the Company’s financial statements.



IFRS 13 – “Fair Value Measurement”
(“IFRS 13”), is a comprehensive standard for fair value measurement and disclosure requirements for use across all
IFRSs. The new standard clarifies that fair value is the price that would be received to sell an asset, or paid to transfer a
liability in an orderly transaction between market participants, at the measurement date. It also establishes disclosures about
fair value measurement. Under existing IFRS, guidance on measuring and disclosing fair value is dispersed among the specific standards
requiring fair value measurements and in many cases does not reflect a clear measurement basis or consistent disclosures. IFRS
13 is effective for annual periods beginning on or after January 1, 2013 and applies prospectively from the beginning of the annual
period in which the standard is adopted. The extent of the impact of the adoption of IFRS 13 on the Company’s financial
statements has not yet been determined.



In June 2011, the IASB issued an amendment
to IAS 1 - “Presentation of Financial Statements” (“IAS 1”) requiring companies to group items presented
within Other Comprehensive Income based on whether they may be subsequently reclassified to profit or loss.  This amendment
to IAS 1 is effective for annual periods beginning on or after July 1, 2012 with full retrospective application.  Early adoption
is permitted. Bellatrix intends to adopt the amendments in its financial statements for the annual period beginning on January
1, 2013. The extent of the impact of the amendments on the financial statements has not yet been determined.



28







Business Risks and Uncertainties



General



Bellatrix’s production and exploration
activities are concentrated in the Western Canadian Sedimentary Basin, where activity is highly competitive and includes a variety
of different sized companies ranging from smaller junior producers to the much larger integrated petroleum companies.



Bellatrix is subject to the various types
of business risks and uncertainties including:



| | · | Finding
                                                                                                               and developing
                                                                                                               oil and natural
                                                                                                               gas reserves at
                                                                                                               economic costs;
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | Production
                                                                                                               of oil and natural
                                                                                                               gas in commercial
                                                                                                               quantities; and
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | Marketability
                                                                                                               of oil and natural
                                                                                                               gas produced.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



In order to reduce exploration risk, the
Company strives to employ highly qualified and motivated professional employees with a demonstrated ability to generate quality
proprietary geological and geophysical prospects. To help maximize drilling success, Bellatrix combines exploration in areas that
afford multi-zone prospect potential, targeting a range of low to moderate risk prospects with some exposure to select high-risk
with high-reward opportunities. Bellatrix also explores in areas where the Company has significant drilling experience.



The Company mitigates its risk related
to producing hydrocarbons through the utilization of the most appropriate technology and information systems managed by qualified
personnel. In addition, Bellatrix seeks to maintain operational control of the majority of its prospects.



Oil and gas exploration and production
can involve environmental risks such as pollution of the environment and destruction of natural habitat, as well as safety risks
such as personal injury. In order to mitigate such risks, Bellatrix conducts its operations at high standards and follows safety
procedures intended to reduce the potential for personal injury to employees, contractors and the public at large. The Company
maintains current insurance coverage for general and comprehensive liability as well as limited pollution liability. The amount
and terms of this insurance are reviewed on an ongoing basis and adjusted as necessary to reflect changing corporate requirements,
as well as industry standards and government regulations. Bellatrix may periodically use financial or physical delivery contracts
to reduce its exposure against the potential adverse impact of commodity price volatility, as governed by formal policies approved
by senior management subject to controls established by the Board.



Pricing and Marketing



Oil



The producers of oil are entitled to negotiate
sales contracts directly with oil purchasers, with the result that the market determines the price of oil. Worldwide supply and
demand primarily determines oil prices. The specific price depends in part on oil quality, prices of competing fuels, distance
to market, the availability of transportation, the value of refined products, the supply/demand balance and contractual terms
of sale. Oil exporters are also entitled to enter into export contracts with terms not exceeding one year in the case of light
crude oil and two years in the case of heavy crude oil, provided that an order approving such export has been obtained from the
National Energy Board of Canada (the "NEB"). Any oil export to be made pursuant to a contract of longer duration (to
a maximum of 25 years) requires an exporter to obtain an export licence from the NEB. The NEB is currently undergoing a consultation
process to update the current regulations governing the issuance of export licences. The updating process is necessary to meet
the criteria set out in the federal Jobs, Growth and Long-term Prosperity Act which received Royal Assent on June 29, 2012 (the
"Prosperity Act"). In this transitory period, the NEB has issued, and is currently following an "Interim Memorandum
of Guidance concerning Oil and Gas Export Applications and Gas Import Applications under Part VI of the National Energy Board
Act".



29





Natural Gas



Alberta's natural gas market has been deregulated
since 1985. Supply and demand determine the price of natural gas and price is calculated at the sale point, being the wellhead,
the outlet of a gas processing plant, on a gas transmission system such as the Alberta "NIT" (Nova Inventory Transfer),
at a storage facility, at the inlet to a utility system or at the point of receipt by the consumer. Accordingly, the price for
natural gas is dependent upon such producer's own arrangements (whether long or short term contracts and the specific point of
sale). As natural gas is also traded on trading platforms such as the Natural Gas Exchange (NGX) or the New York Mercantile Exchange
(NYMEX) in the United States, spot and future prices can be set by such supply and demand. Natural gas exported from Canada is
subject to regulation by the NEB and the Government of Canada. Exporters are free to negotiate prices and other terms with purchasers,
provided that the export contracts must continue to meet certain other criteria prescribed by the NEB and the Government of Canada.
Natural gas (other than propane, butane and ethane) exports for a term of less than two years or for a term of two to 20 years
(in quantities of not more than 30,000 m3/day) must be made pursuant to an NEB order. Any natural gas export to be made pursuant
to a contract of longer duration (to a maximum of 25 years) or for a larger quantity requires an exporter to obtain an export
licence from the NEB.



Royalties and Incentives - General



In addition to federal regulation, each
province has legislation and regulations which govern royalties, production rates and other matters. The royalty regime in a given
province is a significant factor in the profitability of oil sands projects, crude oil, natural gas liquids, sulphur and natural
gas production. Royalties payable on production from lands other than Crown lands are determined by negotiation between the mineral
freehold owner and the lessee, although production from such lands is subject to certain provincial taxes and royalties. Royalties
from production on Crown lands are determined by governmental regulation and are generally calculated as a percentage of the value
of gross production. The rate of royalties payable generally depends in part on prescribed reference prices, well productivity,
geographical location, field discovery date, method of recovery and the type or quality of the petroleum product produced. Other
royalties and royalty like interests are carved out of the working interest owner's interest, from time to time, through non public
transactions. These are often referred to as overriding royalties, gross overriding royalties, net profits interests, or net carried
interests.



Occasionally the governments of the western
Canadian provinces create incentive programs for exploration and development. Such programs often provide for royalty rate reductions,
royalty holidays or royalty tax credits and are generally introduced when commodity prices are low to encourage exploration and
development activity by improving earnings and cash flow within the industry.



Land Tenure



The respective provincial governments predominantly
own crude oil and natural gas located in the western provinces. Provincial governments grant rights to explore for and produce
oil and natural gas pursuant to leases, licences, and permits for varying terms, and on conditions set forth in provincial legislation
including requirements to perform specific work or make payments. Private ownership of oil and natural gas also exists in such
provinces and rights to explore for and produce such oil and natural gas are granted by lease on such terms and conditions as
may be negotiated.



Each of the provinces of Alberta, British
Columbia and Saskatchewan has implemented legislation providing for the reversion to the Crown of mineral rights to deep, non-productive
geological formations at the conclusion of the primary term of a lease or license. On March 29, 2007, British Columbia expanded
its policy of deep rights reversion for new leases to provide for the reversion of both shallow and deep formations that cannot
be shown to be capable of production at the end of their primary term.



Alberta also has a policy of "shallow
rights reversion" which provides for the reversion to the Crown of mineral rights to shallow, non-productive geological formations
for all leases and licenses. For leases and licenses issued subsequent to January 1, 2009, shallow rights reversion will be applied
at the conclusion of the primary term of the lease or license. Holders of leases or licences that have been continued indefinitely
prior to January 1, 2009 will receive a notice regarding the reversion of the shallow rights, which will be implemented three
years from the date of the notice. Leases and licences granted prior to January 1, 2009, but continued after that date, are not
subject to shallow rights reversion until they continue past their primary term (at which time the application of deep rights
reversion occurs). Afterwards, the holders of such agreements will be served with shallow rights reversion notices based on vintage
and location similar to leases and licences that were already continued as of January 1, 2009. The order in which these agreements
will receive reversion notices will depend on their vintage and location.



30







Environmental Regulation



The oil and natural gas industry is currently
subject to environmental regulations pursuant to a variety of provincial and federal legislation, all of which is subject to governmental
review and revision from time to time. Such legislation provides for restrictions and prohibitions on the release or emission
of various substances produced in association with certain oil and gas industry operations, such as sulphur dioxide and nitrous
oxide. In addition, such legislation sets out the requirements for the satisfactory abandonment and reclamation of well and facility
sites. Compliance with such legislation can require significant expenditures and a breach of such requirements may result in suspension
or revocation of necessary licenses and authorizations, civil liability for pollution damage, and the imposition of material fines
and penalties. Implementation of strategies for reducing greenhouse gases could have a material impact on the nature of oil and
gas operations, including those of the Company. Given the evolving nature of the debate related to climate change and the control
of greenhouse gases and resulting requirements, it is not possible to predict either the nature of those requirements or the impact
on the Company and its operations and financial condition.



Global Financial Crisis



Recent market events and conditions, including
disruptions in the international credit markets and other financial systems and the American and European sovereign debt levels
have caused significant volatility in commodity prices. These events and conditions have caused a decrease in confidence in the
broader U.S. and global credit and financial markets and have created a climate of greater volatility, less liquidity, widening
of credit spreads, a lack of price transparency, increased credit losses and tighter credit conditions. Notwithstanding various
actions by governments, concerns about the general condition of the capital markets, financial instruments, banks, investment
banks, insurers and other financial institutions caused the broader credit markets to further deteriorate and stock markets to
decline substantially. While there are signs of economic recovery, these factors have negatively impacted company valuations and
are likely to continue to impact the performance of the global economy going forward. Petroleum prices are expected to remain
volatile for the near future as a result of market uncertainties over the supply and demand of these commodities due to the current
state of the world economies, actions taken by OPEC and the ongoing global credit and liquidity concerns. This volatility may
in the future affect the Company's ability to obtain equity or debt financing on acceptable terms.



Substantial Capital Requirements



The Company anticipates making substantial
capital expenditures for the acquisition, exploration, development and production of oil and natural gas reserves in the future.
As future capital expenditures will be financed out of cash generated from operations, borrowings and possible future equity offerings,
the Company's ability to do so is dependent on, among other factors, the overall state of the capital markets, the Company’s
credit rating (if applicable), interest rates, royalty rates, tax burden due to current and future tax laws, and investor appetite
for investments in the energy industry and the Company's securities in particular. Further, if the Company’s revenues or
reserves decline, it may not have access to the capital necessary to undertake or complete future drilling programs. There can
be no assurance that debt or equity financing, or cash generated by operations will be available or sufficient to meet these requirements
or for other corporate purposes or, if debt or equity financing is available, that it will be on terms acceptable to the Company.
The inability of the Company to access sufficient capital for its operations could have a material adverse effect on the Company's
business financial condition, results of operations and prospects.



Third Party Credit Risk



The Company may be exposed to third party
credit risk through its contractual arrangements with its current or future joint venture partners, marketers of its petroleum
and natural gas production and other parties. In the event such entities fail to meet their contractual obligations to the Company,
such failures may have a material adverse effect on the Company's business, financial condition, results of operations and prospects.
In addition, poor credit conditions in the industry and of joint venture partners may impact a joint venture partner's willingness
to participate in the Company's ongoing capital program, potentially delaying the program and the results of such program until
the Company finds a suitable alternative partner.



31







Critical Accounting Estimates



The reader is advised that the critical
accounting estimates, policies, and practices as described herein continue to be critical in determining Bellatrix’s financial
results.



The reader is cautioned that the preparation
of financial statements in accordance with GAAP requires management to make certain judgments and estimates that affect the reported
amounts of assets, liabilities, revenues and expenses. The following discussion outlines accounting policies and practices that
are critical to determining Bellatrix’s financial results.



Derivatives



The fair value of commodity contracts is
estimated, whenever possible, based on published market prices, and if not available, on estimates from third party brokers, as
at the balance sheet date and may differ from what will eventually be realized.



Oil and gas reserves



Reserves and resources are used in the
units of production calculation for depreciation, depletion and amortization and the impairment analysis which affect net profit.
There are numerous uncertainties inherent in estimating oil and gas reserves. Estimating reserves is very complex, requiring many
judgments based on geological, geophysical, engineering and economic data. Changes in these judgments could have a material impact
on the estimated reserves. These estimates may change, having either a negative or positive effect on net profit as further information
becomes available and as the economic environment changes.



Depreciation and depletion



Depletion of petroleum and natural gas
properties is provided using the unit-of-production method based on production volumes before royalties in relation to total estimated
proved and probable reserves as determined annually by independent engineers and internal reserve evaluations on a quarterly basis
determined in accordance with National Instrument 51-101. Natural gas reserves and production are converted at the energy equivalent
of six thousand cubic feet to one barrel of oil.



Calculations for depletion and depreciation
of production equipment are based on total capitalized costs plus estimated future development costs of proved and probable undeveloped
reserves less the estimated net realizable value of production equipment and facilities after the proved reserves are fully produced.
The costs of acquiring and evaluating unproved properties are excluded from depletion calculations.



Recoverability of asset carrying values



The Company assesses its oil and gas properties,
including exploration and evaluation assets, for possible impairment if there are events or changes in circumstances that indicate
that carrying values of the assets may not be recoverable, or at least at every reporting date.



The assessment of any impairment of property,
plant and equipment is dependent upon estimates of recoverable amount that take into account factors such as reserves, economic
and market conditions, timing of cash flows, the useful lives of assets and their related salvage values.



Bellatrix’s assets are aggregated
into CGUs, for the purpose of calculating impairment, based on their ability to generate largely independent cash flows, geography,
geology, production profile and infrastructure of its assets. By their nature, these estimates and assumptions are subject to
measurement uncertainty and may impact the carrying value of the Company’s assets in future periods.



32







Decommissioning obligations



Provisions for decommissioning obligations
associated with the Company’s drilling operations are based on current legal and constructive requirements, technology,
price levels and expected plans for remediation. Actual costs and cash outflows can differ from estimates because of changes in
laws and regulations, public expectations, prices, discovery and analysis of site conditions and changes in clean up technology.



Share-based compensation



The fair value of stock options granted
is measured using a Black Scholes model. Measurement inputs include share price on measurement date, exercise price of the option,
expected volatility, expected life of the options, expected dividends and the risk-free rate. The Company estimates volatility
based on the historical share price. The expected life of the options is based on historical experience and general option holder
behavior. Dividends were not taken into consideration as the Company does not expect to pay dividends. Management also makes an
estimate of the number of options that will be forfeited and the rate is adjusted to reflect the actual number of options that
actually vest.



Income taxes



Related assets and liabilities are recognized
for the estimated tax consequences between amounts included in the financial statements and their tax base using substantively
enacted future income tax rates. Timing of future revenue streams and future capital spending changes can affect the timing of
any temporary differences, and accordingly affect the amount of the deferred tax asset or liability calculated at a point in time.
These differences could materially impact earnings.



Business Combinations



Business combinations are accounted for
using the acquisition method of accounting. The determination of fair value often requires management to make assumptions and
estimates about future events. The assumptions and estimates with respect to determining the fair value of property, plant, and
equipment, and exploration and evaluation assets acquired generally require the most judgment and include estimates of reserves
acquired, forecast benchmark commodity prices, and discount rates. Changes in any of the assumptions or estimates used in determining
the fair value of acquired assets and liabilities could impact the amounts assigned to assets, liabilities in the purchase price
allocation, and any resulting gain or loss. Future net earnings can be affected as a result of changes in future depletion, depreciation
and accretion, and asset impairments.



Legal, Environmental Remediation and
Other Contingent Matters



The Company is involved in various claims
and litigation arising in the normal course of business. While the outcome of these matters is uncertain and there can be no assurance
that such matters will be resolved in the Company’s favor, the Company does not currently believe that the outcome of adverse
decisions in any pending or threatened proceeding related to these and other matters or any amount which it may be required to
pay by reason thereof would have a material adverse impact on its financial position or results of operations.



The Company reviews legal, environmental
remediation and other contingent matters to both determine whether a loss is probable based on judgment and interpretation of
laws and regulations and determine that the loss can reasonably be estimated. When the loss is determined, it is charged to earnings.
The Company’s management monitor known and potential contingent matters and make appropriate provisions by charges to earnings
when warranted by the circumstances.



With the above risks and uncertainties
the reader is cautioned that future events and results may vary substantially from that which Bellatrix currently foresees.



33







Controls and Procedures



Disclosure Controls and Procedures



The Company’s Chief Executive Officer
and Chief Financial Officer have designed, or caused to be designed under their supervision, disclosure controls and procedures
to provide reasonable assurance that: (i) material information relating to the Company is made known to the Company’s Chief
Executive Officer and Chief Financial Officer by others, particularly during the period in which the annual and interim filings
are being prepared; and (ii) information required to be disclosed by the Company in its annual filings, interim filings or other
reports filed or submitted by it under securities legislation is recorded, processed, summarized and reported within the time
period specified in securities legislation. Such officers have evaluated, or caused to be evaluated under their supervision, the
effectiveness of the Company’s disclosure controls and procedures at the financial year end of the Company and have concluded
that the Company’s disclosure controls and procedures are effective at the financial year end of the Company for the foregoing
purposes.



Internal Control over Financial Reporting



The Company’s Chief Executive Officer
and Chief Financial Officer have designed, or caused to be designed under their supervision, internal control over financial reporting
to provide reasonable assurance regarding the reliability of the Company’s financial reporting and the preparation of financial
statements for external purposes in accordance with GAAP. Such officers have evaluated, or caused to be evaluated under their
supervision, the effectiveness of the Company’s internal control over financial reporting at the financial year end of the
Company and concluded that the Company’s internal control over financial reporting is effective at the financial year end
of the Company for the foregoing purpose.



The Company is required to disclose herein
any change in the Company’s internal control over financial reporting that occurred during the period beginning on October
1, 2012 and ended on December 31, 2012 that has materially affected, or is reasonably likely to materially affect, the Company’s
internal control over financial reporting. No material changes in the Company’s internal control over financial reporting
were identified during such period that has materially affected, or are reasonably likely to materially affect, the Company’s
internal control over financial reporting.



It should be noted that a control system,
including the Company’s disclosure and internal controls and procedures, no matter how well conceived, can provide only
reasonable, but not absolute, assurance that the objectives of the control system will be met and it should not be expected that
the disclosure and internal controls and procedures will prevent all errors or fraud.



Sensitivity Analysis



The table below shows sensitivities to
funds flow from operations as a result of product price, exchange rate, and interest rate changes. This is based on actual average
prices received for the fourth quarter of 2012 and average production volumes of 18,763 boe/d during that period, as well as the
same level of debt outstanding at December 31, 2012. Diluted weighted average shares are based upon the fourth quarter of 2012.
These sensitivities are approximations only, and not necessarily valid under other significantly different production levels or
product mixes. Commodity price risk management activities can significantly affect these sensitivities. Changes in any of these
parameters will affect funds flow as shown in the table below:



|                                         |  | Funds Flow from Operations (1) |       |  | Funds Flow  from Operations(1) | 
|---------------------------------------- |  | ------------------------------ | ----- |  | ------------------------------ | 
|                                         |  | (annualized)                   |       |  | Per Diluted Share              | 
|Sensitivity Analysis                     |  | ($000s)                        |       |  | ($)                            | 
|Change of US $1/bbl WTI                  |  |                                | 1,500 |  |                                | 
|Change of $0.10/ mcf                     |  |                                | 2,600 |  |                                | 
|Change of US $0.01 CDN/ US exchange rate |  |                                | 1,100 |  |                                | 
|Change in prime of 1%                    |  |                                | 1,300 |  |                                | 





| | (1) | The term “funds flow from operations” should not be considered an alternative to,
or more meaningful than cash flow from operating activities as determined in accordance with GAAP as an indicator of the Company’s
performance. Therefore reference to additional GAAP measures of diluted funds flow from operations or funds flow from operations
per share may not be comparable with the calculation of similar measures for other entities. Management uses funds flow from operations
to analyze operating performance and leverage and considers funds flow from operations to be a key measure as it demonstrates the
Company’s ability to generate the cash necessary to fund future capital investments and to repay debt. The reconciliation
between cash flow from operating activities and funds flow from operations can be found elsewhere herein. Funds flow from operations
per share is calculated using the weighted average number of common shares for the period.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



34







Selected Quarterly Consolidated Information



The following table sets forth selected
consolidated financial information of the Company for the quarters in 2012 and 2011.



|2012 – Quarter ended (unaudited)              |  |          |        |  |         |   |        |          |  |   |         |  
|--------------------------------------------- |  | -------- | ------ |  | ------- | - | ------ | -------- |  | - | ------- | -
|($000s, except per share amounts)             |  | March 31 |        |  | June 30 |   |        | Sept. 30 |  |   | Dec. 31 |  
|Revenues before royalties and risk management |  |          | 58,191 |  |         |   | 50,714 |          |  |   | 48,126  |  
|Cash flow from operating activities           |  |          | 24,056 |  |         |   | 28,458 |          |  |   | 24,807  |  
|Cash flow from operating activities per share |  |          |        |  |         |   |        |          |  |   |         |  
|Basic                                         |  | $        | 0.22   |  |         | $ | 0.24   |          |  | $ | 0.23    |  
|Diluted                                       |  | $        | 0.21   |  |         | $ | 0.22   |          |  | $ | 0.22    |  
|Funds flow from operations (1)                |  |          | 29,194 |  |         |   | 25,366 |          |  |   | 26,613  |  
|Funds flow from operations per share (1)      |  |          |        |  |         |   |        |          |  |   |         |  
|Basic                                         |  | $        | 0.27   |  |         | $ | 0.24   |          |  | $ | 0.25    |  
|Diluted                                       |  | $        | 0.25   |  |         | $ | 0.22   |          |  | $ | 0.23    |  
|Net profit (loss)                             |  |          | 9,172  |  |         |   | 9,963  |          |  |   | (615    | )
|Net profit (loss) per share                   |  |          |        |  |         |   |        |          |  |   |         |  
|Basic                                         |  | $        | 0.09   |  |         | $ | 0.09   |          |  | $ | (0.01   | )
|Diluted                                       |  | $        | 0.08   |  |         | $ | 0.09   |          |  | $ | (0.01   | )
|Net capital expenditures (cash)               |  |          | 73,831 |  |         |   | 16,284 |          |  |   | 35,515  |  



|2011 – Quarter ended (unaudited)              |  |          |        |   |         |   |        |          |  |   |         | 
|--------------------------------------------- |  | -------- | ------ | - | ------- | - | ------ | -------- |  | - | ------- | 
|($000s, except per share amounts)             |  | March 31 |        |   | June 30 |   |        | Sept. 30 |  |   | Dec. 31 | 
|Revenues before royalties and risk management |  |          | 40,535 |   |         |   | 53,444 |          |  |   | 49,145  | 
|Cash flow from operating activities           |  |          | 15,718 |   |         |   | 23,825 |          |  |   | 28,023  | 
|Cash flow from operating activities per share |  |          |        |   |         |   |        |          |  |   |         | 
|Basic                                         |  | $        | 0.16   |   |         | $ | 0.23   |          |  | $ | 0.26    | 
|Diluted                                       |  | $        | 0.15   |   |         | $ | 0.22   |          |  | $ | 0.24    | 
|Funds flow from operations (1)                |  |          | 17,027 |   |         |   | 23,126 |          |  |   | 23,964  | 
|Funds flow from operations per share (1)      |  |          |        |   |         |   |        |          |  |   |         | 
|Basic                                         |  | $        | 0.17   |   |         | $ | 0.22   |          |  | $ | 0.22    | 
|Diluted                                       |  | $        | 0.16   |   |         | $ | 0.21   |          |  | $ | 0.21    | 
|Net profit (loss)                             |  |          | (5,487 | ) |         |   | 12,315 |          |  |   | 820     | 
|Net profit (loss) per share                   |  |          |        |   |         |   |        |          |  |   |         | 
|Basic                                         |  | $        | (0.06  | ) |         | $ | 0.12   |          |  | $ | 0.01    | 
|Diluted                                       |  | $        | (0.06  | ) |         | $ | 0.11   |          |  | $ | 0.01    | 
|Net capital expenditures (cash)               |  |          | 59,247 |   |         |   | 28,784 |          |  |   | 40,087  | 



(1)Refer to “Additional
GAAP Measures” in respect of the term “funds flow from operations” and “funds flow from operations per
share”.



The quarterly results for 2012 compared
to 2011 were positively impacted by increased production resulting from the expansion of Bellatrix’s 2011 and 2012 drilling
programs, offset somewhat by lower overall commodity prices realized in the 2012 quarters compared to the 2011 quarters.



During the first quarter of 2012, the Company
spent $74.1 million in capital expenditures, compared to $59.1 million in the first quarter of 2011. The Company drilled or participated
in 13 gross (10.72 net) wells in the first quarter of 2012, compared to 21 gross (12.07 net) wells in the comparative 2011 quarter.
Higher sales volumes of 15,900 boe/d in the 2012 first quarter compared to 10,084 boe/d in the 2011 period, in conjunction with
stronger crude oil and NGL pricing and offset slightly by depressed natural gas prices, resulted in increased revenue of $58.2
million in the first quarter of 2012, compared to $40.5 million in the 2011 first quarter.



35







In the second quarter of 2012, the Company
closed on the disposition of two minor non-core properties for total proceeds of $2.0 million after adjustments. In the 2012 second
quarter, the Company spent $18.3 million (2011: $29.0 million) in capital expenditures, and drilled 2 gross (1.72 net) wells,
compared to 2 gross (1.71 net) wells in the same period in 2011. Due primarily to Bellatrix’s 2012 drilling program executed
in the first and second quarters, sales volumes increased by 42% to 16,569 boe/d in the second quarter of 2012, compared to 11,643
boe/d in the second quarter of 2011.



During the third quarter of 2012, the Company
closed on the disposition of a minor non-core property interest in the Wainwright area for proceeds of $4.3 million after adjustments.
In the third quarter of 2012, the Company spent $39.8 million on capital expenditures compared to $44.2 million in the third quarter
of 2011. In the third quarter of 2012, Bellatrix drilled 9 gross (7.71 net) wells, compared to 19 gross (13.41 net) wells in the
third quarter of 2011.



Fourth quarter of 2012 results are compared
in detail to fourth quarter 2011 results throughout this MD&A.



Overall, the success and execution of the
Company’s 2012 drilling program resulted in increased sales volumes and cash flows, despite weaker commodity prices experienced
during most of the 2012 year.



36







Selected Annual Consolidated Information



The following table sets forth selected
consolidated financial information of the Company for the most recently completed year ending December 31, 2012 and for comparative
2011 and 2010 years. The adoption date of IFRS of January 1, 2011 required restatement for comparative purposes, of the Company’s
opening balance sheet as at January 1, 2010, all interim quarterly periods in 2010 and for its year ended December 31, 2010.



|Years ended December 31,                        |  |      |          |   |      |   |          |      | 
|----------------------------------------------- |  | ---- | -------- | - | ---- | - | -------- | ---- | 
|($000s, except per share amounts)               |  | 2012 |          |   | 2011 |   |          | 2010 | 
|Revenues (before royalties and risk management) |  |      | 219,314  |   |      |   | 202,318  |      | 
|Funds flow from operations (1)                  |  |      | 111,038  |   |      |   | 94,237   |      | 
|Funds flow from operations per share (1)        |  |      |          |   |      |   |          |      | 
|Basic                                           |  | $    | 1.03     |   |      | $ | 0.91     |      | 
|Diluted                                         |  | $    | 0.96     |   |      | $ | 0.87     |      | 
|Cash flow from operating activities             |  |      |          |   |      |   |          |      | 
|Cash flow from operating activities per share   |  |      | 109,328  |   |      |   | 98,192   |      | 
|Basic                                           |  | $    | 1.02     |   |      | $ | 0.95     |      | 
|Diluted                                         |  | $    | 0.95     |   |      | $ | 0.87     |      | 
|Net profit (loss)                               |  |      | 27,771   |   |      |   | (5,949   | )    | 
|Net profit (loss) per share                     |  |      |          |   |      |   |          |      | 
|Basic                                           |  | $    | 0.26     |   |      | $ | (0.06    | )    | 
|Diluted                                         |  | $    | 0.25     |   |      | $ | (0.06    | )    | 
|Net capital expenditures (cash)                 |  |      | (178,688 | ) |      |   | (175,358 | )    | 
|Total assets                                    |  |      | 681,421  |   |      |   | 580,422  |      | 
|Total net debt (1) (2)                          |  |      | 189,577  |   |      |   | 119,250  |      | 
|Non-current financial liabilities               |  |      |          |   |      |   |          |      | 
|Future income taxes                             |  |      | -        |   |      |   | -        |      | 
|Decommissioning liabilities                     |  |      | 43,909   |   |      |   | 45,091   |      | 
|Sales volumes (boe/d)                           |  |      | 16,775   |   |      |   | 11,954   |      | 
|Distributions declared                          |  |      | -        |   |      |   | -        |      | 
|Distributions per share/unit                    |  |      | -        |   |      |   | -        |      | 



| | (1) | Refer to “Additional
                                                                       GAAP Measures” in respect of the terms “funds
                                                                       flow from operations,” “funds flow from operations
                                                                       per share,” “net debt” and “total
                                                                       net debt.”
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (2) | Net debt includes the net working capital deficiency
before short-term commodity contract assets and liabilities, current finance lease obligations and short-term future income tax
assets and liabilities. Total net debt also includes the liability component of convertible debentures and excludes finance lease
obligations, decommissioning liabilities and future income tax liabilities.
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



2012 annual results are compared in detail
to 2011 annual results throughout this MD&A.



The annual results for 2011 compared to
2010 were most notably impacted by an expanded drilling program resulting in increased sales volumes. Revenues and cash flows
were impacted by increased sales volumes, higher crude oil, condensate and NGL prices and lower natural gas prices realized, as
well as lower operating costs per boe between the years.



Bellatrix’s capital expenditures
totaled $179.6 million in 2011, compared to $106.7 million in 2010. Due in large part to the expanded capital program in 2011,
total sales volumes increased by 40% to 11,954 boe/d in 2011, compared to 8,519 boe/d in 2010. Primarily due to the significant
increase in sales volumes between the years, revenues before royalties and risk management increased to $202.3 million in 2011,
compared to $117.7 million realized in 2010, despite reductions in commodity prices between the years.



37