FORBEARANCE
      AGREEMENT

    AND
      THIRD AMENDMENT TO

    SECOND
      AMENDED AND

    RESTATED
      FINANCING AGREEMENT

     

    THIS
      FORBEARANCE AGREEMENT AND THIRD AMENDMENT TO SECOND AMENDED AND RESTATED
      FINANCING AGREEMENT
      (the
“Agreement”)
      is
      made and entered into on this 28th day of December, 2007, to be effective,
      unless another effective date is otherwise herein specified, as of the date
      hereof, by and among The CIT Group/Business Credit, Inc. (“CIT”),
      SunTrust Bank (“SunTrust”),
      Wachovia Bank, N.A. (“Wachovia”),
      and
      PNC Bank National Association (“PNC”)
      (CIT,
      SunTrust, Wachovia and PNC being herein collectively referred to as the
      Lenders), CIT as administrative and collateral agent (“Agent”),
      and
      United Fuel & Energy Corporation, a Texas corporation (“United”),
      and
      Three D Oil Co. of Kilgore, Inc., a Texas corporation (“Three D”),
      and
      Cardlock Fuels Systems, Inc., a California corporation (“Cardlock”)
      (United, Three D and Cardlock being herein individually referred to as a
“Company”
and
      collectively referred to as the “Companies”),
      and
      United Fuel & Energy Corporation, a Nevada corporation (“Parent”).

     

    RECITALS

     

    A. Companies,
      Lenders and Agent are the present parties to that certain Second Amended and
      Restated Financing Agreement, dated as of March 27, 2007, originally
      executed by United, Three D, Lenders and Agent (as amended from time to
      time, the “Financing
      Agreement”).
      Capitalized terms not otherwise defined herein shall have the meanings given
      such terms in the Financing Agreement.

     

    B. To
      induce
      Agent and Lenders to make the loans under the Financing Agreement to Companies,
      Parent has delivered to Agent that certain Guaranty dated October 5, 2007
      (“Guaranty”)
      guaranteeing payment and performance by Companies of their
      Obligations.

     

    C. Companies
      have failed to comply (i) with the Fixed Charge Coverage Ratio financial
      covenant specified in Section 7.10(a)
      of the
      Financing Agreement for the respective measurement periods ending on
      October 31, 2007, and November 30, 2007 and (ii) the deadline for
      furnishing to the Lenders with required financial information for the period
      ending October 31, 2007 as required by Section 7.8 of the Financing Agreement;
      and accordingly Events of Default have occurred and are continuing under
Section 10.1(e)
      of the
      Financing Agreement (the “Existing
      Events of Default”).

     

    D. By
      reason
      of the existence of the Existing Events of Defaults, Agent and Lenders have
      full
      legal right to exercise their rights and remedies under the Financing Agreement
      and the other Loan Documents. Companies have no defenses, offsets or
      counterclaims to the exercise of such rights and remedies.

     

    E. Companies
      have requested that Agent and Lenders, for the period from the date hereof
      until
      March 7, 2008, forbear from exercising their rights and remedies under the
      Loan Documents.


    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    


    F. Agent
      and
      Lenders are willing for the period from the date hereof until March 7,
      2008, to forbear from exercising their rights and remedies under the Loan
      Documents, on the terms and conditions set forth herein.

     

    AGREEMENT

     

    In
      consideration of the Recitals and of the mutual promises and covenants contained
      herein, Agent, Lenders, Companies and Parent agree as follows:

     

    1. Agreement
      to Forbear.
      During
      the period commencing on the date hereof and ending on the earlier to occur
      of
      (i) 5:00 p.m. (Dallas, Texas time) on March 7, 2008 and (ii) the date
      the Agent receives written notice from the Required Lenders to terminate this
      Agreement after the occurrence of any Forbearance Default (as defined in
Section
      7
      hereof)
      (the “Forbearance
      Period”),
      and
      subject to the other terms and conditions of this Agreement, each of Agent
      and
      each Lender agrees that it will forbear from exercising its rights and remedies
      under the Loan Documents due to the Existing Events of Default; provided,
      however,
      nothing
      herein shall limit the rights of Agent pursuant to the Financing Agreement
      to
      establish reserves or the amount of any reserves. Upon the expiration or
      termination of the Forbearance Period, Agent’s and Lenders’ forbearance shall
      automatically terminate and Agent and Lenders shall be entitled to exercise
      any
      and all of their rights and remedies under this Agreement and the Loan Documents
      without further notice. Companies and Parent agree that Agent and Lenders shall
      have no obligation to extend the Forbearance Period. 

     

    2. Conditions
      Precedent to Effectiveness of Agreement Against Agent and
      Lenders.
      This
      Agreement shall not be effective against Agent and Lenders unless and until
      each
      of the following conditions shall have been satisfied in Agent’s credit judgment
      or waived by Agent:

     

    (a) Agent
      shall have received this Agreement, duly executed by Companies, Parent and
      Lenders;

     

    (b) Agent
      shall have received such additional documents, instruments and information
      as
      Agent may request; and

     

    (c) Agent
      shall have received evidence satisfactory to Agent that all organizational
      proceedings taken in connection with the transactions contemplated by this
      Agreement and all documents, instruments and other legal matters incident
      thereto shall be satisfactory to Agent.

     

    3. Representations
      and Warranties.
      Each of
      each Company and Parent hereby represents and warrants to Agent and Lenders
      as
      follows:

     

    (a) Recitals.
      The
      Recitals in this Agreement are true and correct in all material
      respects.

     

    (b) Incorporation
      of Representations.
      All
      representations and warranties of Companies and Parent in the Loan Documents
      are
      incorporated herein in full by this reference and are true and correct in all
      material respects as of the date hereof.


    
      
        
        

      

      
        2

        
          

        

      

      
        
        

      

    


    (c) Organizational
      Power; Authorization.
      Each of
      each Company and Parent has the organizational power, and has been duly
      authorized by all requisite organizational action, to execute and deliver this
      Agreement and to perform its obligations hereunder. This Agreement has been
      duly
      executed and delivered by each Company and by Parent.

     

    (d) Enforceability.
      This
      Agreement is the legal, valid and binding obligation of each Company and Parent,
      enforceable against each Company and Parent in accordance with its
      terms.

     

    (e) No
      Violation.
      Each of
      each Company’s and Parent’s execution, delivery and performance of this
      Agreement does not and will not (i) violate any law, rule, regulation or
      court order to which any Company or Parent is subject; (ii) conflict with
      or result in a breach of any Company’s or Parent’s Articles or Certificate of
      Incorporation or Bylaws or any agreement or instrument to which any Company
      or
      Parent is party or by which it or its properties are bound, or (iii) result
      in the creation or imposition of any lien, security interest or encumbrance
      on
      any property of any Company or Parent, whether now owned or hereafter
      acquired.

     

    (f) Obligations
      Absolute.
      The
      obligation of Companies to repay the loans and the other Obligations, together
      with all interest accrued thereon, is absolute and unconditional, and there
      exists no right of set off or recoupment, counterclaim or defense of any nature
      whatsoever to payment of the Obligations.

     

    (g) Full
      Opportunity for Review; No Undue Influence.
      This
      Agreement was reviewed by each of each Company and Parent which acknowledges
      and
      agrees that it (i) understands fully the terms of this Agreement and the
      consequences of the issuance hereof; (ii) has been afforded an opportunity
      to have this Agreement reviewed by, and to discuss this Agreement with, such
      attorneys and other persons as it may wish; and (iii) has entered into this
      Agreement of its own free will and accord and without threat or duress. This
      Agreement and all information furnished to Agent and Lenders is made and
      furnished in good faith, for value and valuable consideration. This Agreement
      has not been made or induced by any fraud, duress or undue influence exercised
      by Agent or Lenders or any other person.

     

    (h) No
      Other Defaults.
      Other
      than the Existing Events of Default, no Event of Default exists under the
      Financing Agreement or any of the other Loan Documents and each of each Company
      and Parent is in full compliance with all covenants and agreements contained
      therein.

     

    4. Ratification
      of Guaranty.
      Parent
      hereby acknowledges and consents to all of the terms and conditions of this
      Agreement and the Loan Documents and hereby ratifies and confirms the Guaranty
      for the benefit of Agent and Lenders. Guarantor hereby represents and
      acknowledges that it has no claims, counterclaims, offsets, credits or defenses
      to the Loan Documents or the performance of its obligations thereunder.
      Guarantor agrees that nothing contained in this Agreement or the Loan Documents
      shall adversely affect any right or remedy of either Agent or Lenders under
      the
      Guaranty. Guarantor hereby agrees that with respect to the Guaranty, all
      references in such Guaranty to the “Obligations” shall include, without
      limitation, the obligations of Companies to Agent and Lenders under the
      Financing Agreement, as amended hereby. Guarantor hereby represents and
      acknowledges that the execution and delivery of this Agreement and the other
      Loan Documents executed in connection herewith shall in no way change or modify
      its obligations as a guarantor, debtor, pledgor, assignor, obligor and/or
      grantor under its Guaranty and each other Loan Document to which it is a party
      and shall not constitute a waiver by either Agent or any Lender of any of either
      Agent’s or any Lender’s rights against Guarantor.


    
      
        
        

      

      
        3

        
          

        

      

      
        
        

      

    


    5. Additional
      Agreements.

     

    (a) Suspension
      of Compliance with Fixed Charge Coverage Ratio for Testing Periods respectively
      ending on December 31, 2007, and January 31, 2008; Addition of New
      EBITDA Financial Covenant.
      The
      parties hereto agree that during the Forbearance Period, compliance by the
      Companies with the Fixed Charge Coverage Ratio financial covenant set forth
      in
Section 7.10(a)
      of the
      Financing Agreement for the respective testing periods ending on
      December 31, 2007, and January 31, 2008, is hereby suspended. In lieu
      thereof, the parties hereto agree that the Companies, on a consolidated basis,
      shall maintain EBITDA of not less than the amount set forth below for the time
      period set forth below:

     

    
      	Period	 	
              Minimum
                EBITDA

            
	 	 	 
	 (i)	
              One
                calendar month period ending

              November 30,
                2007

            	 	
              (i)
                   $0.00

            
	 	 	 	 
	 (ii)	
              Two
                calendar month period

              ending
                December 31, 2007

            	 	
              (ii)  
                $0.00

            
	 	 	 	 
	 (iii) 	
              Three
                calendar month period

              ending
                January 31, 2008

            	 	
              (iii) 
                $250,000.00

            


    

     

    (b) Temporary
      Line Increase Fee.
      In
      consideration for the temporary increase in the Line of Credit and Revolving
      Line of Credit under the Financing Agreement, as amended by this Agreement,
      Companies hereby agree to pay Agent, for the pro rata benefit of the Lenders,
      a
      fee (the “Temporary
      Line Increase Fee”),
      in
      immediately available funds in the amount of $50,000, which Temporary Line
      Increase Fee shall be deemed fully earned and non-refundable as of the date
      hereof, and which Temporary Line Increase Fee shall be due and payable as
      follows:

     

    (i) $25,000
      shall be due and payable on January 1, 2008; and

     

    (ii) $25,000
      shall be due and payable on March 7, 2008, or, if earlier, on the
      termination of the Forbearance Period.

     

    Agent
      and
      Lenders agree that if the Line of Credit and Revolving Line of Credit are
      hereafter prior to December 31, 2008, permanently increased, Companies and
      Parent hereby agreeing and acknowledging that Agent and Lenders have no
      obligation at any time to agree to such a permanent increase, no line increase
      fee shall be payable by Companies as to the first $10,000,000 of any such
      permanent increase in the Line of Credit and Revolving Line of
      Credit.


    
      
        
        

      

      
        4

        
          

        

      

      
        
        

      

    


    (c) Additional
      Interest During Forbearance Period.
      In
      consideration for the forbearance provided for in this Agreement, Companies
      hereby agree to pay Agent, for the pro rata benefit of the Lenders, additional
      interest on the Revolving Loans and such additional interest shall be payable
      monthly on the first day of each month. Base Rate Loans shall accrue interest
      at
      a per annum rate equal to the Base
      Rate
plus
      the
      Applicable Base Rate Margin, plus
      60 basis
      points (the “Additional
      Interest”)
      as
      calculated as set forth in the Financing Agreement subject to the Maximum Legal
      Rate. The LIBOR Loans shall bear interest for each Interest Period with respect
      thereto on the unpaid principal amount thereof at a rate per annum equal to
      the
      LIBOR determined for each Interest Period in accordance with the terms of this
      Financing Agreement plus the Applicable LIBOR Margin, plus
      the
      Additional Interest as calculated as set forth in the Financing Agreement
      subject to the Maximum Legal Rate. The Agent, on behalf of the Lenders, shall
      be
      entitled to charge each such Companies’ Revolving Loan Account for the amount of
      Additional Interest required to be paid above. The Additional Interest shall
      be
      deemed fully earned and non-refundable as of the date when due. 

     

    (d) Additional
      Reporting and Information Requirements.
      In
      addition to any presently existing reporting and informational requirements
      set
      forth in the Financing Agreement, Companies and Parent agree to deliver to
      Agent, in form and substance satisfactory to Agent, each of the following by
      the
      applicable date set forth below:

     

    (i) By
      January 15, 2008, a cash flow statement, in form and substance satisfactory
      to
      Agent, which describes and provides the Companies’ projected cash flow for each
      week during the Forbearance Period, including projected Availability,
      collections, disbursements and the Loan balance for each week;

     

    (ii) By
      January 31, 2008:

     

    (w) Consolidated
      Balance Sheet as of December 31, 2007, and statements of profit and loss,
      cash flow and surplus of Parent, the Companies and their subsidiaries for the
      month ended December 31, 2007, certified by an authorized financial or
      accounting officer of Companies;

     

    (x) Monthly
      projections for calendar year 2008 for Parent and Companies, including, without
      limitation, income statement, balance sheet, Availability projection and Fixed
      Charge Coverage Ratio financial covenant projections;


    
      
        
        

      

      
        5

        
          

        

      

      
        
        

      

    


    (y) Analysis
      by management of Parent and Companies of such historical performance issues
      as
      shall be required by Agent, which analysis shall in any event include a
      performance analysis of the changes in sales and EBITDA between calendar year
      2006 and the eleven month period ended November 30, 2007 and a performance
      analysis of the changes in sales and EBITDA between calendar year 2007 and
      projected calendar year 2008; and

     

    (z)
      Summary by management of Parent and Companies of the turnaround efforts by
      management supporting the projected changes in sales and EBITDA from calendar
      year 2007 to projected calendar year 2008 and the 2008 calendar year
      projections; and 

     

    (iii) On
      a
      daily basis, a borrowing base certificate as required pursuant to Section
      3.2
      of the
      Financing Agreement and United shall use its commercially reasonable efforts
      to
      cause Cardlock to provide a borrowing base certificate as required pursuant
      to
Section
      3.2
      of the
      Financing Agreement on a daily basis, but at a minimum Cardlock shall provide
      such borrowing base certificate on a weekly basis.

     

    6. Amendments
      to Financing Agreement and Other Loan Documents.
      The
      parties hereto agree to the following amendments to the Financing Agreement
      and
      other Loan Documents:

     

    (a) Amendment
      to Section 1 of Financing Agreement; Addition of New Definitions.
      Section
      1
      of the
      Financing Agreement is hereby amended by adding thereto the following new
      definitions to be inserted in their proper alphabetical order and to read in
      their entirety as follows:

     

    “Forbearance
      Agreement
      shall
      mean that certain Forbearance Agreement and Third Amendment to Second Amended
      and Restated Financing Agreement executed by Agent, Lenders, Companies and
      Parent.

     

    Forbearance
      Default
      shall
      have the same meaning as in the Forbearance Agreement.

     

    Forbearance
      Period
      shall
      have the same meaning as in the Forbearance Agreement.

     

    Temporary
      Line Increase Period
      shall
      mean the period beginning on the date of execution of the Forbearance Agreement
      and ending on March 7, 2008 or, if earlier, upon the termination of the
      Forbearance Period.”


    
      
        
        

      

      
        6

        
          

        

      

      
        
        

      

    


    (b) Amendment
      of Section 1 of Financing Agreement; Amendment and Restatement of Definition
      of
“Borrowing Base”.
      Section
      1
      of the
      Financing Agreement is hereby amended by amending and restating the definition
      of “Borrowing Base” to read in its entirety as follows:

     

    “Borrowing
      Base
      shall
      mean, as to Companies, the amount calculated as follows: (a) the
      lesser of
      (i)
      Revolving Line of Credit or (ii) the
      sum of
      (A)
      eighty-five percent (85%) of Companies’ aggregate outstanding Eligible Accounts
      Receivable and Companies’ aggregate outstanding Eligible Unbilled Card-Lock
      Customer Accounts; provided,
      however,
      that if
      the then Dilution Percentage is greater than five percent (5.0%), then the
      rate
      of advance herein shall be reduced by the percentage points by which the
      Dilution Percentage exceeds five percent (5.0%), plus
      (B)
the
      sum of
      (x)
      sixty-five percent (65%) of the aggregate value of Companies’ Eligible
      Inventory, valued at the lower of cost or market, on an average cost basis,
      plus
      (y)
      sixty-five percent (65%) of the aggregate value of Companies’ Eligible Card-Lock
      Inventory, valued at the lower of cost or market, on an average cost basis,
      plus
      (C) the
      Eligible Equipment Based Amount, plus
      (D) one
      hundred percent (100%) of the aggregate Eligible Cash Surrender Value of
      Eligible Life Insurance Policy, plus
      (E) the
      lesser of
      (x) one
      hundred percent (100%) of the Dollar balance of the Eligible Cash Collateral
      or
      (y) $10,000,000, minus
      (F) as long as the Temporary Line Increase Period is in existence,
      $7,500,000, minus
      (b) any
      applicable Availability Reserves.”

     

    (c) Amendment
      to Section 1 of Financing Agreement; Amendment and Restatement of Definition
      of
“Commitment”.
      Section
      1
      of the
      Financing Agreement is hereby amended by amending and restating the definition
      of “Commitment” to read in its entirety as follows:

     

    “Commitment
      shall
      mean, as to any Lender, the amount of the commitment for such Lender set forth
      on the signature page to the Forbearance Agreement or in the Assignment and
      Transfer Agreement to which such Lender is a party, as such amount may be
      reduced or increased in accordance with the provisions of Paragraph
      13.4(b)
      of
Section
      13
      or any
      other applicable provision of this Financing Agreement.”

     

    (d) Amendment
      to Section 1 of Financing Agreement; Amendment and Restatement of Definition
      of
“Line of Credit”.
      Section
      1
      of the
      Financing Agreement is hereby amended by amending and restating the definition
      of “Line of Credit” to read in its entirety as follows:

     

    “Line
      of Credit
      shall
      mean the aggregate commitment of the Lenders in an amount equal to (a) during
      the existence of the Temporary Line Increase Period, $100,000,000 (as the same
      may be reduced from time as a result of a Temporary Revolving Line of Credit
      Reducing Event), and (b) at all other times, $90,000,000, to (i) make
      Revolving Loans pursuant to Section
      3
      of this
      Financing Agreement, (ii) assist Companies in opening Letters of Credit pursuant
      to Section 5
      of this
      Financing Agreement, and (iii) make the Term Loans pursuant to Section
      4
      of this
      Financing Agreement.”


    
      
        
        

      

      
        7

        
          

        

      

      
        
        

      

    


    (e) Amendment
      to Section 1 of Financing Agreement; Amendment and Restatement of Definition
      of
“Revolving Line of Credit”.
      Section
      1
      of the
      Financing Agreement is hereby amended by amending and restating the definition
      of “Revolving Line of Credit” to read in its entirety as follows:

     

    “Revolving
      Line of Credit
      shall
      mean the aggregate commitment of the Lenders to make loans and advances pursuant
      to Section
      3
      hereof
      and issue Letters of Credit Guaranties to the Companies in the aggregate amount
      of (a) during the existence of the Temporary Line Increase Period, $80,000,000,
      provided,
      that,
      upon
      the occurrence of a Forbearance Default, if the Required Lenders have not
      elected to terminate the Forbearance Agreement pursuant to Section 1(ii)
      thereof, the Revolving Line of Credit shall automatically be reduced by an
      amount equal to $2,500,000 on the Wednesday following the date that such
      Forbearance Default occurred and the Revolving Line of Credit continue to reduce
      by an additional $2,500,000 on each Wednesday thereafter until the earlier
      to
      occur of (i) the date that the Forbearance Default has been cured or waived
      by
      the Required Lenders or (ii) the date that the Revolving Line of Credit has
      been
      reduced to $70,000,000 (any such reduction, the “Temporary
      Revolving Line of Credit Reducing Event”),
      and
      (b) at all other times, $70,000,000.”

     

    (f) Amendment
      to Amended and Restated Revolving Credit Notes.

     

    (i) As
      long
      as the Temporary Line Increase Period is in existence, each Amended and Restated
      Revolving Credit Note, dated October 30, 2007, executed by Companies, and
      respectively payable to Wachovia, SunTrust and PNC, shall be deemed amended
      as
      follows:

     

    
      	(x)	
              Each
                reference to the dollar amount “$15,555,555.56” shall be deemed to be a
                reference to the dollar amount “$17,775,555.56”

            
	 	 
	(y) 	
              Each
                reference to the phrase “FIFTEEN MILLION FIVE HUNDRED FIFTY-FIVE THOUSAND
                FIVE HUNDRED FIFTY-FIVE AND 56/100 DOLLARS” shall be deemed to be a
                reference to the phrase “SEVENTEEN MILLION SEVEN HUNDRED SEVENTY-FIVE
                THOUSAND FIVE HUNDRED FIFTY AND 56/100
                DOLLARS”

            


    

    
      

        
          
            
            

          

          
            8

            
              

            

          

          
            
            

          

        

      

       

    

    Upon
      (i)
      any Temporary Revolving Line of Credit Reducing Event, each Amended and Restated
      Revolving Credit Note shall be deemed to have automatically reduced by such
      Lender’s pro rata share amount of such reduction and (ii) the termination of the
      Temporary Line Increase Period, each Amended and Restated Revolving Credit
      Note
      shall be deemed to be amended so as to revert to the prior dollar amount and
      phrase.


    (ii) As
      long
      as the Temporary Line Increase Period is in existence, the Amended and Restated
      Revolving Credit Note, dated October 30, 2007, executed by Companies and
      payable to the order of CIT, shall be deemed amended as follows:

     

    
      	(x)
              	
              Each
                reference to the dollar amount “$23,333,333.32” shall be deemed to be a
                reference to the dollar amount “$26,673,333.32”

            
	 	 
	(y)	
              Each
                reference to the phrase “TWENTY THREE MILLION THREE HUNDRED THIRTY-THREE
                THOUSAND THREE HUNDRED THIRTY-THREE AND 32/100THS DOLLARS” shall be deemed
                to be a reference to the phrase “TWENTY SIX MILLION SIX HUNDRED
                SEVENTY-THREE THOUSAND THREE HUNDRED THIRTY-THREE AND 32/100THS
                DOLLARS”.

            


    

    
      
         

      

    

    Upon
      (i)
      any Temporary Revolving Line of Credit Reducing Event, each Amended and Restated
      Revolving Credit Note shall be deemed to have automatically reduced by CIT’s pro
      rata share amount of such reduction and (ii) termination of the Temporary Line
      Increase Period, the Amended and Restated Revolving Credit Note shall be deemed
      to be amended so as to revert back to the prior dollar amount and
      phrase.

     

    7. Default.
      Each of
      the following shall constitute a “Forbearance
      Default”
      hereunder:

     

    (a) any
      representation or warranty of any Company or Parent contained in this Agreement
      proves to have been false or misleading in any material respect when made or
      furnished; or

     

    (b) any
      Company or Parent shall fail to keep or perform any of the covenants or
      agreements contained herein; or

     

    (c) any
      Company or Parent shall fail to keep or perform any of the covenants or
      agreements contained in the Financing Agreement or the other Loan Documents
      (other than an Existing Event of Default); or


    
      
        
        

      

      
        9

        
          

        

      

      
        
        

      

    

     

    (d) the
      existence of any Event of Default (other than an Existing Event of Default)
      under the Financing Agreement.

     

    8. Effect
      and Construction of Agreement.
      Except
      as expressly provided herein, the Financing Agreement and the other Loan
      Documents are hereby ratified and confirmed and shall be and shall remain in
      full force and effect in accordance with their respective terms, and this
      Agreement shall not be construed to: (i) impair the validity, perfection or
      priority of any lien or security interest securing the Obligations;
      (ii) waive or impair any rights, powers or remedies of Agent and Lenders
      under the Financing Agreement or the other Loan Documents upon termination
      of
      the Forbearance Period; (iii) constitute an agreement by Agent or Lenders
      or require Agent and Lenders to extend the Forbearance Period, or grant
      additional forbearance periods, or extend the term of the Financing Agreement
      or
      the time for payment of any of the Obligations; or (iv) make any loans or
      other extensions of credit to Companies after termination of the Forbearance
      Period. In the event of any inconsistency between the terms of this Agreement
      and the Loan Documents, this Agreement shall govern. Each of each Company and
      Parent acknowledges that it has consulted with counsel and with such other
      experts and advisors as it has deemed necessary in connection with the
      negotiation, execution and delivery of this Agreement. This Agreement shall
      be
      construed without regard to any presumption or rule requiring that it be
      construed against the party causing this Agreement or any part hereof to be
      drafted.

     

    9. Expenses.
      Companies agree to pay all costs, fees and expenses of Agent and Agent’s
      attorneys incurred in connection with the negotiation, preparation,
      administration and enforcement of, and the preservation of any rights under,
      this Agreement, the Financing Agreement and/or the other Loan Documents, and
      the
      transactions and other matters contemplated hereby and thereby, including,
      but
      not limited to, the fees, costs and expenses incurred by Agent in the employment
      of auditors and/or consultants to perform work on Agent’s behalf to audit,
      appraise, monitor and otherwise review any and all portions of the
      Collateral.

     

    10. Miscellaneous.

     

    (a) Further
      Assurances.
      Each of
      Company and Parent agrees to execute such other and further documents and
      instruments as Agent may request to implement the provisions of this Agreement
      and to perfect and protect the liens and security interests created by the
      Financing Agreement and the other Loan Documents.

     

    (b) Benefit
      of Agreement.
      This
      Agreement shall be binding upon and inure to the benefit of and be enforceable
      by the parties hereto, their respective successors and assigns. No other person
      or entity shall be entitled to claim any right or benefit hereunder, including,
      without limitation, the status of a third-party beneficiary of this
      Agreement.

     

    (c) Integration.
      This
      Agreement, together with the Financing Agreement and the other Loan Documents,
      constitutes the entire agreement and understanding among the parties relating
      to
      the subject matter hereof, and supersedes all prior proposals, negotiations,
      agreements and understandings relating to such subject matter. In entering
      into
      this Agreement, each of each Company and Parent acknowledges that it is relying
      on no statement, representation, warranty, covenant or agreement of any kind
      made by the Agent or any Lender or any employee or agent of the Agent or any
      Lender, except for the agreements of Agent and Lenders set forth
      herein.

     

    
      
        
        

      

      
        10

        
          

        

      

      
        
        

      

    

     

    (d) Severability.
      The
      provisions of this Agreement are intended to be severable. If any provisions
      of
      this Agreement shall be held invalid or unenforceable in whole or in part in
      any
      jurisdiction, such provision shall, as to such jurisdiction, be ineffective
      to
      the extent of such invalidity or enforceability without in any manner affecting
      the validity or enforceability of such provision in any other jurisdiction
      or
      the remaining provisions of this Agreement in any jurisdiction.

     

    (e) Governing
      Law.
      This
      Agreement shall be governed by and construed in accordance with the internal
      substantive laws of the State of Texas, without regard to the choice of law
      principles of such state.

     

    (f) Counterparts;
      Telecopied Signatures.
      This
      Agreement may be executed in any number of counterparts and by different parties
      to this Agreement on separate counterparts, each of which, when so executed,
      shall be deemed an original, but all such counterparts shall constitute one
      and
      the same agreement. Any signature delivered by a party by facsimile transmission
      shall be deemed to be an original signature hereto.

     

    (g) Notices.
      Any
      notices with respect to this Agreement shall be given in the manner provided
      for
      in Section 12.6
      of the
      Financing Agreement.

     

    (h) Survival.
      All
      representations, warranties, covenants, agreements, undertakings, waivers and
      releases of each Company and Parent contained herein shall survive the
      termination of the Forbearance Period and payment in full of the
      Obligations.

     

    (i) Amendment.
      No
      amendment, modification, rescission, waiver or release of any provision of
      this
      Agreement shall be effective unless the same shall be in writing and signed
      by
      the parties hereto.

     

    (j) No
      Limitation on Lender.
      Nothing
      in this Agreement shall be deemed in any way to limit or restrict any of Agent’s
      or any Lender’s rights to seek in a bankruptcy court or any other court of
      competent jurisdiction, any relief Agent may deem appropriate in the event
      that
      a voluntary or involuntary petition under any title of the Bankruptcy Code
      is
      filed by or against any Company or Parent.

     

    (k) Material
      Inducement.
      Each of
      each Company and Parent further acknowledges and agrees that the
      representations, acknowledgments, agreements and warranties in this Agreement
      have been made by such Company or Parent as a material inducement to Agent
      and
      Lenders to enter into this Agreement, that each of Agent and each Lender is
      relying on such representations and warranties, has changed and will continue
      to
      change its position in reliance thereon and that each of Agent and each Lender
      would not have entered into this Agreement without such representations,
      acknowledgments, agreements, and warranties.

     

    
      
        
        

      

      
        11

        
          

        

      

      
        
        

      

    

     

    11. Misrepresentation.
      Each of
      each Company and Parent shall indemnify and hold Agent and Lenders harmless
      from
      and against any and all losses, damages, costs and expenses (including
      attorneys’ fees) incurred by Agent or Lenders as a direct or indirect result of
      (i) any breach of any representation or warranty contained in this Agreement,
      or
      (ii) any breach or default under any of the covenants or agreements contained
      in
      this Agreement.

     

    12. Ratification
      of Liens and Security Interest.
      Each of
      each Company and Parent hereby acknowledges and agrees that the liens and
      security interests of the Financing Agreement and the other Loan Documents
      are
      valid, subsisting, perfected and enforceable liens and security interests and
      are superior to all liens and security interests other than those exceptions
      approved by Lender in writing.

     

    13. No
      Commitment.
      Each of
      each Company and Parent agrees that neither Agent nor any Lender has made any
      commitment or other agreement regarding the Financing Agreement or the other
      Loan Documents, except as expressly set forth in this Agreement. Each of each
      Company and Parent warrants and represents that it will not rely on any
      commitment, further agreement to forbear or other agreement on the part of
      Agent
      or Lenders unless such commitment or agreement is in writing and signed by
      Agent
      and Lenders.

     

    
      
        
        

      

      
        12

        
          

        

      

      
        
        

      

    

     

    14. NO
      COUNTERCLAIMS; RELEASE OF CLAIMS; WAIVER; HOLD HARMLESS.
      EACH OF EACH COMPANY AND PARENT REPRESENTS AND WARRANTS THAT IT HAS NO SET-OFF,
      RECOUPMENT, COUNTERCLAIM, DEFENSE, CROSS-COMPLAINT, CLAIM, DEMAND OR OTHER
      CAUSE
      OF ACTION OF ANY NATURE WHATSOEVER (TOGETHER, THE “COUNTERCLAIMS”)
      AGAINST AGENT OR ANY LENDER WHICH ARISE OUT OF THE TRANSACTIONS EVIDENCED BY
      THE
      FINANCING AGREEMENT OR THE OTHER LOAN DOCUMENTS, ANY TRANSACTIONS THAT WERE
      RENEWED OR EXTENDED BY THE FINANCING AGREEMENT OR THE OTHER LOAN DOCUMENTS,
      ANY
      OTHER TRANSACTION WITH AGENT OR ANY LENDER, OR WHICH COULD BE ASSERTED TO REDUCE
      OR ELIMINATE ALL OR ANY PART OF ANY COMPANY’S OR PARENT’S LIABILITY TO REPAY THE
      OBLIGATIONS OR TO SEEK AFFIRMATIVE RELIEF OR DAMAGES OF ANY KIND OR NATURE
      FROM
      AGENT OR ANY LENDER, IRRESPECTIVE OF WHETHER ANY SUCH CLAIMS ARISE OUT OF
      CONTRACT, TORT, VIOLATION OF LAW OR REGULATIONS, OR OTHERWISE, INCLUDING,
      WITHOUT LIMITATION, ANY CONTRACTING FOR, CHANGING, TAKING, RESERVING, COLLECTING
      OR RECEIVING INTEREST IN EXCESS OF THE HIGHEST LAWFUL RATE APPLICABLE, THE
      EXERCISE OF ANY RIGHTS AND REMEDIES UNDER THE FINANCING AGREEMENT OR THE OTHER
      LOAN DOCUMENTS, THE NEGOTIATION FOR AND EXECUTION OF THIS AGREEMENT AND ANY
      SETTLEMENT NEGOTIATIONS. TO THE EXTENT THAT ANY COUNTERCLAIMS MAY EXIST, WHETHER
      KNOWN OR UNKNOWN, SUCH ARE WAIVED AND HEREBY RELEASED BY EACH COMPANY AND
      PARENT. FURTHERMORE, EACH OF EACH COMPANY AND PARENT, ON BEHALF OF ITSELF,
      ITS
      SUCCESSORS, AGENTS, ATTORNEYS, OFFICERS, DIRECTORS, ASSIGNS AND PERSONNEL AND
      LEGAL REPRESENTATIVES, DOES HEREBY RELEASE, REMISE, ACQUIT AND FOREVER DISCHARGE
      AGENT AND EACH LENDER AND AGENT’S AND EACH LENDER’S EMPLOYEES, AGENTS,
      REPRESENTATIVES, CONSULTANTS, ATTORNEYS, FIDUCIARIES, SERVANTS, OFFICERS,
      DIRECTORS, PARTNERS, PREDECESSORS, SUCCESSORS AND ASSIGNS, SUBSIDIARY
      CORPORATIONS, PARENT CORPORATIONS, AND RELATED CORPORATE DIVISIONS (ALL OF
      THE
      FOREGOING HEREINAFTER CALLED THE “RELEASED
      PARTIES”),
      FROM ANY AND ALL ACTIONS AND CAUSES OF ACTION, JUDGMENTS, EXECUTIONS, SUITS,
      DEBTS, CLAIMS, DEMANDS, LIABILITIES, OBLIGATIONS, DAMAGES AND EXPENSES OF ANY
      AND EVERY CHARACTER, KNOWN OR UNKNOWN, DIRECT AND/OR INDIRECT, AT LAW OR IN
      EQUITY, OF WHATSOEVER KIND OR NATURE, WHETHER HERETOFORE OR HEREAFTER ARISING,
      FOR OR BECAUSE OF ANY MATTER OR THINGS DONE, OMITTED OR SUFFERED TO BE DONE
      BY
      ANY OF THE RELEASED PARTIES PRIOR TO AND INCLUDING THE DATE OF EXECUTION HEREOF,
      AND IN ANY WAY DIRECTLY OR INDIRECTLY ARISING OUT OF OR IN ANY WAY CONNECTED
      TO
      THIS AGREEMENT, THE FINANCING AGREEMENT OR THE OTHER LOAN DOCUMENTS,
      IRRESPECTIVE OF WHETHER ANY SUCH CLAIMS ARISE OUT OF CONTRACT, TORT, VIOLATION
      OF LAW OR REGULATIONS OR OTHERWISE, INCLUDING BUT NOT LIMITED TO, ANY
      CONTRACTING FOR, CHARGING, TAKING, RESERVING, COLLECTING OR RECEIVING INTEREST
      IN EXCESS OF THE HIGHEST LAWFUL RATE APPLICABLE, THE EXERCISE OF ANY RIGHTS
      AND
      REMEDIES UNDER THE FINANCING AGREEMENT OR ANY OF THE OTHER LOAN DOCUMENTS,
      THE
      NEGOTIATION FOR AND EXECUTION OF THIS AGREEMENT, OR ANY SETTLEMENT NEGOTIATIONS
      (ALL OF THE FOREGOING HEREINAFTER CALLED THE “RELEASED
      MATTERS”);
      AND EACH OF EACH COMPANY AND PARENT HEREBY COVENANTS AND AGREES NEVER TO
      INSTITUTE ANY ACTION OR SUIT AT LAW OR IN EQUITY, NOR INSTITUTE, PROSECUTE,
      OR
      IN ANY WAY AID IN THE INSTITUTION OR PROSECUTION OF, ANY CLAIM, ACTION OR CAUSE
      OF ACTION, RIGHTS TO RECOVER DEBTS OR DEMANDS OF ANY NATURE AGAINST ANY OF
      THE
      RELEASED PARTIES ARISING OUT OF OR RELATED TO AGENT’S OR ANY LENDER’S ACTIONS,
      OMISSIONS, STATEMENTS, REQUESTS OR DEMANDS IN ADMINISTERING, ENFORCING,
      MONITORING, COLLECTING OR ATTEMPTING TO COLLECT, THE OBLIGATIONS, INDEBTEDNESS
      AND OTHER OBLIGATIONS OF COMPANIES AND PARENT TO AGENT AND LENDERS. EACH OF
      EACH
      COMPANY AND PARENT AGREES TO INDEMNIFY AND HOLD AGENT AND EACH LENDER HARMLESS
      FROM ANY AND ALL COUNTERCLAIMS THAT ANY COMPANY OR PARENT OR ANY OTHER PERSON
      OR
      ENTITY CLAIMING BY, THROUGH, OR UNDER ANY COMPANY OR PARENT MAY AT ANY TIME
      ASSERT AGAINST AGENT OR ANY LENDER. EACH OF EACH COMPANY AND PARENT ACKNOWLEDGES
      THAT THE AGREEMENTS IN THIS PARAGRAPH ARE INTENDED TO BE IN FULL SATISFACTION
      OF
      ALL OR ANY ALLEGED INJURIES OR DAMAGES TO EACH OF EACH COMPANY AND PARENT,
      ITS
      SUCCESSORS, AGENTS, ATTORNEYS, OFFICERS, DIRECTORS, ASSIGNS AND PERSONAL AND
      LEGAL REPRESENTATIVES ARISING IN CONNECTION WITH THE RELEASED MATTERS. EACH
      OF
      EACH COMPANY AND PARENT REPRESENTS AND WARRANTS TO AGENT AND LENDERS THAT IT
      HAS
      NOT PURPORTED TO TRANSFER, ASSIGN OR OTHERWISE CONVEY ANY RIGHT, TITLE OR
      INTEREST OF SUCH COMPANY OR PARENT IN ANY RELEASED MATTER TO ANY OTHER PERSON
      AND THAT THE FOREGOING CONSTITUTES A FULL AND COMPLETE RELEASE OF EACH OF EACH
      COMPANY’S AND PARENT’S CLAIMS WITH RESPECT TO ALL RELEASED MATTERS. THE
      PROVISIONS OF THIS SECTION
      14
      AND THE REPRESENTATIONS, WARRANTIES, RELEASES, WAIVERS,
      REMISES, ACQUITTANCES, DISCHARGES, COVENANTS, AGREEMENTS
      AND INDEMNIFICATIONS CONTAINED HEREIN (A) CONSTITUTE A MATERIAL CONSIDERATION
      FOR AND INDUCEMENT TO AGENT AND EACH LENDER ENTERING INTO THIS AGREEMENT, (B)
      DO
      NOT CONSTITUTE AN ADMISSION OF OR BASIS FOR ESTABLISHING ANY DUTY, OBLIGATION
      OR
      LIABILITY OF AGENT OR ANY LENDER TO ANY COMPANY OR PARENT OR ANY OTHER PERSON,
      (C) DO NOT CONSTITUTE AN ADMISSION OF OR BASIS FOR ESTABLISHING ANY LIABILITY,
      WRONGDOING, OR VIOLATION OF ANY OBLIGATION, DUTY OR AGREEMENT OF AGENT OR ANY
      LENDER TO ANY COMPANY OR PARENT OR ANY OTHER PERSON, AND (D) SHALL NOT BE USED
      AS EVIDENCE AGAINST AGENT OR ANY LENDER BY ANY COMPANY OR PARENT OR ANY OTHER
      PERSON FOR ANY PURPOSE.

     

    
      
        
        

      

      
        13

        
          

        

      

      
        
        

      

    


    IN
      WITNESS WHEREOF, the parties hereto have executed this Agreement as of the
      day
      and year first above written.

    


    
      	
              COMPANIES:

            
	 
	
              UNITED
                FUEL & ENERGY CORPORATION,

            
	
              a
                Texas corporation

            
	 
	
              By:

            	
              /s/
                Charles McArthur

            
	
              Name:

            	
              Charles
                McArthur

            
	
              Title:

            	
              President
                and Chief Executive Officer

            
	 	 
	 	 
	
              THREE
                D OIL CO. OF KILGORE, INC.,

            
	
              a
                Texas corporation

            
	 
	
              By:

            	
              /s/
                Charles McArthur

            
	
              Name:

            	
              Charles
                McArthur

            
	
              Title:

            	
              President
                and Chief Executive Officer

            
	 	 
	 
	
              CARDLOCK
                FUELS SYSTEM, INC.,

            
	
              a
                California corporation

            
	 
	
              By:

            	
              /s/
                Charles McArthur

            
	
              Name:

            	
              Charles
                McArthur

            
	
              Title:

            	
              President
                and Chief Executive Officer

            
	 	 
	 
	
              PARENT:

            
	 
	
              UNITED
                FUEL & ENERGY CORPORATION,

            
	
              a
                Nevada corporation

            
	 	 
	
              By:

            	
              /s/
                Charles McArthur

            
	
              Name:

            	
              Charles
                McArthur

            
	
              Title:

            	
              President
                and Chief Executive Officer

            


    

    


    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

     

    
      	
              AGENT:

            
	 
	
              THE
                CIT GROUP/BUSINES CREDIT, INC.,

            
	
              as
                Agent

            
	 
	
              By:

            	/s/
              Alan R. Schnacke
	
              Name:

            	Alan
              R. Schnacke
	
              Title:

            	Vice
              President
	 	 
	 	 
	
              LENDERS:

            
	 
	
              THE
                CIT GROUP/BUSINES CREDIT, INC.,

            
	
              as
                a Lender

            
	 
	
              By:

            	/s/
              Alan R. Schnacke
	
              Name:

            	Alan
              R. Schnacke
	
              Title:

            	Vice
              President


    

     

    
      	
              Amount
                of Commitment:

            	 
	 	 
	
              (i)

            	 	 	
              During
                Temporary 

            	 	 	 	 
	
               

            	 	 	
              Line
                Increase Period:

            	 	
              $

            	
              33,340,000

            	 
	 	 	 	 	 	 	 	 
	
              (ii)

            	 	 	
              At
                All Other Times

            	 	
              $

            	
              30,000,000

            	 


    

    


     

    
      	
              SUNTRUST
                BANK, as a Lender

            
	 
	
              By:

            	/s/
              Patrick Wiggins
	
              Name:

            	Patrick
              Wiggins
	
              Title:

            	Vice
              President


    

    


    
      	
              Amount
                of Commitment:

            	 
	 	 
	
              (i)

            	 	 	
              During
                Temporary 

            	 	 	 	 
	 	 	 	
              Line
                Increase Period:

            	 	
              $

            	
              22,220,000

            	 
	 	 	 	 	 	 	 	 
	
              (ii)

            	 	 	
              At
                All Other Times

            	 	
              $

            	
              20,000,000

            	 


    

     

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

     

    
      	
              PNC
                BANK NATIONAL ASSOCIATION,

            
	
              as
                a Lender

            
	 
	
              By:

            	/s/
              Paul R. Frank
	
              Name:

            	Paul
              R. Frank
	
              Title:

            	Senior
              Vice President, PNC Business
              Credit


    

     

    
      	
              Amount
                of Commitment:

            	 
	 	 
	
              (i)

            	 	 	
              During
                Temporary 

            	 	 	 	 
	 	 	 	
              Line
                Increase Period:

            	 	
              $

            	
              22,220,000

            	 
	 	 	 	 	 	 	 	 
	
              (ii)

            	 	 	
              At
                All Other Times

            	 	
              $

            	
              20,000,000

            	 


    

     

     

    
      	
              WACHOVIA
                BANK, N.A., as a Lender

            
	 	 
	
              By:

            	/s/
              Thomas P. Floyd
	
              Name:

            	Thomas
              P. Floyd
	
              Title:

            	Vice
              President


    

     

    
      	
              Amount
                of Commitment:

            	 
	 	 
	
              (i)

            	 	 	
              During
                Temporary 

            	 	 	 	 
	
            	 	 	
              Line
                Increase Period:

            	 	
              $

            	
              22,220,000

            	 
	 	 	 	 	 	 	 	 
	
              (ii)

            	
            	
            	
              At
                All Other Times

            	
            	
              $

            	
              20,000,000