Exhibit
10.2


EMPLOYEE
RESTRICTED STOCK AWARD


CANO PETROLEUM, INC.

2005 LONG-TERM INCENTIVE PLAN


Pursuant to the
Cano Petroleum, Inc. 2005 Long-Term Incentive Plan (the “Plan”) for key
employees, key consultants, and outside directors of Cano Petroleum, Inc., a
Delaware corporation (the “Company”)
and its Subsidiaries,


Morris B. Smith


(the “Participant”)


has been granted a
Restricted Stock Award in accordance with Section 6.4 of the Plan.


1.             Terms of Award.  The number of shares of Common Stock awarded
under this Award Agreement (this “Agreement”) 
is 5,000 shares (the “Awarded Shares”). 
The Date of Grant of this Award is August 11, 2006.


2.             Subject to Plan.  This Agreement is subject to the terms and
conditions of the Plan, and the terms of the Plan shall control to the extent
not otherwise inconsistent with the provisions of this Agreement.  The capitalized terms used herein that are
defined in the Plan shall have the same meanings assigned to them in the Plan.  This Agreement is subject to any rules promulgated
pursuant to the Plan by the Board or the Committee and communicated to the
Participant in writing.


3.             Vesting.  Except as specifically provided in this
Agreement and subject to certain restrictions and conditions set forth in the
Plan, all the Awarded Shares shall be vested on the first anniversary of the
Date of Grant, provided the Participant is employed by (or, if the Participant
is a Consultant, is providing services to) the Company or a Subsidiary on that
date.


4.             Forfeiture of Awarded Shares.
 Awarded Shares that are not vested in
accordance with Section 3 shall be forfeited on the date of the
Participant’s Termination of Service. Upon forfeiture, all of the Participant’s
rights with respect to the forfeited Awarded Shares shall cease and terminate,
without any further obligations on the part of the Company.


5.             Restrictions on Awarded Shares.
 Awarded Shares that are not vested in
accordance with Section 3 and which are subject to forfeiture in
accordance with Section 4 shall be subject to the terms, conditions,
provisions, and limitations of this Section 5.


(a)           Subject to the provisions of the Plan
and the other terms of this Agreement, from the Date of Grant until the date
the Awarded Shares are vested in accordance with Section 3 and no longer
subject to forfeiture in accordance with Section 4 (the “Restriction Period”),
the Participant shall not be permitted to sell, transfer, pledge or assign
shares any of the Awarded Shares.


(b)           Except as provided in paragraph (a)
above, the Participant shall have, with respect to his or her Awarded Shares,
all of the rights of a stockholder of the Company, including the right to vote
the shares, and the right to receive any dividends thereon.









 



6.             Legend.  The following legend shall be placed on all
certificates representing Awarded Shares:


On the face of the certificate:


“Transfer of this stock
is restricted in accordance with conditions printed on the reverse of this
certificate.”


On the reverse:


“The
shares of stock evidenced by this certificate are subject to and transferable
only in accordance with that certain Cano Petroleum, Inc. 2005 Long-Term
Incentive Plan, a copy of which is on file at the principal office of the
Company in Dallas, Texas.  No transfer or
pledge of the shares evidenced hereby may be made except in accordance with and
subject to the provisions of said Plan. 
By acceptance of this certificate, any holder, transferee or pledgee
hereof agrees to be bound by all of the provisions of said Plan.”


The following legend
shall be inserted on a certificate evidencing Common Stock issued under the
Plan if the shares were not issued in a transaction registered under the
applicable federal and state securities laws:


“Shares of stock
represented by this certificate have been acquired by the holder for investment
and not for resale, transfer or distribution, have been issued pursuant to
exemptions from the registration requirements of applicable state and federal
securities laws, and may not be offered for sale, sold or transferred other
than pursuant to effective registration under such laws, or in transactions
otherwise in compliance with such laws, and upon evidence satisfactory to the
Company of compliance with such laws, as to which the Company may rely upon an
opinion of counsel satisfactory to the Company.”


All
Awarded Shares owned by the Participant shall be subject to the terms of this
Agreement and shall be represented by a certificate or certificates bearing the
foregoing legend.


7.             Delivery of Certificates.  Certificates for Awarded Shares free of
restriction under this Agreement shall be delivered to the Participant promptly
after, and only after, the Restriction Period shall expire without forfeiture
in respect of such shares of Common Stock. 
Certificates for shares of Common Stock forfeited pursuant to Section
4 shall be promptly returned to the Company by the Participant.  In connection with the issuance of a
certificate for Restricted Stock, the Participant shall endorse such
certificate in blank or execute a stock power in a form satisfactory to the
Company in blank and deliver such certificate and executed stock power to the
Company.  The parties acknowledge that
remedies at law will be inadequate remedies for breach of this Section 7
and consequently agree that this Section 7 shall be enforceable by
specific performance.  The remedy of
specific performance shall be cumulative of all of the rights and remedies at
law or in equity of the parties under this Section 7.


8.             Voting.  The Participant, as record holder of the
Awarded Shares, has the exclusive right to vote, or consent with respect to,
such Awarded Shares until such time as the Awarded Shares are transferred in
accordance with this Agreement or a proxy is granted pursuant to Section 9
below; provided, however, that this



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Section 8
shall not create any voting right where the holders of such Awarded Shares
otherwise have no such right.


9.             Proxies.  Participant may not grant a proxy to any
person, other than a revocable proxy not to exceed 30 days in duration granted
to another stockholder for the sole purpose of voting for directors of the
Company.


10.           Representations, Etc.  Each spouse individually is bound by, and
such spouse’s interest, if any, in any Awarded Shares is subject to, the terms
of this Agreement.  Nothing in this
Agreement shall create a community property interest where none otherwise
exists.


11.           Simultaneous Death.  If Participant and his or her spouse both
suffer a common accident or casualty which results in their respective deaths
within 60 days of each other, it shall be conclusively presumed, for the
purpose of this Agreement, that the Participant died first and the spouse died
thereafter.


12.           Participant’s Representations.  Notwithstanding any of the provisions hereof,
the Participant hereby agrees that he will not acquire any Awarded Shares, and
that the Company will not be obligated to issue any Awarded Shares to the
Participant hereunder, if the issuance of such shares shall constitute a
violation by the Participant or the Company of any provision of any law or regulation
of any governmental authority.  Any
determination in this connection by the Company shall be final, binding, and
conclusive.  The obligations of the
Company and the rights of the Participant are subject to all applicable laws,
rules, and regulations.


13.           Participant’s Acknowledgments.  The Participant acknowledges receipt of a
copy of the Plan, which is annexed hereto, and represents that he or she is
familiar with the terms and provisions thereof, and hereby accepts this Award
subject to all the terms and provisions thereof. The Participant hereby agrees
to accept as binding, conclusive, and final all decisions or interpretations of
the Board or the Committee upon any questions arising under the Plan or this
Agreement.


14.           Law Governing.  This Agreement shall be governed by,
construed, and enforced in accordance with the laws of the State of Texas (excluding any conflict of laws
rule or principle of Texas law
that might refer the governance, construction, or interpretation of this
agreement to the laws of another state).


15.           Legal Construction.  In the event that any one or more of the terms, provisions, or
agreements that are contained in this Agreement shall be held by either a court
of competent jurisdiction, with respect to claims under Section 7, or by
an arbitrator, with respect to all other claims under the Agreement, to be
invalid, illegal, or unenforceable in any respect for any reason, the invalid,
illegal, or unenforceable term, provision, or agreement shall not affect any
other term, provision, or agreement that is contained in this Agreement and
this Agreement shall be construed in all respects as if the invalid, illegal,
or unenforceable term, provision, or agreement had never been contained herein.


16.           Covenants and Agreements as
Independent Agreements. Each of the covenants and agreements that is set
forth in this Agreement shall be construed as a covenant and agreement
independent of any other provision of this Agreement.  The existence of any claim or cause of action
of the Participant against the Company, whether predicated on this Agreement or
otherwise, shall not constitute a defense to the enforcement by the Company of
the covenants and agreements that are set forth in this Agreement.


17.           Entire Agreement.  This Agreement together with the Plan
supersede any and all other prior understandings and agreements, either oral or
in writing, between the parties with respect to the subject matter hereof and
constitute the sole and only agreements between the parties with respect to the
said subject matter.  All prior
negotiations and agreements between the parties with respect to the subject
matter hereof are merged 



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into this
Agreement.  Each party to this Agreement
acknowledges that no representations, inducements, promises, or agreements, orally
or otherwise, have been made by any party or by anyone acting on behalf of any
party, which are not embodied in this Agreement or the Plan and that any
agreement, statement or promise that is not contained in this Agreement or the
Plan shall not be valid or binding or of any force or effect.


18.           Parties Bound.  The terms, provisions, and agreements that
are contained in this Agreement shall apply to, be binding upon, and inure to
the benefit of the parties and their respective heirs, executors, administrators,
legal representatives, and permitted successors and assigns, subject to the
limitation on assignment expressly set forth herein.  No person or entity shall be permitted to
acquire any Awarded Shares without first executing and delivering an agreement
in the form satisfactory to the Company making such person or entity subject to
the restrictions on transfer contained in Section 5 hereof.


19.           Modification.  No change or modification of this Agreement
shall be valid or binding upon the parties unless the change or modification is
in writing and signed by the parties; provided, however, that the Company may
change or modify this Agreement without the Participant’s consent or signature
if the Company determines, in its sole discretion, that such change or
modification is necessary for purposes of compliance with or exemption from the
requirements of Section 409A of the Code or any regulations or other guidance
issued thereunder.  Notwithstanding the
preceding sentence, the Company may amend the Plan to the extent permitted by
the Plan.


20.           Headings.  The headings that are used in this Agreement
are used for reference and convenience purposes only and do not constitute
substantive matters to be considered in construing the terms and provisions of
this Agreement.


21.           Gender and Number.  Words of any gender used in this Agreement
shall be held and construed to include any other gender, and words in the
singular number shall be held to include the plural, and vice versa, unless the
context requires otherwise.


22.           Notice.  Any notice required or permitted to be
delivered hereunder shall be deemed to be delivered only when actually received
by the Company or by the Participant, as the case may be, at the addresses set
forth below, or at such other addresses as they have theretofore specified by
written notice delivered in accordance herewith:


(a)           Notice
to the Company shall be addressed and delivered as follows:


Cano Petroleum, Inc.


801 Cherry Street, Unit 25, Suite 3200


Fort Worth, Texas 
76102


Attn:  General
Counsel


Facsimile:  (817)
698-0796


(b)           Notice to the Participant shall be
addressed and delivered as set forth on the signature page.


23.           Tax Requirements.  The Participant is hereby advised to consult
immediately with his or her own tax advisor regarding the tax consequences of
this Agreement, the
method and timing for filing an election to include this Agreement in income
under Section 83(b) of the Code, and the tax consequences of such
election.  By execution of this Agreement, the Participant agrees that if the
Participant makes such an election, the Participant shall provide the Company
with written notice of such election in accordance with the regulations
promulgated under Code Section 83(b).  The
Company or, if applicable, any Subsidiary (for 



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purposes of this Section
23, the term “Company”
shall be deemed to include any applicable Subsidiary), shall have the right to
deduct from all amounts paid in cash or other form in connection with the Plan,
any Federal, state, local, or other taxes required by law to be withheld in
connection with this Award.  The Company
may, in its sole discretion, also require the Participant receiving shares of
Common Stock issued under the Plan to pay the Company the amount of any taxes
that the Company is required to withhold in connection with the Participant’s
income arising with respect to this Award. 
Such payments shall be required to be made when requested by Company and
may be required to be made prior to the delivery of any certificate
representing shares of Common Stock. 
Such payment may be made (i) by the delivery of cash to the Company in
an amount that equals or exceeds (to avoid the issuance of fractional shares
under (iii) below) the required tax withholding obligations of the Company;
(ii) if the Company, in its sole discretion, so consents in writing, the actual
delivery by the exercising Participant to the Company of shares of Common Stock
that the Participant has not acquired from the Company within six (6) months
prior to the date of exercise, which shares so delivered have an aggregate Fair
Market Value that equals or exceeds (to avoid the issuance of fractional shares
under (iii) below) the required tax withholding payment; (iii) if the Company,
in its sole discretion, so consents in writing, the Company’s withholding of a
number of shares to be delivered upon the exercise of this Award, which shares
so withheld have an aggregate fair market value that equals (but does not
exceed) the required tax withholding payment; or (iv) any combination of (i),
(ii), or (iii).  The Company may, in its
sole discretion, withhold any such taxes from any other cash remuneration
otherwise paid by the Company to the Participant.


[Signature Page to Follow]



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IN WITNESS WHEREOF, the
Company has caused this Agreement to be executed by its duly authorized
officer, and the Participant, to evidence his consent and approval of all the
terms hereof, has duly executed this Agreement, as of the date specified in Section
1 hereof.


	
  

  	
   

  	
   

  	
  COMPANY:

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
  CANO PETROLEUM, INC.

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  

  	
   

  	
   

  	
  By:

  	
  /s/ S.
  Jeffrey Johnson

  	
   

  
	
   

  	
   

  	
   

  	
  Name:

  	
  S. Jeffrey Johnson

  	
   

  
	
   

  	
   

  	
   

  	
  Title:

  	
  CEO and Chairman

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  



 


	
  

  	
   

  	
   

  	
  PARTICIPANT:

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
  /s/ Morris B. Smith

  	
   

  
	
   

  	
   

  	
   

  	
  Signature

  	
   

  



 


	
  

  	
   

  	
   

  	
  Name:

  	
  MORRIS B. SMITH

  	
   

  
	
   

  	
   

  	
   

  	
  Address:

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  



 



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