Document:

Exhibit
10.2.2

BUTTE
COMMUNITY BANK

SALARY
CONTINUATION AGREEMENT

This Salary Continuation
Agreement (Agreement) is entered into by and between Butte Community Bank, a
wholly owned subsidiary of Community Valley Bancorp (collectively Bank),
located in Chico, California and Keith Robbins (Employee), to be effective as
of the date last written below.

RECITALS

A.                                   The
Bank has employed the Employee as the President and Chief Executive Officer
since 1990.

B.                                     The
Bank desires to continue to employ the Employee as its President and Chief
Executive Officer.

C.                                     In
order to encourage the Employee to remain in the employ of the Bank, the Bank
is willing to provide salary continuation benefits to the Employee, as provided
in a series of salary continuation agreements between the parties.

D.                                    Section
885 of the American Jobs Creation Act of 2004 amended the Internal Revenue Code
(Code) to add section 409A implementing detailed rules regarding deferred
compensation.  The Treasury Department
subsequently issued Notice 2005-1 providing transitional guidance for bringing
deferred compensation plans into compliance with Code section 409A.

E.                                      Notice
2005-1 announced that a deferred compensation plan subject to Code section 409A
must be operated in good faith compliance with the provisions of Code section
409A and Notice 2005-1 during the 2005 calendar year.

F.                                      Proposed
Treasury regulations were issued with a proposed effective date of January 1,
2007, extending the good faith compliance period through December 31, 2006.

G.                                     Pursuant
to the Treasury Regulations and other published IRS guidance, benefits vested
under the salary continuation agreement between the Bank and the Employee,
dated September 21, 2004 (Grandfathered Agreement) is eligible for, and shall
receive, grandfather treatment such that the terms of the agreement in effect
on October 3, 2004, shall (i) remain in full force and effect, and (ii)
govern all benefits vested as of December 31, 2004.  The Grandfathered Agreement shall remain in
full force and effect, and this Agreement shall in no way be construed to
limit, replace or abridge benefits payable thereunder.

H.                                    The
parties acknowledge benefits not vested on December 31, 2004, and all amounts
deferred after that date are covered by the requirements of Code section 409A
and the guidance issued thereunder.

I.                                         The
Bank adopts this Agreement, effective January 1, 2006, in good faith compliance
with the requirements of Code section 409A and the guidance issued thereunder.
Its terms apply only to those benefits not vested as of December 31, 2004, and
other amounts deferred after that date.

Accordingly, the
following Agreement is adopted.

AGREEMENT

In consideration of the
promises and mutual covenants contained herein, the Bank and the Employee agree
as follows:

ARTICLE 1.  GENERAL

1.01.        Purpose.

The purpose of this
Agreement is to provide for the payment of deferred compensation benefits after
the Employee’s Termination of Employment, provided that the conditions set
forth in this Agreement are satisfied. 
The Board of Directors of the Bank (Board) has determined that the
overall compensation paid to the Employee under this Agreement and the other
compensation arrangements provided to the Employee by the Bank is reasonable
compensation for the services rendered and to be rendered to the Bank by the
Employee in view of such services and compensation paid by other employers to
employees in similar circumstances.

Neither this Agreement
nor any modifications hereof, nor the payment of any benefits hereunder shall
be construed as a modification of any other deferred compensation arrangement
maintained by the Bank, or to limit, replace or abridge benefits payable
thereunder, including, but not limited to the Grandfathered Agreement
which  remains in full force and effect.

1.02.        Income Tax Status.

The Agreement is intended
to be an unfunded, nonqualified deferred compensation and death benefit plan
that is governed by Code sections 61, 83, 402(b), 404(a)(5), 409A and 451,
such that neither the Employee nor the Employee’s Beneficiary(ies) will have
any taxable income by virtue of the operation of the constructive receipt
doctrine earlier than the first taxable year in which the deferred compensation
benefits under the Agreement are paid.

1.03.        ERISA Status.

This Agreement is
intended to qualify as an unfunded plan of deferred compensation that is
maintained by an employer primarily for the purpose of providing deferred
compensation for a “select group of management or highly compensated employees”
as those terms are defined under the provisions of the Employee Retirement
Income Security Act of 1974, as amended (ERISA).  The Employee is responsible for the
management, growth and protection of the business of the Bank.  The Employee is fully advised of the Bank’s
financial status and has had substantial input in the negotiation and design of
this benefit arrangement.  It is
understood that the amounts payable to the Employee under this Agreement are
strictly from the general assets of the Bank and that the Employee has no
greater rights to the general assets of the Bank than any other unsecured
general creditor.  Similarly, the Bank
may, in its sole and absolute discretion, establish a “rabbi trust” as a means
of setting aside a portion of its general assets for the payment of benefits
under this Agreement.  However, the Bank
shall be under no obligation to establish such a trust, nor shall the Bank
establish such a trust if its establishment or existence would in any way cause
this Agreement to be construed as anything other than an unfunded plan of
deferred compensation under ERISA.  For
purposes of ERISA, the Bank shall be the named fiduciary and administrator
under this Agreement.

1.04.        Limitation Of Rights.

Neither this Agreement,
nor any modifications hereof, nor the payment of any benefits hereunder shall
be construed as an employment contract, nor as giving to the Employee any right
to be employed by the Bank, nor as modifying the terms of any employment
contract between the Employee and the Bank.

1.05.        Other Agreements.

Nothing contained in this
Agreement shall affect any right which the Employee may otherwise have to
participate in any other plan of deferred compensation that the Bank may now or
hereafter maintain for the benefit of its employees.  Any deferred compensation payable under this
Agreement shall not be deemed salary or other compensation to the Employee for
the purpose of computing benefits to which the Employee may be entitled under
any pension plan or other arrangement of the Bank maintained for the benefit of
its employees.

ARTICLE 2.  GENERAL DEFINITIONS

2.01.        Account.

“Account” means the book
reserve account established and maintained for the Employee under the
Agreement.  Each Employee’s Account shall
be divided into the following sub accounts:

A.                                   The
book reserve account maintained by the Bank with respect to the Employee’s
participation hereunder that is (i) not subject to Code section 409A, and
(ii) governed by the terms of the agreement dated September 21, 2004 as those
terms existed on October 3, 2004 (Pre-409A Account); and

B.                                     The
book reserve account maintained by the Bank with respect to the Employee’s
participation hereunder that is (i) subject to Code section 409A, and
(ii) governed by the terms of this Agreement (409A Account).

2.02.        Beneficiary.

“Beneficiary” means the
person or persons entitled to receive benefits under the Agreement in the event
of the death of the Employee, as designated by the Employee on such form as is
acceptable to and filed with the Bank, as set forth in the Beneficiary
Designations paragraph, below.

2.03.        Cause.

“Cause” means the Bank
shall have the right to terminate this Agreement for any of the following
reasons by serving written notice upon the Employee:

A.                                   Gross
negligence or gross neglect of duties to the Bank;

B.                                     Commission
of a felony or of a gross misdemeanor involving moral turpitude involving the
Employee’s employment by the Bank; or

C.                                     Fraud,
disloyalty, dishonesty or willful violation of any law or significant Bank
policy committed in connection with the Employee’s employment and resulting in
an adverse effect on the Bank.

2.04.        Code.

“Code” means the Internal
Revenue Code of 1986, as it may be amended from time to time.  Reference to any provision of the Code
includes reference to any comparable or succeeding provisions of any
legislation that amends, supplements or replaces such provision.

2.05.        ERISA.

“ERISA” means the
Employee Retirement Income Security Act of 1974, Public Law 93-406, enacted
September 2, 1974, as amended.

2.06.        Normal Retirement Age.

“Normal Retirement Age”
means age sixty-five (65).

2.07.        Termination Of Employment.

“Termination of
Employment” means that the Employee ceases to be employed as a common law
employee of the Bank for any reason whatsoever. 
For purposes of this Agreement, if there is a dispute over the
employment status of the Employee or the date of the Employee’s Termination of
Employment, the Bank shall have the sole and absolute right to resolve this
issue for purposes of this Agreement.  A
Termination of Employment will not occur if the Employee is on a leave of
absence approved by the Bank or for periods of military service for which
employment rights are prescribed by USERRA. 
Notwithstanding the foregoing, if the Employee does not return to active
employment with the Bank within thirty (30) days following the end of the leave
of absence, or such longer period as may be prescribed by law, the Employee’s
Termination of Employment shall be deemed to have occurred as of the date when
the Employee’s leave of absence began unless such failure to return was the
result of the Employee’s death.

2.08.        USERRA.

“USERRA” means the
Uniformed Services Employment and Reemployment Rights Act of 1994, as it may be
amended from time to time.

ARTICLE 3.  BENEFITS

3.01.        Normal Retirement Benefit.

Subject to the provisions
of the Entitlement paragraph, below, if the 

Employee’s Termination of
Employment occurs on or after attainment of the Employee’s Normal Retirement
Age, the benefit payable to the Employee under this Agreement shall be the
Annual Benefit as defined in paragraph 3.01.A., below, payable for a period of
twenty (20) years.  After payment
commences, each year the amount of the Annual Benefit shall increase three
percent (3%) over the prior year’s benefit, as a cost of living
adjustment.  The benefit shall be payable
on the first day of each month, in two hundred forty (240) installments or
until the death of the Employee, whichever is later, commencing on the first
day of the month following the Employee’s Termination of Employment.  However, in the event that (i) the Employee
is a “key employee” (as defined in Code section 416(i)), and (ii) the Bank
is a publicly traded corporation, the payment of benefits shall commence on the
first day of the seventh month following the Termination of Employment date.

A.                                   Annual
Benefit.

“Annual Benefit” means the deferred compensation
benefit payable under this Agreement, according to the following schedule:

	
  Termination of Employment Date

  	
   

  	
  Annual Benefit

  	
   

  
	
  After 2-13-2008 and on or before 2-13-2009

  	
   

  	
  $

  	
  6,250

  	
   

  
	
  After 2-13-2009 and on or before 2-13-2010

  	
   

  	
  $

  	
  12,500

  	
   

  
	
  After 2-13-2010 and on or before 2-13-2011

  	
   

  	
  $

  	
  18,750

  	
   

  
	
  After 2-13-2011

  	
   

  	
  $

  	
  25,000

  	
   

  

 

3.02.        Death Benefit.

A.                                   Death
Before Termination Of Employment.

If the Employee dies
prior to the Employee’s Termination of Employment, the deferred compensation
benefit payable under this Agreement to the Employee’s Beneficiary shall be the
Annual Benefit as defined in paragraph 3.01.A, payable for a period of twenty
(20) years.  After payment commences,
each year the amount of the Annual Benefit shall increase three percent (3%)
over the prior year’s benefit as a cost of living adjustment.  The benefit shall be payable in two hundred
forty (240) monthly installments on the first day of each month, commencing
with the month following the Employee’s death. 
If the Employee’s Beneficiary dies prior to receiving all such payments,
then any remaining payments shall be paid to the Beneficiary’s estate.

B.                                     Death
During Benefit Period.

If the Employee dies after the benefit payments have
commenced under this Agreement but before the Employee has received all such
payments to which the Employee is entitled, the Bank shall pay such remaining
benefits to the Employee’s Beneficiary at the same times and in the same
amounts that would have been paid to the Employee, had the Employee survived to
receive two hundred forty (240) monthly installments.  If the Employee’s Beneficiary dies prior to
receiving all such payments, then any remaining payments shall be paid to the
Beneficiary’s estate.

C.                                     Death
Before Benefit Period.

If the Employee becomes
entitled to benefits under this Agreement, but the Employee dies before the
commencement of such benefit payments, the Bank shall pay such benefits to the
Employee’s Beneficiary at the same times and in the same amounts that would
have been paid to the Employee had the Employee survived to receive two hundred
forty (240) monthly installments.  This
benefit shall be payable, on the first day of each month, commencing with the
month following the Employee’s death.  If
the Employee’s Beneficiary dies prior to receiving all such payments, then any
remaining payments shall be paid to the Beneficiary’s estate.

D.                                    Beneficiary
Designations.

The Employee shall notify
the Bank of the name, date of birth and current address of the Employee’s
designated Beneficiary and when any change in the address of the Employee’s
designated Beneficiary occurs.  The
Employee shall have the right, at any time, to revoke such designation or to
substitute another such Beneficiary without the consent of any person.  However, Beneficiary designations will be
effective only if signed by the Employee and accepted by the Bank during the
Employee’s lifetime.  If the Employee’s
Beneficiary on file with the Bank is the Employee’s spouse and the Employee’s
marriage to such spouse is subsequently dissolved, other than by the Employee’s
death, such Beneficiary designation shall be deemed automatically revoked.  If, upon the death of the Employee, there is
no valid Beneficiary designation on file with the Bank or the Employee’s
Beneficiary has predeceased the Employee, the Employee’s surviving spouse, or
if there is none, the Employee’s estate, shall be the Employee’s Beneficiary.

3.03.        Benefit Enhancements.

The
Board may, in its sole and
absolute discretion, increase the amount of the benefit payments to the
Employee or the Employee’s Beneficiary under this Agreement commencing any
time, and from time to time, effective on or after the first anniversary of the
first benefit payment under this Agreement.

3.04.        Entitlement.

A.                                   Excess
Parachute Payments.

Notwithstanding any
provision of this Agreement to the contrary, the Bank shall not pay any benefit under this
Agreement to the extent the benefit would be an excess parachute payment under
section 280G of the Code.  If any
portion of the amounts payable to the Employee under this Agreement, either
alone or together with other payments or benefits, that are contingent on a “change
of control” would constitute “excess parachute payments” subject to the excise
tax imposed by Code section 4999 (or similar tax and/or assessments), then, in
the Bank’s discretion, any of the excess parachute payments payable under this
Agreement or otherwise, shall be reduced to an amount equal to two hundred
ninety-nine percent (299%) of the Employee’s “base amount.”

Any determination
required under this paragraph shall be made in writing by the Bank’s
independent public accountants  
(Accountants) immediately prior to a Change of Control.  The Accountants may make reasonable
assumptions and approximations concerning applicable taxes and may rely on
reasonable, good faith interpretations concerning the application of Code
sections 280G and 4999.  The Bank shall
bear all costs the Accountants may reasonably incur in connection with any
calculations contemplated herein.  The
terms “change of control,” “excess parachute payments” and “base amount” are
defined in Code section 280G and Treasury regulations section 1.280G-1.  This paragraph shall apply and be interpreted
in accordance with Code section 280G and the Treasury regulations promulgated
thereunder effective January 1, 2004, or the Treasury regulations then in
effect.

B.                                     Termination
For Cause.

Notwithstanding any
provision of this Agreement to the contrary, no benefit shall be payable under
this Agreement to any person if the Employee’s Termination of Employment is for
Cause.

C.                                     Competition
After Termination Of Employment.

Notwithstanding any
provision of this Agreement to the contrary, except in the event of the
Employee’s Termination of Employment because of a Change of Control, if the
Board, in its sole and absolute discretion, determines that the Employee has,
at any time, violated the following non-competition provisions, then no
benefits (or no further benefits if benefit payments have commenced) shall be
payable under this Agreement to any person.

1.                                       In
the course of the Employee’s employment with the Bank, the Employee will have
access to trade secrets, confidential information, confidential forms, records,
data, specifications, plans, processes and ideas owned by the Bank or provided
to the Bank in a confidential manner by the person supplying such information
to the Bank.  The Employee shall not, without
the prior written consent of the Bank, directly or indirectly, disclose or use
any such information, except as required in the course of the Employee’s
employment by the Bank.

2.                                       During
the Employee’s employment with the Bank and for two (2) years following the
Employee’s Termination of Employment, the Employee shall not, without the prior
written consent of the Bank, engage in, become interested in, directly or
indirectly, as a sole proprietor, as a partner in a partnership, as a member of
a limited liability company, or as a substantial shareholder in a corporation,
or become associated with, in the capacity of employee, director, officer,
principal, agent, trustee or in any other capacity whatsoever, any enterprise
conducted in the trading area (a fifty (50) mile radius) of the business of the
Bank, which enterprise is, or may deemed to be, competitive with any business
carried on by the Bank as of the date of the Employee’s Termination of
Employment.

3.                                       During
the Employee’s employment with the Bank and for two (2) years following the Employee’s
Termination of Employment, the Employee shall not, without the prior written
consent of the Bank, directly or indirectly, induce or influence, or seek to
induce or influence, any person who is engaged, as an employee, agent,
independent contractor or otherwise, by the Bank, to terminate such person’s
engagement by the Bank.

4.                                       The
Employee shall not commit, cause to be committed, or permit to be committed,
any act which may be held under the laws of the state of California to
constitute unfair competition.

D.                                    Suicide
Or Misstatement.

Notwithstanding any
provision of this Agreement to the contrary, no benefit shall be payable under
this Agreement to any person if the Employee commits suicide within two (2)
years after the date of this Agreement or if the Employee has made any material
misstatement of fact on any application for life insurance purchased by the
Bank.

3.05.        Source Of Benefits.

A.                                   All
benefits payable pursuant to this Agreement shall be paid from the general
assets of the Bank. The Bank is not obligated to segregate any of its assets in
connection with the Agreement benefits, nor to fund or otherwise secure its
obligation to pay such benefits.

B.                                     If
the Bank elects to provide for the payment of its obligations hereunder through
(i) the purchase of any contract of insurance, (ii) any investment
product, (iii) the establishment of a trust, or (iv) otherwise, neither
the Employee nor any Beneficiary who acquires a right to receive payments
hereunder shall have rights or interest in any such contract, product, trust or
other arrangement greater than those of an unsecured general creditor of the
Bank.

C.                                     All
amounts of compensation deferred under the Agreement, all property and rights
purchased with such amounts, and all income attributable to such amount,
property or rights, shall remain, until made available to the Employee or the
Employee’s Beneficiary, solely the property and rights of the Bank, without
regard to the provision of benefits under the Agreement and subject only to the
claims of the general creditors of the Bank.

3.06.        Repayment Of Overpayment Of Benefits.

By accepting payment(s)
under this Agreement, the Employee or the Employee’s Beneficiary receiving the
payment agrees that, in the event of overpayment, the Employee or the Employee’s
Beneficiary will promptly repay the amount of overpayment without interest;
provided that, if the Employee or the Employee’s Beneficiary has not repaid the
overpayment within thirty (30) days after notice, the Employee or the Employee’s
Beneficiary will also pay an amount equal to simple interest at the rate 

determined by the Bank on
the unpaid amount from the date of overpayment to the date of repayment and, in
addition, will pay all legal fees, court costs and the reasonable time value of
the Bank, or any of its employees or agents, related to the collection of such
overpayment.

3.07.        Recovery Of Estate Taxes.

If the Employee’s gross
estate, for federal estate tax purposes, includes any amount determined by
reference to and on account of this Agreement, and if the Beneficiary is other
than the Employee’s estate, then the Employee’s estate shall be entitled to
recover from the Beneficiary receiving such benefit under the terms of this
Agreement an amount by which the total estate tax due by the Employee’s estate,
exceeds the total estate tax which would have been payable if the value of such
benefit had not been included in the Employee’s gross estate.  If there is more than one person receiving
such benefit, the right of recovery shall be against each such person.  In the event the Beneficiary has a liability
hereunder, the Beneficiary may petition the Bank for a lump sum payment in an
amount not to exceed the Beneficiary’s liability hereunder.

3.08.        Withholding.

The Bank may withhold
from any benefit payable under the Agreement all federal, state or local taxes
that may be required to be withheld pursuant to applicable law.

3.09.        Payments To Incapacitated Individuals.

If a benefit is payable
to a minor, to a person declared incapacitated, or to a person incapable of
handling the disposition of his or her property, the Bank may make all benefit
distributions to the person(s) or institution(s) which are providing for the
care and maintenance of the distributee, and continue to make distributions to
them until a duly appointed legal representative of the distributee makes a
claim for the payment.  If a valid claim
is made by a duly appointed legal representative of the distributee, the Bank
shall pay such benefit to the guardian, legal representative or person having
the care or custody of such minor, incapacitated person or incapable
person.  The Bank may require proof of
incapacity, minority or guardianship as it may deem appropriate prior to
distribution of the benefit.  Payments
made pursuant to the terms of this paragraph shall constitute a distribution to
the Employee or Beneficiary entitled thereto, and shall immediately discharge
the Bank of any further liability therefore.

 

 

ARTICLE 4.  BENEFIT
CLAIMS AND APPEALS

4.01.        Request For Information.

Any Employee or
Beneficiary may request such information concerning the Employee’s or
Beneficiary’s rights or benefits under this Agreement as is required to be
disclosed under Part 1, Subtitle B, Title I of ERISA.  The Bank shall respond, in writing, within a
reasonable time, not to exceed thirty (30) days, unless the failure to respond
results from matters reasonably beyond the Bank’s control.

4.02.        Claim For Benefits.

Claims for benefits shall
be processed as soon as administratively feasible and without unreasonable
delay due to causes beyond the control of the Bank.  A written ruling on each claim for benefits
shall be delivered to the Employee or Beneficiary making the claim.  If the claim is denied in any respect, the
ruling shall set forth the specific reasons for such denial, written in a
manner calculated to be understood by the Employee or Beneficiary, including:

A.                                   Specific
references to pertinent Agreement provisions on which the denial is based;

B.                                     A
description of any additional material or information necessary for the
claimant to perfect the claim;

C.                                     An
explanation of why such material or information is needed; and

D.                                    An
explanation of the Agreement’s review procedure for denied claims.

Such ruling shall be made
within thirty (30) days from the date the claim is received by the Bank.  If information upon which the ruling is based
is not available, the Bank shall make a prompt effort to secure all information
needed and make its ruling.  If the claim
is not acted upon within one hundred twenty (120) days of the claim, the
claimant may proceed to the review stage as if the claim had been denied.

4.03.        Review Of Denied Claim.

If a claim for benefits
has been denied by the Bank, then within ninety (90) days after receipt of the
ruling (or two hundred ten (210) days of the claim if the claim has not been
acted upon within one hundred twenty (120) days of the claim), the Employee or
Beneficiary making the claim or the Employee’s or Beneficiary’s authorized
representative may file a written 

request for review on a
form furnished by the Bank, giving the Employee or Beneficiary thirty (30) days
notice thereof, and notifying said claimant that said claimant may submit a
written statement and documents, or appear personally at such or both, to give
whatever facts or evidence the claimant feels bears upon the claim, review
pertinent documents and records and submit issues and comments in writing.  The Bank shall make a full and fair review of
the record, including the written and oral information submitted by the
claimant.  Within thirty (30) days, the
Bank shall render a decision and, if the claim is again denied, the Bank shall
set forth the specific reasons for such denial written in a manner calculated
to be understood by the Employee or Beneficiary.  Such ruling shall contain the same
information required by the Claim For Benefits paragraph, above.

4.04.        Resolution Of Disputes.

Any claim under this
Agreement that has not been resolved under the preceding provisions of this
Agreement shall be resolved pursuant to the provisions of this Resolution Of
Disputes paragraph.

A.                                   Negotiation/Mediation.

If any dispute arises
over performance under the terms of this Agreement, the parties shall use their
best efforts for a period of thirty (30) days to resolve the dispute by
agreement through negotiation or mediation. 
To commence the dispute resolution process, any party may serve written
notice on the other parties specifically identifying the dispute and requesting
that efforts at resolution begin.  If the
parties are unable to agree after reasonable negotiations among them, mediation
shall be initiated upon written request by any party and a mediator shall be
selected by the parties from (i) the Retired Judges Registry maintained by the
California Judges Association, (ii) the Sacramento Arbitration and Mediation
Services, or (iii) Judicat (Mediator). 
The parties shall submit to the Mediator all written, documentary and
other evidence and such oral testimony as is necessary for a proper resolution
of the dispute.  When and as requested by
the Mediator, the parties shall meet promptly in good faith efforts to resolve
the dispute.

B.                                     Binding
Arbitration.

If the parties’ good
faith efforts at resolving the dispute by agreement through negotiation or
mediation are unsuccessful within the thirty (30) day period set forth in the
Negotiation/ Mediation paragraph, above, or such longer period as mutually
agreed by the parties, such dispute between the parties shall be 

submitted to, and
conclusively determined by, binding arbitration in accordance with this Binding
Arbitration paragraph.

1.                                       The
parties agree that the Mediator selected pursuant to the Negotiation/Mediation
paragraph, above, shall serve as the Arbitrator; provided, however, that if
such Mediator is unable or unwilling to serve, then an Arbitrator shall be
selected by the parties from the list of individuals affiliated with Judicial
Arbitration and Mediation Services, Inc. 
If the parties are unable to agree upon an Arbitrator, each party shall
select an Arbitrator and the Arbitrators so selected shall select a third
Arbitrator.

2.                                       Any
arbitration hearing shall be conducted in Butte County, California.  The law applicable to the arbitration of any
dispute shall be the law of the State of California, excluding its laws of
evidence.  Except as otherwise provided
in this Agreement, the arbitration shall be governed by the rules of
arbitration of the American Arbitration Association.

3.                                       In
no event shall the Arbitrator’s award include any component of punitive or
exemplary damages.  The parties shall
equally bear all costs of arbitration.

4.05.        Time.

The filing of claims or
receipt of notices of rulings and any event starting a time period shall be deemed
to commence with personal delivery signed for by the claimant or by affidavit
of personal service, or the date of actual receipts for certified or registered
mail (or date returned if delivery is refused or a claimant has moved without
giving the Bank a forwarding address).

ARTICLE 5.  ADMINISTRATION

5.01.        Employment Records.

The Bank shall maintain
permanent employment records to show dates of employment and Termination of
Employment, compensation, and such other information as necessary or appropriate
in the administration of the Agreement for the Employee.

5.02.        Reports And Disclosure.

The Bank shall prepare,
file and distribute, in a timely manner, all reports and information to be
disclosed to the Employee as may be required by ERISA.

5.03.        Powers And Duties Of The Bank.

The Bank shall administer
the Agreement in accordance with its terms and shall have the power and
discretion to construe the terms of the Agreement, resolve any ambiguities in
the Agreement, and to determine all questions arising in connection with the
administration, interpretation and application of the Agreement.  Any such determination by the Bank shall be
conclusive and binding upon all persons. 
The Bank may establish procedures, correct any defect, supply any
information, or reconcile any inconsistency in such manner and to such extent
as shall be deemed necessary or advisable to carry out the purpose of the
Agreement; provided, however, that any such procedure, discretionary act,
interpretation or construction shall be consistent with the intent set forth in
the Income Tax Status and ERISA Status paragraphs above.

ARTICLE 6.  MISCELLANEOUS

6.01.        Binding Effect.

This Agreement shall be
binding upon and inure to the benefit of the Bank, its successors and assigns,
the Employee and the Employee’s spouse, heirs, executors, administrators and
legal representatives.

6.02.        Amendment.

No waiver or modification
of any part of this Agreement shall be valid unless the amendment is in writing
signed by the Bank and the Employee. 
Notwithstanding any other provision of this Agreement to the contrary,
the Bank may amend this Agreement at any time, without the consent of the
Employee, effective as of any date, if the Bank determines in its sole and
absolute discretion that the amendment is necessary or appropriate in order to
either (i) maintain the status of the Agreement as set forth in the Income Tax
Status paragraph or ERISA Status paragraph above, or (ii) if the Agreement
would otherwise result in significant financial penalties or be otherwise
significantly detrimental to the Bank (other than the financial impact of
paying the benefits under the Agreement), regardless of the effect of any such
amendment on the Employee or the benefits with respect to the Employee.

6.03.        Termination.

If not terminated at an
earlier date, this Agreement shall terminate as of the earliest date on which
the Bank’s obligations to the Employee and his Beneficiary(ies) have been
satisfied.  Upon termination of the
Agreement, no distributions of benefits shall be made that are not otherwise
permitted by the Agreement, unless such distributions are permitted under Code
section 409A or the lawful guidance published by the Treasury Department or the
IRS pursuant to Code section 409A.

6.04.        Alienation.

No benefits under this
Agreement shall be subject in any manner to anticipation, alienation, sale,
transfer, assignment, pledge, encumbrance or charge.  Any attempt to so anticipate, alienate, sell,
transfer, assign, pledge, encumber or charge the same shall be void.  Nor shall any such benefits in any manner be
liable for or subject to the debts, contracts, liabilities, domestic relations
orders or torts of the person entitled to such benefits except to the extent
required by ERISA.

6.05.        Applicable Law.

This Agreement shall be
construed, administered and governed in all respects by the laws of the United
States of America to the extent applicable, and otherwise by the laws of the
state of California.

6.06.        Enforcement.

If any action at law or
in equity, or if the services of any attorney are necessary to enforce or
interpret the terms of this Agreement, then, except as provided in the
Resolution of Disputes paragraph, above, the prevailing party shall be entitled
to reasonable attorneys’ fees, costs and necessary disbursements in addition to
any other relief to which that party may be entitled.

6.07.        Severability.

If any provision of this
Agreement is held by a court of competent jurisdiction to be invalid or
unenforceable, the remaining provisions hereof shall continue to be fully
effective without being impaired or invalidated in any way.

6.08.        Waiver.

Waiver of breach of any
provision of this Agreement shall not be deemed to be a waiver of any other
provision or of any subsequent breach of such provision.

6.09.        Headings.

The paragraph headings
appearing in this Agreement shall not be deemed to govern, limit, modify, or in
any way affect the scope, meaning or intent of this Agreement.

6.10.        Entire Agreement.

This Agreement
constitutes the entire agreement between the Bank and the Employee as it
relates to the salary continuation benefits under this Agreement.  This Agreement supersedes all prior and
contemporaneous agreements, understandings and representations between the
parties, whether written or oral, with respect to the subject matter hereof.

IN WITNESS WHEREOF, the
Bank and the Employee have caused this Agreement to be executed on the date
last written below.

	
  

  	
  

  	
  BANK:

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  BUTTE COMMUNITY BANK

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  Date:

  	
  9-18-2006

  	
   

  	
  By:

  	
  //s// Don Leforce

  	
   

  
	
   

  	
   

  	
   

  	
  Title:

  	
  Chairman

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
  EMPLOYEE:

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Date:

  	
  9-12-2006

  	
   

  	
  By:

  	
  //s// K C Robbins

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
  Keith
  RobbinsEXHIBIT
10.1

AMENDMENT NO. 5 AND AGREEMENT

This AMENDMENT NO. 5 AND AGREEMENT (“Agreement”) entered into and made
effective as of March 6, 2007 (“Effective Date”) is among Cano Petroleum, Inc.,
a Delaware corporation (“Borrower”), the Guarantors (as defined below), the
Lenders (as defined below), and Union Bank of California, N.A., as
administrative agent for such Lenders (in such capacity, the “Administrative
Agent”) and as issuing lender (in such capacity, the “Issuing Lender”).

RECITALS

A.            The Borrower is party to that
certain Credit Agreement dated as of November 29, 2005, as amended by the
Amendment No. 1 dated as of February 24, 2006, and as amended by the Amendment
No. 2, Assignment and Agreement dated as of April 28, 2006, Amendment No. 3
entered into on May 12, 2006 but made effective as of March 31, 2006, and
Amendment No. 4 dated as of June 30, 2006 (as so amended, the “Credit Agreement”)
among the Borrower, the lenders party thereto from time to time (the “Lenders”),
the Administrative Agent, and the Issuing Lender.

B.            The
Borrower, the Lenders and the Administrative Agent wish to, subject to the
terms and conditions of this Agreement make certain other amendments to the
Credit Agreement as provided herein.

THEREFORE, the Borrower, the Guarantors, the
Lenders, and the Administrative Agent hereby agree as follows:

Section 1.              Defined
Terms.  As used in
this Agreement, each of the terms defined in the opening paragraph and the
Recitals above shall have the meanings assigned to such terms therein.  Each term defined in the Credit Agreement and
used herein without definition shall have the meaning assigned to such term in
the Credit Agreement, unless expressly provided to the contrary.

Section 2.              Other
Definitional Provisions. Article, Section, Schedule, and
Exhibit references are to Articles and Sections of and Schedules and Exhibits
to this Agreement, unless otherwise specified. 
All references to instruments, documents, contracts, and agreements are
references to such instruments, documents, contracts, and agreements as the
same may be amended, supplemented, and otherwise modified from time to time,
unless otherwise specified.  The words “hereof”,
“herein”, and “hereunder” and words of similar import when used in this
Agreement shall refer to this Agreement as a whole and not to any particular
provision of this Agreement.  The term “including”
means “including, without limitation,”. 
Paragraph headings have been inserted in this Agreement as a matter of
convenience for reference only and it is agreed that such paragraph headings
are not a part of this Agreement and shall not be used in the interpretation of
any provision of this Agreement.

 

Section 3.              Amendments to Credit Agreement.

(a)           Section 1.01 of the Credit Agreement is
amended by replacing the definitions of “Maturity Date” and “Interest Expense”
in their entirety with the following corresponding terms:

“Maturity
Date” means November 29, 2009.

“Interest
Expense” means, for the Borrower and its consolidated Subsidiaries for any
period, total interest, letter of credit fees, and other fees and expenses
incurred in connection with any Debt for such period, whether paid or accrued,
including, without limitation, (i) all commissions, discounts and other fees
and charges owed with respect to letters of credit and bankers’ acceptance
financing, imputed interest under Capital Leases, and net costs under Interest
Hedge Agreements, all as determined in conformity with GAAP, and (ii) all
interests, dividends, distributions, or other payments made in respect of preferred
Equity Interests or Debt Issuances; but excluding (A) dividends payable solely
in Equity Interests of the Borrower made in respect of preferred Equity
Interests and (B) the expensing of deferred amortized costs pertaining to the
payment in full of the Subordinated Debt and pertaining to the Obligations.

(b)           Section 1.01 of the
Credit Agreement is further amended by deleting the phrase “but excluding the Barnett Shale
Properties” from the definition of “Material Adverse Change”.

(c)           Section 1.01 of the
Credit Agreement is further amended by deleting the phrase “(other than the
Barnett Shale Properties)” from the definition of “Borrowing Base”.

(d)           Section 1.01 of the
Credit Agreement is further amended by adding the following terms in
alphabetical order:

“Fire
Litigation” means those certain lawsuits and claims now pending or
hereafter filed against Borrower or any of its Subsidiaries related to or
arising from fires beginning on March 12, 2006 in the Texas panhandle.

(e)           Sections 2.02(c),
5.01, 5.06(d), 5.08 and 5.10 of the Credit Agreement are amended by deleting
the phrase “(other than the Barnett Shale Properties)”.

(f)            Section 5.02(b) of
the Credit Agreement is hereby amended by adding the following sentence to the
end thereof:

“Notwithstanding
the foregoing, the Borrower is not required to turn over to the Collateral
Trustee the casualty insurance proceeds received by the Borrower and its
Subsidiaries in connection with the fires beginning on March 12, 2006 in the
Texas Panhandle; provided that (i) the aggregate amount of insurance proceeds
the Borrower is permitted to retain pursuant to the preceding provision shall
not exceed $6,000,000, (ii) the Borrower shall deposit all such insurance
proceeds into a controlled deposit account with the Collateral Trustee, and
(iii) the Borrower shall use such proceeds to pay the attorneys’ fees,
settlement amounts and other litigation expenses incurred by the Borrower and
its Subsidiaries in defending or settling the Fire Litigation.

 2
 

(g)           Section 5.06(b) of
the Credit Agreement is hereby deleted in its entirety and replaced with the
following:

(b)          Quarterly Financials.  As soon as available and in any event not
later than 45 days after the end of each of the first three fiscal quarters of
each fiscal year of the Borrower and its consolidated Subsidiaries, commencing
with the fiscal quarter ending March 31, 2007, (i) to the extent not otherwise
provided in the Form 10-Q for such fiscal quarter end, the unaudited balance
sheet and the statements of income, cash flows, and retained earnings of each
such Person for the period commencing at the end of the previous year and
ending with the end of such fiscal quarter, all in reasonable detail and duly
certified with respect to such consolidated statements (subject to year-end
audit adjustments) by a Responsible Officer of the Borrower as having been
prepared in accordance with GAAP, (ii) the Form 10-Q filed with the SEC for
such fiscal quarter end, and (iii) a Compliance Certificate executed by the
Responsible Officer of the Borrower;

(h)           Section 5.06(c)(iv)
of the Credit Agreement is hereby is amended by deleting the reference to the “ monthly
cash flow budget for the twelve months” and replacing such reference with the
phrase “quarterly cash flow budget for the four quarters”.

(i)            Section 5.06(c) of
the Credit Agreement is amended by deleting the proviso contained therein.

(j)            Section 5.06(d) of
the Credit Agreement is deleted in its entirety and replaced with the
following:

(d)          Production and Hedging Reports.  As soon as available and in any event within
45 days after the end of each quarter, commencing with the quarter ending March
31, 2007, a report certified by a Responsible Officer of the Borrower in form
and substance satisfactory to the Administrative Agent prepared by the Borrower
(i) covering each of the Oil and Gas Properties of the Borrower and its
Subsidiaries (including the Barnett Shale Properties) and detailing on a
quarterly basis (A) the production, revenue, and price information and
associated operating expenses for each such quarter, (B) any changes to any
producing reservoir, production equipment, or producing well during each such
quarter, which changes could cause a Material Adverse Change, and (C) any sales
of the Borrower’s or any Subsidiaries’ Oil and Gas Properties during each such
quarter, (ii) setting forth a true and complete list of all Hedge Contracts of
the Borrower and its Subsidiaries and detailing the material terms thereof
(including the type, term, effective date, termination date and notional
amounts or volumes), the net mark to market value thereof, all credit support
agreements relating thereto (including any margin required or supplied), and
the counterparty to each such agreement, and (iii) certifying the Borrower’s
compliance with Section 5.12 hereof.

 3
 

(k)           Section 5.09 of the
Credit Agreement is hereby deleted in its entirety and replaced with the
following:

Section
5.09         Use of Proceeds.  The Borrower shall use the proceeds of the
Advances and Letters of Credit (a) to develop and acquire Oil and Gas
Properties, (b) for working capital purposes and (c) for general corporate
purposes; provided that the Borrower shall not use the proceeds of any Advance
for general corporate purposes or working capital purposes unless the use
thereof for such purposes would not cause the General Corporate Advance Amount,
after the application thereof, to exceed $10,000,000.  For the avoidance of doubt, in calculating
the General Corporate Advance Amount, development and acquisition of Oil and
Gas Properties shall not constitute general corporate or working capital
purposes.

(l)            Section 5.12 of the
Credit Agreement is hereby deleted in its entirety and replaced with the
following:

Section
5.12         Hedging Arrangements.  The Borrower shall maintain (a) each Hydrocarbon
Hedge Agreement that is in place as of the effective date of the Amendment No.
5 and Agreement which amends this Agreement until the stated maturity of such
Hydrocarbon Hedge Agreement and (b) 
Hydrocarbon Hedge Agreements covering no less than 50% and no more than
80% of the production volumes attributable to “proved, developed and producing”
Proven Reserves of the Borrower’s and its Subsidiaries’ Oil and Gas Properties
for a minimum period of at least three years as of the end of December 31, 2006
and as of the end of each six month period ending thereafter, and at a minimum
price floor as required by the Majority Lenders from time to time.

(m)          Section 6.04 of the
Credit Agreement is hereby deleted in its entirety and replaced with the
following:

Section
6.04         Merger or Consolidation;
Asset Sales.  The Borrower shall not,
nor shall it permit any of its Subsidiaries to (a) merge or consolidate with or
into any other Person without the prior consent of all of the Lenders; provided
that the Borrower or any Subsidiary may merge or may be consolidated into the
Borrower or any Guarantor if the Borrower or such Guarantor is the surviving
entity; or (b) sell, lease, transfer, assign, farm-out, convey, or otherwise
dispose of any of its Property (including, without limitation, any working
interest, overriding royalty interest, production payments, net profits
interest, royalty interest, or mineral fee interest) other than: (i) the sale
of Hydrocarbons in the ordinary course of business and (ii) the sale or transfer
of equipment that is (A) obsolete, worn out, depleted or uneconomic and
disposed of in the ordinary course of business, (B) no longer necessary for the
business of such Person or (C) contemporaneously replaced by equipment of at
least comparable value and use.

 4
 

(n)           Section 6.18 of the
Credit Agreement is hereby deleted in its entirety and replaced with the
following:

Section
6.18         Leverage Ratio.  The Borrower (a) shall not permit the
Leverage Ratio at the end of each fiscal quarter ending on or after March 31,
2007 to be greater than 5.00 to 1.00; (b) shall not permit the Leverage Ratio
at the end of each fiscal quarter ending on or after September 30, 2007 to be
greater than 4.50 to 1.00; and (c) shall not permit the Leverage Ratio at the
end of each fiscal quarter ending on or after March 31, 2008 to be greater than
4.00 to 1.00; provided that, solely for purposes of calculating Leverage Ratio
under this clause, “consolidated Debt” shall not include Debt outstanding under
preferred Equity Interests issued in compliance with Section 6.22.

(o)           Schedule I-Pricing Grid, Schedule 4.07, Exhibit B
— Compliance Certificate, and Exhibit F- Notice of Borrowing which are attached
to the Credit Agreement are hereby replaced in their entirety with the
corresponding Schedule I-Pricing Grid, Schedule 4.07, Exhibit B — Compliance
Certificate, and Exhibit F- Notice of Borrowing attached to this Agreement.

Section 4.              Borrower Representations and Warranties.  The Borrower represents and warrants that:
(a) after giving effect to this Agreement, the representations and warranties
contained in the Credit Agreement and the representations and warranties
contained in the other Loan Documents are true and correct in all material
respects on and as of the Effective Date as if made on as and as of such date
except to the extent that any such representation or warranty expressly relates
solely to an earlier date, in which case such representation or warranty is
true and correct in all material respects as of such earlier date; (b) after
giving effect to this Agreement, no Default has occurred and is continuing; (c) the execution,
delivery and performance of this Agreement are within the corporate power and
authority of the Borrower and have been duly authorized by appropriate
corporate and governing action and proceedings; (d) this Agreement constitutes
the legal, valid, and binding obligation of the Borrower enforceable in
accordance with its terms, except as limited by applicable bankruptcy,
insolvency, reorganization, moratorium, or similar laws affecting the rights of
creditors generally and general principles of equity; (e) there are no
governmental or other third party consents, licenses and approvals required in
connection with the execution, delivery, performance, validity and enforceability
of this Agreement; and (f) the Liens under the Security Instruments are valid
and subsisting and secure Borrower’s obligations under the Loan Documents.

Section 5.              Guarantors Representations and Warranties.  Each Guarantor represents and warrants that:
(a) after giving effect to this Agreement, the representations and warranties
contained in the Guaranty and the representations and warranties contained in
the other Loan Documents are true and correct in all material respects on and
as of the Effective Date as if made on as and as of such date except to the
extent that any such representation or warranty expressly relates solely to an
earlier date, in which case such representation or warranty is true and correct
in all material respects as of such earlier date; (b) after giving effect to
this Agreement, no Default has occurred and is continuing; (c) the execution,
delivery and performance of this Agreement are within the corporate,

 5
 

limited liability company,
or partnership power and authority of such Guarantor and have been duly
authorized by appropriate corporate, limited liability company, or partnership
action and proceedings; (d) this Agreement constitutes the legal, valid, and
binding obligation of such Guarantor enforceable in accordance with its terms,
except as limited by applicable bankruptcy, insolvency, reorganization,
moratorium, or similar laws affecting the rights of creditors generally and
general principles of equity; (e) there are no governmental or other third
party consents, licenses and approvals required in connection with the
execution, delivery, performance, validity and enforceability of this
Agreement; (f) it has no defenses to the enforcement of the Guaranty; and (g)
the Liens under the Security Instruments are valid and subsisting and secure
such Guarantor’s and the Borrower’s obligations under the Loan Documents.

Section 6.              Conditions to Effectiveness.  This Agreement and the
amendments to the Credit Agreement provided herein shall become effective on
the Effective Date and enforceable against the parties hereto upon the
occurrence of the following conditions precedent:

(a)           The Administrative Agent shall have
received multiple original counterparts, as requested by the Administrative
Agent, of this Agreement duly and validly executed and delivered by duly
authorized officers of the Borrower, the Guarantors, the Administrative Agent,
and the Lenders.

(b)           The representations
and warranties in this Agreement shall be true and correct in all material
respects.

(c)           The Borrower shall have paid all fees and expenses of the Administrative Agent’s
outside legal counsel and other consultants pursuant to all invoices presented
for payment on or prior to the Effective Date.

Section 7.              Acknowledgments and Agreements.

(a)           The Borrower acknowledges that on the
date hereof all Obligations are payable without defense, offset, counterclaim
or recoupment.

(b)           The Administrative
Agent and the Lenders hereby expressly reserve all of their rights, remedies,
and claims under the Loan Documents.  Nothing
in this Agreement shall constitute a waiver or relinquishment of (i) any
Default or Event of Default under any of the Loan Documents, (ii) any of the
agreements, terms or conditions contained in any of the Loan Documents, (iii)
any rights or remedies of the Administrative Agent or any Lender with respect
to the Loan Documents, or (iv) the rights of the Administrative Agent or any
Lender to collect the full amounts owing to them under the Loan Documents.

(c)           Each of the
Borrower, the Guarantors, Administrative Agent, and Lenders does hereby adopt,
ratify, and confirm the Credit Agreement, as amended hereby, and acknowledges
and agrees that the Credit Agreement, as amended hereby, is and remains in full
force and effect, and the Borrower and the Guarantors acknowledge and agree
that their respective liabilities and obligations under the Credit Agreement,
as amended hereby, and the Guaranty, are not impaired in any respect by this
Agreement.

 6
 

 

(d)           From and after the
Effective Date, all references to the Credit Agreement and the Loan Documents
shall mean such Credit Agreement and such Loan Documents as amended by this
Agreement.

(e)           This Agreement is a
Loan Document for the purposes of the provisions of the other Loan
Documents.  Without limiting the foregoing,
any breach of representations, warranties, and covenants under this Agreement
shall be a Default or Event of Default, as applicable, under the Credit
Agreement.

Section 8.              Reaffirmation of the Guaranty.  Each Guarantor hereby ratifies, confirms,
acknowledges and agrees that its obligations under the Guaranty are in full
force and effect and that such Guarantor continues to unconditionally and
irrevocably guarantee the full and punctual payment, when due, whether at
stated maturity or earlier by acceleration or otherwise, all of the Guaranteed
Obligations (as defined in the Guaranty), as such Guaranteed Obligations may
have been amended by this Agreement, and its execution and delivery of this
Agreement does not indicate or establish an approval or consent requirement by
such Guarantor under the Guaranty in connection with the execution and delivery
of amendments, consents or waivers to the Credit Agreement, the Notes or any of
the other Loan Documents.

Section 9.              Counterparts.  This Agreement may be signed in any number of
counterparts, each of which shall be an original and all of which, taken
together, constitute a single instrument. 
This Agreement may be executed by facsimile signature and all such
signatures shall be effective as originals.

Section 10.            Successors
and Assigns.  This
Agreement shall be binding upon and inure to the benefit of the parties hereto
and their respective successors and assigns permitted pursuant to the Credit
Agreement.

Section 11.            Invalidity.  In the event that any one or more of the
provisions contained in this Agreement shall for any reason be held invalid,
illegal or unenforceable in any respect, such invalidity, illegality or
unenforceability shall not affect any other provision of this Agreement.

Section 12.            Governing
Law.  This
Agreement shall be deemed to be a contract made under and shall be governed by
and construed in accordance with the laws of the State of Texas.

Section 13.            Entire
Agreement. THIS AGREEMENT, THE CREDIT AGREEMENT AS AMENDED BY THIS AGREEMENT, THE
NOTES, AND THE OTHER LOAN DOCUMENTS CONSTITUTE THE ENTIRE UNDERSTANDING AMONG
THE PARTIES HERETO WITH RESPECT TO THE SUBJECT MATTER HEREOF AND SUPERSEDE ANY
PRIOR AGREEMENTS, WRITTEN OR ORAL, WITH RESPECT THERETO.

THERE
ARE NO UNWRITTEN ORAL AGREEMENTS AMONG THE PARTIES.

[SIGNATURES BEGIN ON NEXT PAGE]

 

 7

EXECUTED effective as of the date first above written.

	
  BORROWER:

  	
  CANO PETROLEUM, INC.

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ S. Jeffrey Johnson

  
	
   

  	
   

  	
   

  	
   S. Jeffrey
  Johnson

  
	
   

  	
   

  	
   

  	
   Chairman and
  Chief Executive Officer

  
	
   

  	
   

  
	
  GUARANTORS:

  	
  SQUARE ONE ENERGY, INC.

  
	
   

  	
  LADDER COMPANIES, INC.

  
	
   

  	
  W.O. ENERGY OF NEVADA, INC.

  
	
   

  	
  WO ENERGY, INC.

  
	
   

  	
  PANTWIST, LLC

  
	
   

  	
  CANO PETRO OF NEW MEXICO, INC.

  
	
   

  	
   

  
	
   

  	
  Each by:

  	
  /s/ S. Jeffrey Johnson

  
	
   

  	
   

  	
   

  	
   S. Jeffrey
  Johnson

  
	
   

  	
   

  	
   

  	
   President

  
	
   

  	
   

  
	
   

  	
  W.O. OPERATING COMPANY, LTD.

  
	
   

  	
  By:  WO
  Energy, Inc., its general partner

  
	
   

  	
   

  
	
   

  	
   

  	
  By:

  	
  /s/ S. Jeffrey Johnson

  
	
   

  	
   

  	
   

  	
   

  	
   S. Jeffrey
  Johnson

  
	
   

  	
   

  	
   

  	
   

  	
   President

  
	
   

  	
   

  
	
   

  	
  W.O. PRODUCTION COMPANY, LTD.

  
	
   

  	
  By:  WO
  Energy, Inc., its general partner

  
	
   

  	
   

  
	
   

  	
   

  	
  By:

  	
  /s/ S. Jeffrey Johnson

  
	
   

  	
   

  	
   

  	
   

  	
   S. Jeffrey
  Johnson

  
	
   

  	
   

  	
   

  	
   

  	
   President

  
									

 

 

	
  ADMINISTRATIVE
  AGENT/

  	
   

  
	
  ISSUING
  LENDER/LENDER:

  	
  UNION BANK OF
  CALIFORNIA, N.A.,

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Kimberly Coil

  
	
   

  	
   

  	
   

  	
  Kimberly Coil

  
	
   

  	
   

  	
   

  	
  Vice President

  

 

 

	
  

  	
  NATIXIS (formerly known
  as Natexis Banques

  
	
   

  	
  Populaires) as a Lender

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
   /s/ Donovan C. Broussard

  
	
   

  	
  Name:

  	
  Donovan C. Broussard

  
	
   

  	
  Title:

  	
  Managing Director

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
   /s/ Timothy L. Polvado

  
	
   

  	
  Name:

  	
  Timothy L. Polvado

  
	
   

  	
  Title:

  	
  Managing Director

  
						

 

SCHEDULE I

PRICING GRID

 

Applicable
Margins

	
  Utilization Level*

  	
   

  	
  Base Rate

  Advances

  	
   

  	
  Eurodollar Rate

  Advances

  	
   

  	
  Commitment Fee

  	
   

  
	
  Level I

  	
   

  	
  0.25

  	
  %

  	
  1.75

  	
  %

  	
  0.25

  	
  %

  
	
  Level II

  	
   

  	
  0.50

  	
  %

  	
  2.00

  	
  %

  	
  0.25

  	
  %

  
	
  Level III

  	
   

  	
  0.75

  	
  %

  	
  2.25

  	
  %

  	
  0.375

  	
  %

  
	
  Level IV

  	
   

  	
  1.00

  	
  %

  	
  2.50

  	
  %

  	
  0.375

  	
  %

  

* Utilization Levels are
described below and are determined in accordance with the definition of “Utilization
Level”.

1.  Level I: If
the Utilization Level is less than 50%.

2.  Level II:
If the Utilization Level is greater than or equal to 50% but less than 75%.

3.  Level III: If
the Utilization Level is greater than or equal to 75% but less than 90%.

4.  Level IV: If
the Utilization Level is greater than or equal to 90%.

EXHIBIT B

FORM OF COMPLIANCE
CERTIFICATE

FOR THE PERIOD FROM           ,
200     TO            ,
200    

This certificate dated as
of                      ,
         is prepared pursuant to the
Credit Agreement dated as of November 29, 2005 (as amended, supplemented or
otherwise modified from time to time, the “Credit Agreement”) among CANO
PETROLEUM, INC., a Delaware corporation (“Borrower”), the lenders party
thereto (the “Lenders”), and UNION BANK OF CALIFORNIA, N.A., as administrative
agent for such Lenders (in such capacity, the “Administrative Agent”)
and as issuing lender.  Unless otherwise
defined in this certificate, capitalized terms that are defined in the Credit
Agreement shall have the meanings assigned to them by the Credit Agreement.

The undersigned hereby
certifies that:

(a)                                  all
of the representations and warranties made by the Borrower in the Credit
Agreement and the other Loan Documents are true and correct in all material
respects as if made on this date, except to the extent that any such representation
or warranty expressly relates solely to an earlier date, in which case it shall
have been true and correct in all material respects as of such earlier date;

[(b)     that no Default or Event of Default has
occurred and is continuing; and]

[(b)     the following Default[s] or Event[s] of
Default exist as of the date hereof or have occurred since the date of the
Borrower’s previous certification to the Administrative Agent, if any, and the
actions set forth below have been or are being taken to remedy such
circumstances:

                                                          ;
and]

(c) that as of the last
day of the previous quarter the following statements, amounts, and calculations
were true and correct:

I.                                         Current
Ratio—Section 6.17.

	
  (a)

  	
  consolidated
  current assets (1)

  	
  $

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  (b)

  	
  consolidated current liabilities (2)

  	
  $

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  Current Ratio =
  (a) to (b) =

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  Minimum Current
  Ratio not less than:

  	
  1.00 to 1.00

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  COMPLIANCE?

  	
  YES

  	
  NO

  	
   

  	
   

  
						

II.            Leverage
Ratio—Section 6.18.

	
  (a)

  	
  consolidated
  Debt (3)

  	
   

  	
   

  

(1)             “current
assets” shall include the aggregate Unused Commitment Amounts of the
Lenders, but shall exclude (A) any cash deposited with or at the request of a
counterparty to any Hedge Contract or any other similar hedge arrangement and
(B) any assets representing a valuation account arising from the application of
SFAS 133 and 143.

(2)             “current
liabilities” shall exclude, as of the date of calculation, the current
portion of long-term Debt existing under the Credit Agreement and any
liabilities representing a valuation account arising from the application of
SFAS 133 and 143.

(3)             “consolidated
Debt” shall not include Debt outstanding under preferred Equity Interests
issued in compliance with Section 6.22 of the Credit Agreement.

 

 1
 

 

	
  (b)

  	
  consolidated
  EBITDA (4) =

  
	
   

  
	
                 (i)
  + [(ii) + (iii) + (iv)] (5) — (v) =

  	
  $

  
	
   

  
	
   

  	
  (i)

  	
  Consolidated Net
  Income

  	
  $

  
	
   

  
	
   

  	
  (ii)

  	
  consolidated
  Interest Expense

  	
  $

  
	
   

  
	
   

  	
  (iii)

  	
  taxes

  	
  $

  
	
   

  
	
   

  	
  (iv)

  	
  depreciation,
  amortization, depletion & other non-cash items (6)

  	
  $

  
	
   

  
	
   

  	
  (v)

  	
  all non-cash items of income included in determining
  Consolidated Net Income (7)

  	
  $

  
	
   

  	
   

  
	
  Leverage Ratio = (a) to (b) = 

  
	
   

  	
   

  
	
  Maximum Leverage Ratio:

  	
   

  	
  [5.00 to 1.00] [4.50 to 1.00]

  
	
   

  	
   

  	
  [4.00 to 1.00] (8)

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  COMPLIANCE?

  	
  YES

  	
  NO

  
									

(4)    EBITDA
shall be measured for the four fiscal quarter period then ended.

(5)    Items (ii)
— (iv) shall be included to the extent deducted in determining Consolidated Net
Income.

(6)    Other
non-cash items should include any provisions for the reduction in the carrying
value of assets recorded in accordance with GAAP and including non-cash charges
resulting from the requirements of SFAS 133 or 143.

(7)    Non-cash
items of income should include any items resulting from the requirements of
SFAS 133 or 143.

(8)    Use (i)
5.00 to 1.00 for fiscal quarter ending March 31, 2007, (ii) 4.50 to 1.00 for
fiscal quarter ending September 30, 2007 and (iii) 4.00 to 1.00 for fiscal
quarters ending on or after March 31, 2008.

 2
 

III.           Interest
Coverage Ratio—Section 6.19.

	
  (a)

  	
  consolidated EBITDA = See II(b) above =

  	
  $

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  (b)

  	
  consolidated Interest Expense (9) =

  	
  $

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  Interest Coverage Ratio = (a) to (b) = 

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  Minimum Interest Coverage Ratio =

  	
  [1.25 to 1.00]

  
	
   

  	
   

  	
  [1.50 to 1.00][2.00 to
  1.00] (10)

  
	
   

  	
   

  	
   

  	
   

  
	
  COMPLIANCE?

  	
  YES

  	
  NO

  	
   

  	
   

  
						

(9) For the fiscal quarter ending December 31, 2006, Interest Expense
shall be calculated using Interest Expense for the three fiscal quarter period
then ended multiplied by 4/3 and for fiscal quarters ending on or after March
31, 2007, Interest Expense shall be calculated using Interest Expense for the
four fiscal quarters then ended.

(10) Use (a) 1.25 to 1.00 for fiscal quarters ending on
or after June 30, 2006 but prior to March 31, 2007, (b) 1.50 to 1.00 for fiscal
quarter ending March 31, 2007, and (c) 2.00 to 1.00 for fiscal quarters ending
on or after June 30, 2007.

 

IN WITNESS THEREOF, I
have hereto signed my name to this Compliance Certificate as of                        ,
20    .

	
  

  	
  CANO PETROLEUM, INC., a Delaware corporation

  
	
   

  	
   

  	
  By:

  	
   

  	 

	
   

  	
  Name:

  	
   

  	 

	
   

  	
  Title:

  	
   

  	 

										

 

 3

EXHIBIT F

FORM OF NOTICE OF BORROWING

[Date]

Union Bank of California, N.A., as
Administrative Agent

445 South Figueroa Street, 15th Floor

Los
Angeles, California 90071

Attention:              [LOAN PROCESSOR]

Ladies and Gentlemen:

The undersigned, Cano
Petroleum, Inc., a Delaware corporation (the “Borrower”), refers to the
Credit Agreement dated as of November 29, 2005 (as the same has been and may be
amended, restated or modified from time-to-time, the “Credit Agreement,”
the defined terms of which are used in this Notice of Borrowing unless
otherwise defined in this Notice of Borrowing) among the Borrower, the lenders
party thereto (the “Lenders”), and Union Bank of California, N.A., as
administrative agent for the Lenders (the “Administrative Agent”) and as
issuing lender for the Lenders (the “Issuing Lender”), and hereby gives
you irrevocable notice pursuant to Section 2.03(a) of the Credit Agreement that
the undersigned hereby requests a Borrowing, and in connection with that
request sets forth below the information relating to such Borrowing (the “Proposed
Borrowing”) as required by Section 2.03(a) of the Credit Agreement:

1.             The Business Day of the Proposed Borrowing is                    ,
         .

2.             The Proposed Borrowing will be composed of [Reference
Rate Advances] [Eurodollar Rate Advances].

3.             The aggregate amount of the Proposed Borrowing is $                   .

4.             [The Interest Period for each Eurodollar Rate Advance
made as part of the Proposed Borrowing is [            
month[s]].]

The Borrower hereby certifies
that the following statements are true on the date hereof, and will be true on
the date of the Proposed Borrowing:

(a)                                  the representations and warranties
contained in Article IV of the Credit Agreement and the representations and
warranties contained in the Security Instruments, the Guaranties, and each of
the other Loan Documents are true and correct in all material respects on and
as of the date of the Proposed Borrowing, before and after giving effect to the
Proposed Borrowing and to the application of the proceeds from the Proposed
Borrowing, as though made on and as of such date, except to the extent that any
such representation or warranty expressly relates solely to an earlier date, in
which case it shall have been true and correct in all material respects as of
such earlier date;

 1
 

(b)                                 no Default has occurred and is continuing
or would result from the Proposed Borrowing or from the application of the
proceeds therefrom; and

(c)                                  $                        
of the Proposed Borrowing will be used for general corporate or working capital
purposes and, after giving effect to such application of proceeds, the General
Corporate Advance Amount is not in excess of $10,000,000.

	
  

  	
  Very truly
  yours,

  
	
   

  	
   

  
	
   

  	
  CANO PETROLEUM,
  INC., a Delaware corporation

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
  Name:

  	
   

  
	
   

  	
  Title:

  	
   

  
					

 

 2

Schedule 4.07

Litigation

On March 23, 2006, the following lawsuit was filed in
the 100th Judicial District Court in Carson County,
Texas; Cause No. 9840, The Tom L. and Anne Burnett Trust, by Anne Burnett
Windfohr, Windi Phillips, Ben Fortson, Jr., George Beggs, III and Ed Hudson,
Jr. as Co-Trustees; Anne Burnett Windfohr; and Burnett Ranches, Ltd. v. Cano
Petroleum, Inc., W.O. Energy of Nevada, Inc.; W. O. Operating Company, Ltd, and
W.O. Energy, Inc. The owner of the remainder of the mineral estate, Texas
Christian University, has intervened in the suit joining the plaintiffs’
request to terminate certain oil and natural gas leases and on January 26,
2007, Southwestern Public Service Company d/b/a XCEL Energy, intervened in the
suit as a party adverse to all defendants, claiming that the fire that is the
subject of this lawsuit destroyed transmission and distribution equipment,
including utility poles, lines and other equipment with an estimated loss of
$1,876,000.

On April 28, 2006, the
following lawsuit was filed in the 31st Judicial District Court of Roberts County,
Texas, Case No. 1922, Robert and Glenda Adcock, et al. v. Cano Petroleum, Inc.,
W.O. Energy of Nevada, Inc.; W. O. Operating Company, Ltd, and W.O. Energy,
Inc.  There are 43 plaintiffs and four
groups of interveners in this suit.

On April 10, 2006, the
following lawsuit was filed in the 31st Judicial District Court of Roberts County,
Texas, Case No. 1920, Joseph Craig Hutchison and Judy Hutchison v. Cano
Petroleum, Inc., W.O. Energy of Nevada, Inc.; W. O. Operating Company, Ltd, and
W.O. Energy, Inc.

On May 1, 2006, the
following lawsuit was filed in the 31st Judicial District Court of Roberts County,
Texas, Case No. 1923, Chisum Family Partnership, Ltd. v. Cano Petroleum, Inc.,
W.O. Energy of Nevada, Inc.; W. O. Operating Company, Ltd, and W.O. Energy,
Inc.

The plaintiffs in the
above actions claim that the electrical wiring and equipment of Cano Petroleum,
Inc. or certain of its subsidiaries relating to its oil and gas operations
started a wildfire that began on March 12, 2006 in Carson County, Texas.  The plaintiffs (i) allege negligence and
gross negligence, trespass or nusiance and (ii) seek undisclosed damages,
including, but not limited to, damages for damage to their land and livestock,
certain expenses related to fighting the fire and certain remedial
expenses.  In addition, certain
plaintiffs seek (i) termination of certain oil and gas leases, (ii)
reimbursement for their attorney’s fees and (iii) exemplary damages.

On July 3, 2006, the following lawsuit was filed in
the 31st Judicial District Court of Roberts County, Texas, Case No. 1928,
Rebecca Lee Martinez, et al v. Cano Petroleum, Inc., W.O. Energy of Nevada,
Inc.; W. O. Operating Company, Ltd., and W.O. Energy, Inc. The plaintiffs claim
that the electrical wiring and equipment of Cano or certain of its subsidiaries
relating to oil and natural gas operations started a wildfire that began on
March 12, 2006 in Carson County, Texas. The plaintiffs (i) allege negligence
and gross negligence and (ii) seek undisclosed damages for the wrongful death
of two individuals who they claim died as a result of the fire. Additional
heirs and relatives of one of the decedents have intervened in this case
seeking similar claims.

On August 9, 2006, the following lawsuit was filed in
the 233rd Judicial District Court of Gray County, Texas, Yolanda Villareal,
Individually and on behalf of the Estate of Gerardo Villareal v. Cano
Petroleum, Inc., W.O. Energy of Nevada, Inc., W. O. Operating Company, Ltd., and
W.O. Energy, Inc. The plaintiffs claim that the electrical wiring and equipment
of Cano or certain of its subsidiaries relating to oil and natural gas
operations started a wildfire that began on March 12, 2006 in Carson County,
Texas. The plaintiffs (i) allege negligence and gross negligence and (ii) seek
undisclosed damages for the wrongful death of Gerardo Villareal who they claim
died as a result of the fire. Relatives of Roberto Chavira have intervened in
the case alleging similar claims regarding the death of Roberto Chavira.

On June 20, 2006, the following lawsuit was filed in
the United States District Court for the Northern District of Texas, Fort Worth
Division, C.A. No. 4-06cv-434-A, Mid-Continent Casualty Company, Plaintiff, vs.
Cano Petroleum, Inc., W.O. Energy of Nevada, Inc., W.O. Operating Company, Ltd.
and W.O. Energy, Inc. seeking a declaration that the plaintiff is not
responsible for pre-tender defense costs and that the plaintiff has the sole
and exclusive right to select defense counsel and to defend, investigate,
negotiate and settle the litigation described above

and on September 18, 2006, the First Amended Complaint
for Declaratory Judgment was filed with regard to the cases described
above.  On February 9, 2007, Cano and its
subsidiaries entered into a Settlement Agreement and Release with the plaintiff
pursuant to which in exchange for mutual releases, in addition to the
approximately $923,000 that had been reimbursed by plaintiff, the plaintiff
agreed to pay to Cano within 20 business days of February 9, 2007 the amount of
$6,699,827 comprised of the following: (a) the $1,000,000 policy limits of the
primary policy; (b) the $5,000,000 policy limits of the excess policy; (c)
$500,000 for future defense costs; (d) $144,000 as partial payment for certain
unpaid invoices for litigation related expenses; (e) all approved reasonable
and necessary litigation related expenses through December 21, 2006 that are
not part of the above referenced $144,000; and (f) certain specified attorneys
fees.

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