8-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 8-K

CURRENT REPORT

Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

Date of report (date of earliest event reported):  May 5, 2011

PAXTON ENERGY, INC.

(Exact name of registrant as specified in its charter)

Nevada	0-52590	20-1399613
(State or Other Jurisdiction of Incorporation)	(Commission File Number)	(IRS Employer Identification No.)

295 Highway 50, Suite 2, Lake Village Professional Building, Stateline, NV 89449

Mailing Address:  P.O. Box 1148, Zephyr Cove, NV 89448-1148

(Address of principal executive offices)

Registrant’s telephone number, including area code: (775) 588-5390

Copy of correspondence to:

Richard A. Friedman, Esq.

James M. Turner, Esq.

Sichenzia Ross Friedman Ference LLP

61 Broadway, 32nd Floor

New York, New York 10006

Tel:  (212) 930-9700   Fax:  (212) 930-9725

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below):

o Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

o Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

o Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

o Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

Item 1.01 Entry into a Material Definitive Agreement.

Item 3.02 Unregistered Sales of Equity Securities.

On May 5, 2011 Paxton Energy, Inc. (the “Company”) sold to certain investors (“Purchasers”) units (“Units”) for aggregate cash gross proceeds of $2,133,250 at a price of $30,000 per Unit (the “Financing”). Each Unit consisted of (i) a $30,000 principal amount secured convertible debenture (the “Note”) and (ii) a warrant (“Warrant”) to purchase 200,000 shares of the Company’s common stock (“Common Stock”).

The Notes mature on May 5, 2012 and bear interest at 9% per annum and are convertible at the holder’s option at any time into Common Stock at a conversion price of $0.15 per share.  The Notes will automatically be redeemed with a 30% premium upon a Change of Control or Listing Event (each as defined in the Note). Interest on the Notes is payable quarterly in arrears in cash.  The Notes contain full ratchet anti-dilution protection.  In addition the conversion price shall be adjusted if the conversion price of securities in a subsequent offering by the Company is adjusted pursuant to a make good provision.  The shares of Common Stock issuable upon conversion of the Note are entitled to piggyback registration rights.

The Warrants are exercisable for a period of five year at an exercise price of $0.30 per share.  The Warrants will be exercisable on a cashless basis at any time six months after issuance if there is not an effective registration statement registering for resale the shares issuable upon exercise of the Warrants. The shares of Common Stock issuable upon exercise of the Warrants are entitled to piggyback registration rights.

 In connection with the Financing, we paid our placement agent, Buckman, Buckman & Reid, Inc. (“BBR”), (i) a cash payment of $305,990, which represented a 10% commission of the gross proceeds delivered by Purchasers in the Financing, a 2% non-accountable expense allowance of the gross proceeds delivered by Purchasers in the Financing and a $50,000 retainer and (ii) five-year placement agent Warrants to acquire 1,422,167 shares of Common Stock (“PA Warrants”), which was 10% of the aggregate number of shares of Common Stock issuable upon conversion of the Notes sold through BBR in the Financing, which PA Warrants are exercisable at an exercise price of $0.30 per share. The PA Warrants may be exercised on a cashless basis.

Pursuant to the Notes and Warrants, no holder may convert or exercise such holder’s Note or Warrant if such conversion or exercise would result in the holder beneficially owning in excess of 4.99% of our then issued and outstanding common stock. A holder may, however, increase or decrease this limitation (but in no event exceed 9.99% of the number of shares of Common Stock issued and outstanding) by providing the Company with 61 days’ notice that such holder wishes to increase or decrease this limitation.

Pursuant to a Mineral Mortgage (the “Security Agreement”), between the Company and the Purchasers, the Company granted the Purchasers a first priority lien on all assets acquired from Montecito Offshore, L.L.C. (“Montecito”) pursuant to the Asset Sale Agreement, entered into on March 28, 2011 and amended on April 7, 2011 (the “Montecito Agreement”) between the Company and Montecito.  The Security Agreement will not be executed by the Company unless and until the Company closes on the acquisition of Montecito.  In the event that the Company does not acquire Montecito, the Notes will be unsecured.

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           A copy of the press release that discusses these matters is filed as Exhibit 99.1 to, and incorporated by reference in, this report. The information in this Current Report is being furnished and shall not be deemed "filed" for the purposes of Section 18 of the Securities Exchange Act of 1934 or otherwise subject to the liabilities of that Section. The information in this Current Report shall not be incorporated by reference into any registration statement or other document pursuant to the Securities Act of 1933, except as shall be expressly set forth by specific reference in any such filing.

ITEM 9.01 Financial Statements and Exhibits.

(d)	Exhibits.
	4.01	Form of Subscription Agreement.
	4.02	Form of Convertible Secured Debenture.
	4.03	Form of Warrant.
	4.04	Form of Mortgage, Assignment, Security Agreement and Financing Statement.
	99.1	Press Release, issued by the Company on May 6, 2011.

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SIGNATURE

Pursuant to the requirement of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	PAXTON ENERGY, INC.
Date:  May 9, 2011	By: /s/ CHARLES F. VOLK, JR.
	Charles F. Volk, Jr.
	Chief Executive Officer

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EX-4.01

Exhibit 4.01

SUBSCRIPTION AGREEMENT

 SUBSCRIPTION AGREEMENT (this “Agreement”) dated as of  ___________, 2011,  and made as of the date set forth on the Signature Page hereof  between Paxton Energy , Inc. a Nevada  corporation (“Company”) and the undersigned, as identified on the “Signature Page” (the “Subscriber”).

W I T N E S S E T H:

WHEREAS, the Company is offering (the “Offering”) up to maximum of $2,550,000 principal amount of the Company’s Convertible Secured Debentures (“Notes”) and 17,000,000 of the Company’s five year Warrants at an exercise price of $.30 per share (the “Warrants”). As used herein: (i) “Securities” shall refer to the Notes and Warrants; (ii) the shares of common stock issuable upon exercise of such Warrants shall be referred to as the “Warrant Shares”; and (ii) the shares of common stock issuable upon conversion of the Notes shall be referred to as the “Note Shares”;

WHEREAS,  the Securities are being offered in units of $30,000 Principal Amount of Notes and 200,000 Warrants (“Units”) at a price of $30,000 per Unit;

WHEREAS, the Securities are being offered pursuant to exemptions from registration contained in Section 4(2) and Regulation D of the Securities Act of 1933 (the “Act”) only to persons who qualify as Accredited Investors.; and

WHEREAS, the Offering is to be conducted on a “best efforts” basis, subject to prior sale and the right of the Company to withdraw, cancel, or modify the offering and to reject any subscription, in whole or in part.  The offering may continue until 30 days from of the Offer unless the offering is extended by the Company for an additional 30 days; and

WHEREAS, the Subscriber desires to purchase the number of Securities set forth on the ‘Signature Page’ hereof on the terms and conditions hereinafter set forth.

NOW, THEREFORE, in consideration of the promises and the mutual representations and covenants hereinafter set forth, the parties hereto do hereby agree as follows:

ARTICLE I

SUBSCRIPTION FOR SECURITIES AND TERMS OF SUBSCRIPTION

1.1           Subject to the terms and conditions hereinafter set forth, Subscriber hereby subscribes for and agrees to purchase from the Company, and the Company agrees to sell to Subscriber, the number of Units as is set forth upon the Signature Page hereof against payment made by personal or business check, wire or money order made payable to US Bank, referencing Account Number 146437000 in accordance with Exhibit A attached hereto. Payment of the total subscription price for the Units must accompany or precede this executed Subscription Agreement.

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INSTRUCTIONS FOR DELIVERY OF THE EXECUTED SUBSCRIPTION AGREEMENT TO THE COMPANY AND FOR PAYMENT OF THE SUBSCRIPTION AMOUNT ARE SET FORTH IN EXHIBIT A ATTACHED HERETO.

In connection with the Subscription, the Subscriber hereby authorizes and directs the Company to deliver the Securities to be issued to the Subscriber pursuant to this Agreement to the address indicated on the Signature Page hereto.

1.2           The Company’s agreement with each Subscriber is a separate agreement and the sale of Shares to each Subscriber is a separate sale.

1.3           The Subscriber understands, acknowledges and agrees with the Company that this subscription may be rejected, in whole or in part, by the Company, in the sole and absolute discretion of the Company, at any time subscribed for by the Subscriber, notwithstanding prior receipt by the Subscriber of notice of acceptance of the Subscriber’s subscription. The Subscriber understands, acknowledges and agrees with the Company that, except as otherwise set forth herein, the subscription hereunder is irrevocable by the Subscriber, except as required by law, and, as such, the Subscriber is not entitled to cancel, terminate or revoke this Agreement or any agreements of the Subscriber hereunder.

1.4           The   Company may at any time terminate the Offering.

ARTICLE II

 REPRESENTATIONS BY SUBSCRIBER

In addition to the representations and warranties set forth in Article VI hereof and elsewhere in this Agreement, the Subscriber, represents, warrants and acknowledges to the Company that:

2.1           The Subscriber recognizes that (i) the purchase of the Securities involves a high degree of risk and is speculative, and only investors who can afford the loss of their entire investment should consider investing in the Company and the Securities; (ii) the Subscriber may not be able to liquidate its investment; (iii) the transferability of the Securities is extremely limited; and, (iv) in the event of a disposition of the Securities, the Subscriber could sustain the loss of its entire investment.

2.2           The Subscriber represents that the Subscriber is an “accredited investor”, as indicated by the Subscriber’s responses to the questions contained in Article VI.

2.3           The Subscriber hereby acknowledges that it has been furnished with, or has had an opportunity to acquire and carefully review, the “Offering Documents” consisting of the Company’s Disclosure Document (the “Disclosure Document’’) which incorporates the “SEC Reports” of the Company as defined therein, this Subscription Agreement (“Subscription Agreement”)  and the, Security Agreement, Collateral Agent Agreement, Note and Warrant and such other documents referred to in the Subscription Agreements and Disclosure Document all in the form approved by the parties. The Subscriber further represents and warrants that Subscriber is familiar with and understands the terms of the Offering, including the rights to which the Subscriber is entitled under this Agreement as well as the substantial risks relating to the investment hereby.

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2.4           The Subscriber further represents that the Subscriber has been furnished by the Company during the course of this transaction with all information regarding the Company which the Subscriber, his, her or its investment advisor, attorney and/or accountant has requested or desired to know and has been afforded the opportunity to ask questions of and receive answers from duly authorized officers or other representatives of the Company concerning the Company and the terms and conditions of the Offering.

2.5           The Subscriber has relied primarily on his, her or its own investigation of the Company in making the Subscriber’s decision to invest in the Securities and has not relied upon any other representations or other information (whether oral or written) from the Company, or any agent, employee or affiliate of the Company or any other third party other than as set forth in the Offering Documents and the results of Subscriber’s own independent investigation. The Subscriber acknowledges and agrees that it shall not be entitled to seek any remedies with respect to the Offering from any party other than the Company.

2.6           The Subscriber represents that no Securities were offered or sold to it by means of any form of general solicitation or general advertising, and in connection therewith the Subscriber did not:  (A) receive or review any advertisement, article, notice or other communication published in a newspaper or magazine or similar media or broadcast over television or radio whether closed circuit, or generally available; or (B) attend any seminar meeting or industry investor conference whose attendees were invited by any general solicitation or general advertising.

 2.7           The Subscriber understands that the Securities have not been, and the Note Shares will not be, registered under the Act by reason of a claimed exemption under the provisions of the Act which depends, in part, upon the Subscriber’s investment intention. In this connection, the Subscriber hereby represents that the Subscriber is purchasing the Securities, and will acquire the Note Shares, for the Subscriber’s own account for investment purposes only and not with a view toward the resale or distribution to others and has no contract, undertaking, agreement or other arrangement, in existence or contemplated, to sell, pledge, assign or otherwise transfer the Securities or the Note Shares to any other person.

2.8           The Subscriber agrees that the Subscriber will not transfer the Securities or the Note Shares unless such transfer is subject to an effective registration statement under the Act and regulations thereunder, or pursuant to an exemption from the registration requirements of the Act.  Any such transfer may be subject the receipt of an opinion of counsel in a form and substance satisfactory to the Company to the effect that any proposed transfer or resale is in compliance with the act and any applicable state securities laws. The Subscriber consents to the placement of a legend on any certificate or other document evidencing the Securities and the Note Shares reflecting the foregoing restrictions. The Subscriber is aware that the Company will make a notation in its appropriate records with respect to the aforesaid restrictions on the transferability of the Securities and the Note Shares.  It is understood that, certificates evidencing the Securities may bear the following or any similar legend:

“The securities represented hereby may not be transferred unless (i) such securities have been registered for sale pursuant to the Securities Act of 1933, as amended, (ii) such securities may be sold pursuant to Rule 144, or (iii) the Company has received an opinion of counsel reasonably satisfactory to it that such transfer may lawfully be made without registration under the Securities Act of 1933 or qualification under applicable state securities laws.  Notwithstanding the foregoing, the securities may be pledged in connection with a bona fide margin account secured by the securities.”

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2.9            The Subscriber agrees to supply the Company, within five (5) days after the Subscriber receives the request therefor from the Company, with such additional information concerning the Subscriber as the Company deems necessary or advisable.

2.10           The Subscriber understands, acknowledges and agrees with the Company that the Offering is intended to be exempt from registration under the Act by virtue of Section 4(2) of the Act and the provisions of Regulation D adopted under the Act, which is in part dependent upon the truth, completeness and accuracy of the statements made by the Subscriber and Subscriber will hold the Company harmless from all liability, damages, costs and expenses resulting from any breach thereof.

2.11           The Subscriber acknowledges that the information contained in the Offering Documents or otherwise made available to the Subscriber is confidential and non-public and agrees that all such information shall be kept in confidence by the Subscriber and will neither be used by the Subscriber for the Subscriber’s personal benefit (other than in connection with this Subscription) nor disclosed to any third party for any reason, notwithstanding that the Subscriber’s Subscription may not be accepted by the Company.

2.12           The Company is under no obligation to, and there can be no assurance that, the Company will receive or accept subscriptions for the aggregate number of Securities being offered by the Company pursuant to the Offering.

2.13           If the Subscriber is an entity, such Subscriber is a validly existing corporation, limited partnership or limited liability company and has all requisite corporate, partnership or limited liability company power and authority to invest in the Units pursuant to this Agreement.

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2.14         The execution, delivery and performance by such Subscriber of the Transaction Documents to which such Subscriber is a party have been duly authorized and will each constitute the valid and legally binding obligation of such Subscriber, enforceable against such Subscriber in accordance with their respective terms, subject to bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium and similar laws of general applicability, relating to or affecting creditors’ rights generally.

ARTICLE III

REPRESENTATIONS BY AND COVENANTS OF THE COMPANY

3.1           The Company hereby represents and warrants to the Subscriber that, (i) the Company has the requisite corporate power and authority to enter into and perform its obligations under this Agreement and to sell and issue the Securities and perform its obligations with respect to the Agreement in accordance with the terms hereof and (ii) when executed and delivered by the Company, the Agreement will be duly executed and delivered by the Company.

3.2           Company agrees that as long as any of the Securities remain issued and outstanding, it will not consummate any consolidation, merger, sale, transfer or other disposition of assets or shares, including any form of share exchange, unless prior to, or simultaneously with, the consummation thereof,  the successor corporation resulting from such consolidation or merger (if other than the Company), or the corporation purchasing or otherwise acquiring the assets of the Company, agrees to assume the Company’s continuing obligations hereunder.

3.3           The Subscriber is entitled to the benefit of registration rights with respect to the Warrant Shares and Note Shares as set forth below:

(a)           As used in this Agreement, the following terms shall have the following meanings:

“Holders” shall mean the Subscriber, all other subscribers for the Securities, and any Person to whom the rights under Section 3.3 have been transferred in accordance with the provisions herein.

“Person” shall mean any person, individual, corporation, limited liability company, partnership, trust or other nongovernmental entity or any governmental agency, court, authority or other body (whether foreign, federal, state, local or otherwise).

The terms “register,” “registered” and “registration,” refer to the registration effected by preparing and filing a registration statement in compliance with the Act, and the declaration or ordering of the effectiveness of such registration statement.

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“Registrable Securities” shall mean the Warrant Shares and Note Shares.

                                “Registration Expenses” shall mean all expenses incurred by the Company in complying with Section  3.3(b) hereof, including, without limitation, all registration, qualification and filing fees, printing expenses, escrow fees, fees and expenses of counsel for the Company, blue sky fees and expenses and the expense of any special audits incident to or required by any such registration.

“Registration Statement” shall mean any registration statement of the Company filed under the Act that covers the resale of any of the Registrable Securities pursuant to the provisions of this Agreement, amendments and supplements to such Registration Statement, including post-effective amendments, all exhibits and all material incorporated by reference in such Registration Statement.

“Selling Expenses” shall mean all underwriting discounts and selling commissions applicable to the sale of Registrable Securities and all fees and expenses of legal counsel for any Holder.

(b)           If, at any time the Company proposes to register under the Act, for its own account or the account of  others, any of its equity securities (other than on Form S-4 or Form S-8 or their then equivalents) and a Registration Statement covering the Registrable Securities is not then effective, the Company shall send to the Holders written notice of its intention to register such equity securities, and if, within 10 days after the date of such notice, a Holder shall so request in writing, the Company shall include in such registration all or any part of the applicable Registrable Securities such Holder requests to be registered. If an offering in connection with which the Holder is entitled to registration under this Section 3.3 b is an underwritten offering, then each Holder whose Registrable Securities are included in such registration statement shall, unless otherwise agreed by the Company, offer and sell such Registrable Securities in an underwritten offering using the same underwriter or underwriters and subject to the provisions of this Agreement, on the same terms and conditions as other shares, included in such underwritten offering.  The number of requests by the Holders permitted by this Section 3.3 (b) shall be unlimited.  Notwithstanding the foregoing, this Section 3.3(b) shall not apply in the event there is an effective Registration Statement of the Company, with a current prospectus available, providing for the resale of all of the Registrable Securities of the Holders, or if the Holder may sell all Holders’ Registrable Securities pursuant to Rule 144 promulgated under the Act or other exemption from the registration requirement under the Act. The Company shall keep such effective Registration Statement effective for one year (the “Registration Period”) which period shall be extended by the amount of time of any suspension or lockup pursuant to Sections 3.3(f) or 3.3(h) or otherwise.

(c)           The Company shall have the right to terminate or withdraw any registration contemplated under this Section 3.3(b) prior to the effectiveness of such registration, whether or not any Holder of Registrable Securities has elected to include securities in such registration.

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(d)     The Holders shall have no right to take any action to restrain, enjoin or otherwise delay any registration statement filed by the Company as a result of any controversy that may arise with respect to the interpretation or implementation of this Agreement.

            (e)                      All Registration Expenses incurred in connection with any registration, qualification, exemption or compliance pursuant to Section 3.3(b) shall be borne by the Company.  All Selling Expenses relating to the sale of securities registered by or on behalf of Holders shall be borne by such Holders.

             (f)                      In the case of the registration, qualification, exemption or compliance effected by the Company pursuant to this Agreement, the Company shall, upon reasonable request, inform each Holder as to the status of such registration, qualification, exemption and compliance.  At its expense the Company shall:

(i)           use its best efforts to keep such registration, and any qualification, exemption or compliance under state or federal securities laws which the Company determines to obtain, continuously effective until the termination of the Registration Period; and

(ii)           advise the Holders as soon as practicable:

(A)   when such Registration Statement or any post-effective amendment thereto has become effective;

(B)            of (I) the issuance by the Commission of any stop order suspending the effectiveness of such Registration Statement or the initiation of any proceedings for such purpose; or (II) the receipt by the Company of any notification with respect to the suspension of the qualification of the Registrable Securities included therein for sale in any jurisdiction or the initiation or threatening of any proceeding for such purpose; and

(C)           of the happening of any event that requires the making of any changes in such Registration Statement or the prospectus so that, as of such date, the statements therein are not misleading and do not omit to state a material fact required to be stated therein or necessary to make the statements therein (in the case of the prospectus, in the light of the circumstances under which they were made) not misleading;

(iii)           make every reasonable effort to obtain the withdrawal of any order suspending the effectiveness of any Registration Statement at the earliest possible time;

(iv)           furnish to each Holder, without charge, at least one copy of such Registration Statement and any post-effective amendment thereto, including financial statements and schedules;

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(v)           during the applicable Registration Period, deliver to each Holder, without charge, as many copies of the prospectus included in such Registration Statement and any amendment or supplement thereto as such Holder may reasonably request; and the Company consents to the use, consistent with the provisions hereof, of the prospectus or any amendment or supplement thereto by each of the selling Holders of Registrable Securities in connection with the offering and sale of the Registrable Securities covered by the prospectus or any amendment or supplement thereto;

(vi)           prior to any public offering of Registrable Securities pursuant to any Registration Statement, register or qualify or obtain an exemption for offer and sale under the securities or blue sky laws of such jurisdictions as any such Holders reasonably request in writing, provided that the Company shall not for any such purpose be required to qualify generally to transact business as a foreign corporation in any jurisdiction where it is not so qualified or to consent to general service of process in any such jurisdiction, and do any and all other acts or things reasonably necessary or advisable to enable the offer and sale in such jurisdictions of the Registrable Securities covered by such Registration Statement;

(vii)           upon the occurrence of any event contemplated by Section 3.3 (f)(iii) above, the Company shall promptly prepare a post-effective amendment to such Registration Statement or a supplement to the related prospectus, or file any other required document so that, as thereafter promptly delivered to purchasers of the Registrable Securities included therein, the prospectus will not include any untrue statement of a material fact or omit to state any material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; and

(viii)           use its best efforts to comply with all applicable rules and regulations of the SEC, and use its best efforts to make generally available to the Holders not later than 45 days (or 90 days if the fiscal quarter is the fourth fiscal quarter) after the end of its fiscal quarter in which the first anniversary date of the effective date of such Registration Statement occurs, an earnings statement satisfying the provisions of Section 11(a) of the Act.

(g)

(i)           To the extent permitted by law, the Company shall indemnify each Holder, each underwriter of the Registrable Securities and each person controlling such Holder within the meaning of Section 15 of the Act, including any officer, director or equityholder, with respect to which any registration, qualification or compliance has been effected pursuant to this Agreement, against all claims, losses, damages and liabilities (or action in respect thereof), including any of the foregoing incurred in settlement of any litigation, commenced or threatened (subject to the provisions herein) arising out of or based on the offering to which such registration statement or qualification relates, including but not limited to, any untrue statement (or alleged untrue statement) of a material fact contained in such Registration Statement, or any amendment or supplement thereof, incident to any such registration, qualification or compliance, or based on any omission (or alleged omission) to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, in light of the circumstances in which they were made, and will reimburse each Holder, each underwriter of the Registrable Securities and each person controlling such Holder, for reasonable legal and other expenses reasonably incurred in connection with investigating or defending any such claim, loss, damage, liability or action as incurred; provided that the Company will not be liable in any such case to the extent that any untrue statement or omission or allegation thereof is made in reliance upon and in conformity with written information furnished to the Company by or on behalf of such Holder and stated to be specifically for use in preparation of such Registration Statement, prospectus or offering circular; provided, further, that the Company will not be liable in any such case where the claim, loss, damage or liability arises out of or is related to the failure of the Holder to comply with the covenants and agreements contained in this Agreement respecting sales of Registrable Securities

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(ii)           Each Holder will severally, if Registrable Securities held by such Holder are included in the securities as to which such registration, qualification or compliance is being effected, indemnify the Company, each of its directors and officers, each underwriter of the Registrable Securities and each person who controls the Company within the meaning of Section 15 of the Act, against all claims, losses, damages and liabilities (or actions in respect thereof), including any of the foregoing incurred in settlement of any litigation, commenced or threatened (subject to provisions below), arising out of or based on any untrue statement (or alleged untrue statement) of a material fact contained in any registration statement, prospectus or offering circular, or any amendment or supplement thereof, incident to any such registration, qualification or compliance, or based on any omission (or alleged omission) to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, in light of the circumstances in which they were made, and will reimburse the Company, such directors and officers, each underwriter of the Registrable Securities and each person controlling the Company for reasonable legal and any other expenses reasonably incurred in connection with investigating or defending any such claim, loss, damage, liability or action as incurred, in each case to the extent, but only to the extent, that such untrue statement or omission or allegation thereof is made in reliance upon and in conformity with written information furnished to the Company by or on behalf of such Holder and stated to be specifically for use in preparation of such registration statement, prospectus or offering circular; provided that the indemnity shall not apply to the extent that such claim, loss, damage or liability results from the fact that a current copy of the prospectus was not made available to the Holder and such current copy of the prospectus would have cured the defect giving rise to such loss, claim, damage or liability.  Notwithstanding the foregoing, in no event shall a Holder be liable for any such claims, losses, damages or liabilities in excess of the net proceeds received by such Holder in the offering, except in the event of fraud by such Holder.

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(iii)           Each party entitled to indemnification under this Section 3.3(g) (the “Indemnified Party”) shall give notice to the party required to provide indemnification (the “Indemnifying Party”) promptly after such Indemnified Party has actual knowledge of any claim as to which indemnity may be sought, and shall permit the Indemnifying Party to assume the defense of any such claim or any litigation resulting therefrom, provided that counsel for the Indemnifying Party, who shall conduct the defense of such claim or litigation, shall be approved by the Indemnified Party (whose approval shall not unreasonably be withheld), and the Indemnified Party may participate in such defense at such Indemnified Party’s expense, and provided further that the failure of any Indemnified Party to give notice as provided herein shall not relieve the Indemnifying Party of its obligations under this Agreement, unless such failure is materially prejudicial to the Indemnifying Party in defending such claim or litigation.  An Indemnifying Party shall not be liable for any settlement of an action or claim affected without its written consent (which consent will not be unreasonably withheld).

(iv)           If the indemnification provided for in this Section 3.3.(g) is held by a court of competent jurisdiction to be unavailable to an Indemnified Party with respect to any loss, liability, claim, damage or expense referred to therein, then the Indemnifying Party, in lieu of indemnifying such Indemnified Party thereunder, shall contribute to the amount paid or payable by such Indemnified Party as a result of such loss, liability, claim, damage or expense in such proportion as is appropriate to reflect the relative fault of the Indemnifying Party on the one hand and of the Indemnified Party on the other in connection with the statements or omissions which resulted in such loss, liability, claim, damage or expense as well as any other relevant equitable considerations.  The relative fault of the Indemnifying Party and of the Indemnified Party shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission to state a material fact relates to information supplied by the Indemnifying Party or by the Indemnified Party and the parties’ relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission.  Notwithstanding the foregoing, in no event shall a Holder be liable for any such claims, losses, damages or liabilities pursuant to this Section 3.3.(g)(iv) in excess of the net proceeds received by such Holder in the Offering, except in the event of fraud by such Holder.

(h)

(i)           Each Holder agrees that, upon receipt of any notice from the Company of the happening of any event requiring the preparation of a supplement or amendment to a prospectus relating to Registrable Securities so that, as thereafter delivered to the Holders, such prospectus shall not contain an untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading, each Holder will forthwith discontinue disposition of Registrable Securities pursuant to a Registration  until its receipt of copies of the supplemented or amended prospectus from the Company, such prospectus to be forwarded promptly to the Holder by the Company, and, if so directed by the Company, each Holder shall deliver to the Company all copies, other than permanent file copies then in such Holder’s possession, of the prospectus covering such Registrable Securities current at the time of receipt of such notice.

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(ii)           Each Holder shall suspend, upon request of the Company, any disposition of Registrable Securities pursuant to a registration statement contemplated by either of Section 3.3(b) during any period, not to exceed one 45-day period within any one 12-month period, when the Company determines in good faith that offers and sales pursuant thereto should not be made by reason of the presence of material undisclosed circumstances or developments with respect to which the disclosure that would be required in such a prospectus is premature, would have an adverse effect on the Company or is otherwise inadvisable.

(iii)           As a condition to the inclusion of its Registrable Securities, each Holder shall furnish to the Company such information regarding such Holder and the distribution proposed by such Holder as the Company may reasonably request in writing or as shall be required in connection with any registration, qualification or compliance referred to in this Section 3.3.

(iv)           Each Holder hereby covenants with the Company not to make any sale of the Registrable Securities without effectively causing the prospectus delivery requirements under the Act to be satisfied.

(v)           Each Holder acknowledges and agrees that the Registrable Securities sold pursuant to a Registration Statement described in this Section 3.3 are not transferable on the books of the Company unless the stock certificate submitted to the transfer agent evidencing such Registrable Securities is accompanied by a certificate reasonably satisfactory to the Company to the effect that (i) the Registrable Securities have been sold in accordance with such Registration Statement and (ii) the requirement of delivering a current prospectus has been satisfied.

(vi)           Each Holder agrees not to take any action with respect to any distribution deemed to be made pursuant to a Registration Statement which would constitute a violation of Regulation M under the Exchange Act or any other applicable rule, regulation or law.

(vii)           At the end of the period during which the Company is obligated to keep a Registration Statement current and effective as described above, the Holders of Registrable Securities included in such Registration Statement shall discontinue sales of shares pursuant to such Registration Statement upon receipt of notice from the Company of its intention to remove from registration the shares covered by such Registration Statement which remain unsold, and such Holders shall notify the Company of the number of shares registered which remain unsold immediately upon receipt of such notice from the Company.

(i)             INTENTIONALLY DELETED.

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(j)           The rights to cause the Company to register Registrable Securities granted to the Holders by the Company under this Section 3.3 may be assigned in full by a Holder in connection with a transfer by such Holder of its Registrable Securities, provided, however, that (i) such transfer may otherwise be effected in accordance with applicable securities laws; (ii) such Holder gives  prior written notice to the Company; and (iii) such transferee agrees to comply with the terms and provisions of this Agreement, and such transfer is otherwise in compliance with this Agreement.  Except as specifically permitted by this Section 3.3(j), the rights of a Holder with respect to Registrable Securities as set out herein shall not be transferable to any other Person, and any attempted transfer shall cause all rights of such Holder therein to be forfeited.

(k)           With the written consent of the Company and the Holders holding at least a majority of the Registrable Securities that are then outstanding, any provision of this Section 3.3 may be waived (either generally or in a particular instance, either retroactively or prospectively and either for a specified period of time or indefinitely) or amended.  Upon the effectuation of each such waiver or amendment, the Company shall promptly give written notice thereof to the Holders, if any, who have not previously received notice thereof or consented to any such waiver or amendment

ARTICLE IV

CONDITIONS TO OBLIGATIONS OF THE COMPANY

4.1           The Company's obligation to sell and issue the Units at the closing is subject to the fulfillment to the Company’s satisfaction, on or prior to the closing date, of the following conditions, any of which may be waived by the Company:

(a)           The representations and warranties made by each Subscriber herein shall be true and correct in all material respects when made, and shall be true and correct in all material respects on the closing date with the same force and effect as if they had been made on and as of said date.  The Subscriber shall have performed in all material respects all obligations and covenants herein required to be performed prior to the Closing Date.

(b)           The Subscriber shall have delivered its purchase price to the Escrow Agent.

(c)           The Subscriber shall have delivered the executed Security Agreement to the Company.

 (d)           The Subscriber shall have delivered the executed Collateral Agent Agreement to the Company.

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ARTICLE  V

MISCELLANEOUS

5.1           Any and all notices or other communications or deliveries required or permitted to be provided hereunder shall be in writing and shall be deemed given and effective on the earliest of (a) one business day following the date of transmission, if such notice or communication is delivered via facsimile at the facsimile number specified below, (b) one business day, if sent by overnight courier service, or (c) three business days following the date of mailing with the United States Postal Service  by registered or certified mail, return receipt requested.  The addresses for such notices and communications are those set forth below, or such other address as may be designated in writing hereafter, in the same manner, by such person.

If to the Company:

Charles Volk

Chairman & CEO

Paxton Energy, Inc.

Lake Village Professional Building

295 Highway 50, Suite 2

Zephyr Cove, NV 89448-1148

With a copy to:

Richard A. Friedman, Esq.

Sichenzia Ross Friedman Ference LLP

61 Broadway

New York, New York 10006

If to a Subscriber:

At the address specified on the Signature Page hereof.

5.2           Except as otherwise provided herein this Agreement shall not be changed, modified or amended except by a writing signed by the parties to be charged, and this Agreement may not be discharged except by performance in accordance with its terms or by a writing signed by the party to be charged.

5.3           This Agreement shall be binding upon and inure to the benefit of the parties hereto and to their respective heirs, legal representatives, successors and assigns.  This Agreement sets forth the entire agreement and understanding between the parties as to the subject matter hereof and merges and supersedes all prior discussions, agreements and understandings of any and every nature among them.  The Subscriber may not assign its rights and/or obligations under this Agreement without the express written consent of Company or as otherwise provided for herein.

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5.4           This Agreement will be deemed to have been made and delivered in Colorado and will be governed as to validity, interpretation, construction, effect and in all other respects by the internal laws of the State of New York.  Any lawsuit, action or proceeding arising out of or relating to this Agreement shall be instituted exclusively in the courts of New York  or in the United States District Courts located in such state.  Each of the Company and the Subscriber (i) waives any objection to the venue of any such suit, action or proceeding and the right to assert that such forum is not a convenient forum for such suit, action or proceeding, and (ii) irrevocably consents to the jurisdiction of the courts of New York  in any such suit, action or proceeding.  ANY SUIT OR OTHER JUDICIAL PROCEEDING RELATING TO THIS SUBSCRIPTION AGREEMENT OR ANY DISPUTE HEREUNDER OR WITH RESPECT HERETO SHALL BE HEARD BEFORE THE RELEVANT COURT WITHOUT A JURY, AND ALL OF THE PARTIES WAIVE THEIR RESPECTIVE RIGHTS TO TRIAL BY JURY.  Subscriber hereby waives any and all claims for and right to seek recovery of consequential, punitive and exemplary damages (including, but not limited to, claims for lost profits) in any action against the Company, its directors, officers, employees, consultants and/or agents.

5.5           The holding of any provision of this Agreement to be invalid or unenforceable by a court of competent jurisdiction shall not affect any other provision of this Agreement, which shall remain in full force and effect.  If any provision of this Agreement shall be declared by a court of competent jurisdiction to be invalid, illegal or incapable of being enforced in whole or in part, such provision shall be interpreted so as to remain enforceable to the maximum extent permissible consistent with applicable law and the remaining conditions and provisions or portions thereof shall nevertheless remain in full force and effect and enforceable to the extent they are valid, legal and enforceable, and no provisions shall be deemed dependent upon any other covenant or provision unless so expressed herein.

5.6           It is agreed that a waiver by either party of a breach of any provision of this Agreement shall not operate, or be construed, as a waiver of any subsequent breach by that same party.

5.7           The parties agree to execute and deliver all such further documents, agreements and instruments and take such other and further action as may be necessary or appropriate to carry out the purposes and intent of this Agreement.

5.8           This Agreement may be executed in two or more counterparts each of which shall be deemed an original, but all of which shall together constitute one and the same instrument.

5.9           The Subscriber agrees not to issue any public statement with respect to the Subscriber’s investment or proposed investment in the Company or the terms of any agreement or covenant between them and the Company without the Company’s prior written consent, except such disclosures as may be required under applicable law or under any applicable order, rule or regulation.

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5.10           The Subscriber represents and warrants that it has not engaged, consented to nor authorized any broker, finder or intermediary to act on its behalf, directly or indirectly, as a broker, finder or intermediary in connection with the transactions contemplated by this Agreement.  The Subscriber hereby agrees to indemnify and hold harmless the Company from and against all fees, commissions or other payments, or otherwise claims, owing/due to any such person or firm acting on behalf of the Subscriber hereunder.

5.11           Nothing in this Agreement shall create or be deemed to create any rights in any person or entity not a party to this Agreement.

ARTICLE VI

CONFIDENTIAL INVESTOR QUESTIONNAIRE FOR SUBSCRIBER

6.1           (a)           Each person who desires to invest in Company, purchasing Seurities pursuant to this Agreement and the Offering, must carefully and accurately complete this Article VI.  The purpose of this questionnaire is to allow the Company to make a reasonable determination as to whether each prospective investor is qualified under applicable securities laws to purchase Securities and/or invest monies. Completion and/or receipt of this questionnaire does not constitute an offer to sell or a solicitation of an offer to buy a security.

(b)           This Offering has not been registered under the Act or the securities laws of any states, and will be offered and sold in reliance upon applicable exemptions from the registration requirements of those laws. The Company is relying on exemptions from registration provided by Section 4(2) under the Act and Rule 506 of Regulation D adopted under the Act as amended. Rule 506 exempts from registration certain private placements of securities made to an unlimited number of accredited investors as defined under the Act, as amended.  Under Rule 506, the Company and those acting on its behalf must satisfy certain stringent conditions if the exemption from registration is to be made available. One such condition is that before accepting monies from an investor pursuant to an offering, the Company must have reasonable grounds to believe, and must actually believe, after making reasonable inquiry, that the investor is an ‘accredited investor’.

(c)           Please note that answers in Article Vi will be kept strictly confidential. By completing the questionnaire and signing on the Signature Page, however, Subscriber Agrees that the Company may present this questionnaire to such parties or state/federal regulatory agencies that have a legal right to see it.

6.2           The Subscriber represents and warrants that Subscriber comes within one of the categories marked below, and that for any category marked, Subscriber has truthfully set forth, where applicable, the factual basis or reason the Subscriber comes within that category.  ALL INFORMATION IN RESPONSE TO THIS SECTION WILL BE KEPT STRICTLY CONFIDENTIAL except as otherwise required by law.  The undersigned agrees to furnish any additional information which the Company deems necessary in order to verify the answers set forth below.

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Category A ___  The undersigned is an individual (not a partnership, corporation, etc.), whose individual net worth, or joint net worth with his or her spouse, presently exceeds $1,000,000.00.

Explanation.  In calculating net worth the net equity in your personal residence should be excluded. However, mortgage indebtedness against your principal residence which is more than the value of your principal residence must be deducted in calculating net worth.

Category B ___ The undersigned is an individual (not a partnership, corporation, etc.) who had an income in excess of $200,000.00 in each of the two most recent years, or joint income with his or her spouse in excess of $300,000.00 in each of those years (in each case including foreign income, tax exempt income and full amount of capital gains and losses but excluding any income of other family members and any unrealized capital appreciation) and has a reasonable expectation of reaching the same income level in the current year.

Category C ___ The undersigned is a director or executive officer of the Company which is issuing and selling the Securities.

Category D ___  The undersigned is a bank; a savings and loan association; insurance company; registered investment company; registered business development company; licensed small business investment company (“SBIC”); or employee benefit plan within the meaning of Title 1 of ERISA and (a) the investment decision is made by a plan fiduciary which is either a bank, savings and loan association, insurance company or registered investment advisor, or (b) the plan has total assets in excess of $5,000,000.00 or (c) is a self directed plan with investment decisions made solely by persons that are accredited investors. (describe entity) ______________________________________________________.

Category E ___ The undersigned is a ‘private business development company’ as defined in section 202(a) (22) of the Investment Advisors Act of 1940 (“Act”). (describe entity) ______________________________________________________.

Category F ___ The undersigned is either a corporation, partnership, Massachusetts business trust, or non-profit organization within the meaning of Section 501(c)(3) of the Internal Revenue Code, in each case not formed for the specific purpose of acquiring the Securities and with total assets in excess of $5,000,000.00.  (describe entity) _____________________________________________________.

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Category G ___  The undersigned is a trust with total assets in excess of $5,000,000.00, not formed for the specific purpose of acquiring the Securities, where the purchase is directed by a “sophisticated investor“ as defined in Regulation 506(b)(2)(ii) under the Act.

Category H ___ The undersigned is an entity (other than a trust) in which all of the equity owners are “accredited investors” within one or more of the above categories.  If relying upon this Category alone, each equity owner must complete a separate copy of this Agreement.  (describe entity)_______________________________________________ .

Category I ___ The undersigned is not within any of the categories above and is therefore not an “accredited investor”.

The Subscriber agrees to notify the Company at any time on or prior to the purchase of the Securities in the event that the representations and warranties in this Agreement shall cease to be true, accurate and complete.

 6.3           Manner in which title to the Securities is to be held:  (Circle One)

(a)	Individual Ownership
(b)	Community Property
(c)	Joint Tenant with Right of
	Survivorship (both parties must sign)
(d)	*Partnership
(e)	Tenants in Common
(f)	*Company
(g)	*Trust
(h)	*Other    _________________________ .

* If the subscribed Securities are for an entity, please complete the attached Certificate of Signatory.

 6.4           Are you affiliated or associated with an NASD member firm (please check one):

Yes _________	No __________
If Yes, please describe:
_________________________________________________________
_________________________________________________________

6.5           The Subscriber is informed of the significance to the Company of the foregoing representations and answers contained in the ‘Confidential Investor Questionnaire For Subscriber’ under Article VI and represents and warrants that such answers: (i) are accurate and complete in all respects; (ii) may be relied upon by Company in determining whether the Offering and sale of Securities and/or Securities is exempt from registration under Rule 506 of Regulation D of the Act or other applicable exemptions, and complies with applicable state securities laws; and, (iii) may be relied upon by Company in determining whether Subscriber is an ‘accredited investor’ within the meaning of Rule 501 of Regulation D of the Act.

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6.6           (a)         The Subscriber represents and warrants that the Subscriber and, if the Subscriber is an organization, each owner holding 10% or more of the Subscriber’s equity, each senior management official of the Subscriber (director or executive officer or similar official), and each affiliate of the Subscriber, is not included on either of the following lists (the “Prohibited Lists”): (i) the Office of Foreign Assets Control list of foreign nations, organizations and individuals subject to economic and trade sanctions, based on U.S. foreign policy and national security goals (found at http://www.treas.gov/ofac/) and (ii) Executive Order 13224, which sets forth a list of individuals and groups with whom U.S. persons are prohibited from doing business because such person have been identified as terrorists or person who support terrorism (found at http://www.treasury.gov/offices/enforcement/ofac/programs/terror/terror.pdf).

(b)           The Subscriber represents and warrants that the Subscriber is not a Senior Foreign Political Figure. A Senior Foreign Political Figure is defined as a senior government, legislative, judicial or military official of a foreign government (whether elected or not), a senior official of a major foreign political party, or a senior executive of a foreign government-owned enterprise.  In addition, a Senior Foreign Political Figure includes any corporation, business or other entity that has been formed by or for the benefit of a Senior Foreign Political Figure and includes an immediate family member (parents, siblings, spouse, children and in-laws) or a close associate (a person widely and publicly known internationally to maintain an unusually close relationship with the official, including a person in a position to conduct substantial domestic and international financial transactions on behalf of the official) of the Senior Foreign Political Figure.

(c)           The Subscriber represents and warrants that the funds invested by the Subscriber are not directly or indirectly derived from any activities that may contravene federal, state or international laws or regulations, including anti-money laundering laws and the Office of Foreign Assets Control regulations.

(d)           The Subscriber represents and warrants that the Subscriber is not, and in its transactions with the Company the Subscriber will not employ the services of, a bank (i) with no physical presence in any country, (ii) operating under a license that prohibits it from conducting a banking business with the citizens of the licensing country or in the currency of that country, or (iii) operating under a license issued by a country included on the list of Non-Cooperative Countries and Territories issued by the Financial Action Task Force on Money Laundering.

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           (e)           The Subscriber acknowledges and agrees that any dividends or other monies paid to the Subscriber will be paid only to an account in the Subscriber’s name, unless the Company in its sole discretion agrees otherwise.  The Subscriber acknowledges and agrees, further, that, due to changing anti-money laundering rules and requirements, the Company may require additional information about the Subscriber before paying dividends or other monies to the Subscriber and that the Subscriber may encounter delays in such payments if such information is not promptly submitted.

[signature page follows]

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SIGNATURE PAGE

Subscriber hereby executes this Agreement and pursuant to Section 1.1 of Subscription Agreement, Subscriber hereby subscribes for purchase of the number of Securities indicated below at the purchase price set forth.

_________________________ X    $30,000           = _________________

Number of Units Subscribed for        Purchase Price     Total Purchase Price

Dated:  _______________ , 2011.

By: __________________________	By:  ___________________________
Signature	Signature (if purchasing jointly)
_____________________________	______________________________
Name Typed or Printed	Name Typed or Printed
_____________________________	______________________________
Entity Name
_____________________________	______________________________
Address	Address
_____________________________	______________________________
City, State and Zip Code	City, State and Zip Code
_____________________________	______________________________
Telephone	Telephone
_____________________________	______________________________
Facsimile	Facsimile
_____________________________	______________________________
EIN Tax ID # or Social Security #	EIN Tax ID # or Social Security #

Name in which Securities should be issued/held: ________________________________

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COMPANY ACCEPTANCE

This Subscription Agreement is agreed to and accepted as of ______________,  2011.

 Paxton Energy, Inc.

 By:________________________________

    Charles Volk, CEO

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Pursuant to Section 5.3

Company/Partnership/Trust/Other

CERTIFICATE OF SIGNATORY

(To be completed if Securities are being subscribed for by an Entity)

I,________________, am the______________ of ____________________ (the “Entity”). I certify that I am empowered and duly authorized by the Entity to execute and carry out the terms of the Subscription Agreement and to purchase and hold the Securities, and certify further that the Subscription Agreement has been duly and validly executed on behalf of the Entity and constitutes a legal and binding obligation of the Entity.

IN WITNESS WHEREOF, I have set my hand this ____ day of __________, 2011.

By:

(Signature)

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EXHIBIT A

PAYMENT AND MAILING INSTRUCTIONS

PAXTON ENERGY, INC.  SUBSCRIPTION AGREEMENT

Instructions for Mailing Subscription Agreement

The fully executed Subscription Agreement, Security Agreement and Collateral Agent Agreement should be delivered by the Subscriber to the Company at the following address:

Paxton Energy Inc

c/o Buckman, Buckman & Reid, Inc.

174 Patterson Avenue

Shrewsbury, NJ 07702

ATTN: Jack Buckman

Phone: 800-531-0303

Fax: 732-530-2937

Instructions for Payment of Subscription Amount

The Total Subscription Price must accompany or precede the executed Subscription Agreement and shall be payable either by check or wire transfer.

Wire Transfers for payment of subscriptions shall be sent to:

Bank: US Bank

60 Livingston Avenue,

St. Paul, MN 55107

ABA Number: 091000022

Account Name: U.S. Bank Trust

Account Number: 180121167365

For Further Credit to Account Number: 146437000

Att: Amy 651 495-3996

Checks for payment of subscriptions shall be sent to:

(Via Overnight/Courier) USB Operations Center Lockbox Services - CM 9705 1200 Energy Park Drive (ENER0106) St. Paul, MN 55108 (Ref: acct#  146437000 on check) (Via First Class Mail) U.S. Bank Corporate Trust CM-9705 P.O. Box 70870 St. Paul, MN 55170-9705 (Ref: acct # 146437000 on check)

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EX-4.02

Exhibit 4.02

THIS DEBENTURE AND THE COMMON SHARES ISSUABLE UPON CONVERSION OF THIS DEBENTURE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE SECURITIES LAWS.  THIS NOTE AND THE COMMON SHARES ISSUABLE UPON CONVERSION OF THIS NOTE MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT AS TO THIS DEBENTURE UNDER SAID ACT AND ANY APPLICABLE STATE SECURITIES LAWS OR AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO PAXTON ENERGY, INC. THAT SUCH REGISTRATION IS NOT REQUIRED.

 CONVERTIBLE SECURED DEBENTURE

FOR VALUE RECEIVED, Paxton Energy, Inc., a Nevada corporation (the “Borrower”), promises to pay to ____________________ (the “Holder”) or its registered assigns or successors in interest, the sum of __________ Dollars ($________), together with any accrued and unpaid interest hereon, on May 5, 2012 (the “Maturity Date”) if not sooner paid.

Capitalized terms used herein without definition shall have the meanings ascribed to such terms in that certain Subscription Agreement dated as of May 5, 2011, between Borrower and the Holder (as amended, modified or supplemented from time to time, (the “Subscription Agreement”).

The “Debentures” shall refer to all Debentures issued pursuant to the Subscription Agreement, including this Debenture, and the “Holder” shall refer to all Holders of the Debenture including the Holder.

The Holder has been granted a security interest in certain assets of the Borrower as more fully described in the  Security Agreement and Collateral Agent Agreement, dated as of the date hereof.

The following terms shall apply to this Debenture:

ARTICLE I

INTEREST

1.             Interest. Interest on the principal will accrue on this Debenture until the Maturity Date, at the rate of nine percent (9%) per annum based on a 360-day year. Interest shall be payable in arrears on the first date of each Calendar Quarter with the first payment due on July 1, 2011, with the last payment due on the Maturity Date.  If any portion of this Debenture is outstanding on the Maturity Date, interest at the rate of eighteen percent (18%) per annum or the highest rate allowed by law, whichever is lower, shall accrue on the outstanding principal of this Debenture from the Maturity Date to and including the date of payment by the Borrower.

ARTICLE II

CONVERSION

2.1           Optional Conversion.  Subject to the terms of this Article II, the Holder shall have the right, but not the obligation, at any time until the Maturity Date, or thereafter during an Event of Default and to convert all or any portion of the outstanding Principal Amount and/or accrued interest and fees due and payable into fully paid and nonassessable shares of the Common Stock at the Fixed Conversion Price. The shares of Common Stock to be issued upon such conversion are herein referred to as the “Conversion Shares.”  The “Fixed Conversion Price” shall mean $0.15.

2.2           Conversion Limitation. Holder shall not have the right to convert any portion of this Debenture, pursuant to this Section 2 or otherwise, to the extent that after giving effect to such issuance after conversion.  The Holder (together with the Holder’s Affiliates, and any other person or entity acting as a group together with the Holder or any of the Holder’s Affiliates), would beneficially own in excess of the Beneficial Ownership Limitation (as defined below). For purposes of this Section beneficial ownership shall be calculated in accordance with Section 13(d) of the Exchange Act and the rules and regulations promulgated thereunder. Holder is solely responsible for any schedules required to be filed in accordance therewith. The Borrower shall have no obligation to verify or confirm the accuracy of such filings.  In any case, the number of outstanding shares of Common Stock shall be determined after giving effect to the conversion or exercise of securities of the Borrower, including this Debenture, by the Holder or its Affiliates since the date as of which such number of outstanding shares of Common Stock was reported.  The “Beneficial Ownership Limitation” shall be 4.99% of the number of shares of the Common Stock outstanding immediately after giving effect to the issuance of shares of Common Stock issuable upon conversion of this Debenture.  The Holder, upon not less than 61 days’ prior notice to the Borrower, may increase or decrease the Beneficial Ownership Limitation provisions of this Section 2.3, provided that the Beneficial Ownership Limitation in no event exceeds 9.99% of the number of shares of the Common Stock outstanding immediately after giving effect to the issuance of shares of Common Stock upon conversion of this Debenture held by the Holder and the provisions of this Section 2.3 shall continue to apply.  Any such increase or decrease will not be effective until the 61st day after such notice is delivered to the Borrower.

2.3           Mechanics of Holder’s Conversion.  In the event that the Holder elects to convert this Debenture into Common Stock, the Holder shall give notice of such election by delivering an executed and completed notice of conversion in the from attached as Exhibit A (“Notice of Conversion”) to Borrower. On each Conversion Date (as hereinafter defined) and in accordance with its Notice of Conversion, the Borrower shall make the appropriate reduction to the Principal Amount, (accrued interest), and fees as entered in its records and shall provide written notice thereof to the Holder.  Each date on which a Notice of Conversion is delivered or telecopied to Borrower in accordance with the provisions hereof shall be deemed a Conversion Date (the “Conversion Date”).  Pursuant to the terms of the Notice of Conversion, Borrower will issue instructions to the transfer agent accompanied by an opinion of counsel to Borrower of the Notice of Conversion and shall cause the transfer agent to transmit the certificates representing the Conversion Shares to the Holder by physical delivery or crediting the account of the Holder’s designated broker with the Depository Trust Corporation (“DTC”) through its Deposit Withdrawal Agent Commission (“DWAC”) system within three (3) business days after receipt by Borrower of the Notice of Conversion (the “Delivery Date”). The Conversion Shares issuable upon such conversion shall be deemed to have been issued upon the date of receipt by Borrower of the Notice of Conversion. The Holder shall be treated for all purposes as the record holder of such Common Stock, (unless the Holder provides Borrower written instructions to the contrary.

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2.4           Remedies on Conversion Failure/ Late Payments.

(a) Borrower understands that a delay in the delivery of the shares of Common Stock in the form required pursuant to this Article beyond the Delivery Date could result in economic loss to the Holder.  As compensation to the Holder for such loss, Borrower agrees to pay late payments to the Holder for late issuance of such shares in the form required pursuant to this Article II upon conversion of the Debenture, in the amount equal to $500 per business day after the Delivery Date. Borrower shall pay any payments incurred under this Section in immediately available funds upon demand.

(b) If the Company fails to cause the Transfer Agent to transmit to the Holder a certificate or the certificates representing shares of Common Stock in the form required pursuant to this Article beyond the Delivery Date, then, the Holder will have the right to rescind such conversion at any time before such shares are transmitted.

(c)  In addition to any other rights available to the Holder, if the Company fails to cause the Transfer Agent to transmit to the Holder a certificate or the certificates representing the shares of Common Stock in the form required pursuant to this Article beyond the Delivery Date, and if after such date the Holder is required by its broker to purchase (in an open market transaction or otherwise) or the Holder’s brokerage firm otherwise purchases, shares of Common Stock to deliver in satisfaction of a sale by the Holder of the Shares which the Holder anticipated receiving upon such Conversion then the Company shall  pay  Holder an amount equal to $1,000.

2.5           Conversion Calculation The number of shares of Common Stock to be issued upon each conversion of this Debenture shall be determined by dividing that portion of the principal and interest and fees to be converted, if any, by the then applicable Fixed Conversion Price.

2.6           Adjustment to Conversion Price. The Fixed Conversion Price and number and kind of shares or other securities to be issued upon conversion shall be subject to adjustment from time to time upon the happening of certain events while this conversion right remains outstanding, as follows:

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(a) If the Company, at any time while this Debenture is outstanding: (i) pays a stock dividend or otherwise make a distribution or distributions on shares of its Common Stock or any other equity or equity equivalent securities payable in shares of Common Stock (which, for avoidance of doubt, shall not include any shares of Common Stock issued by the Company upon Conversion of this Debenture), (ii) subdivides outstanding shares of Common Stock into a larger number of shares, (iii) combines (including by way of reverse stock split) outstanding shares of Common Stock into a smaller number of shares or (iv) issues by reclassification of shares of the Common Stock any shares of capital stock of the Company, then in each case the Conversion Price shall be multiplied by a fraction of which the numerator shall be the number of shares of Common Stock (excluding treasury shares, if any) outstanding immediately before such event and of which the denominator shall be the number of shares of Common Stock outstanding immediately after such event.  Any adjustment made pursuant to this Section 2.6 shall become effective immediately after the record date for the determination of stockholders entitled to receive such dividend or distribution and shall become effective immediately after the effective date in the case of a subdivision, combination or re-classification.

(b) If the Company, at any time while this Debenture is outstanding, shall distribute to all holders of Common Stock (and not to Holders of the Debentures) evidences of its indebtedness or assets (including cash and cash dividends) or rights or warrants to subscribe for or purchase any security other than the Common Stock (which shall be subject to this Section 2.6), then in each such case the Conversion Price shall be adjusted by multiplying the Conversion Price in effect immediately prior to the record date fixed for determination of stockholders entitled to receive such distribution by a fraction of which the denominator shall be the VWAP determined as of the record date mentioned above, and of which the numerator shall be such VWAP on such record date less the then per share fair market value at such record date of the portion of such assets or evidence of indebtedness so distributed applicable to one outstanding share of the Common Stock as determined by the Board of Directors in good faith.  In either case the adjustments shall be described in a statement provided to the Holder of the portion of assets or evidences of indebtedness so distributed or such subscription rights applicable to one share of Common Stock.  Such adjustment shall be made whenever any such distribution is made and shall become effective immediately after the record date mentioned above.

(c)  If at any time while this Debenture is outstanding, (i) the Company effects any merger or consolidation of the Company with or into another Person, (ii) the Company effects any sale of all or substantially all of its assets in one or a series of related transactions, (iii) any tender offer or exchange offer (whether by the Company or another Person) is completed pursuant to which holders of Common Stock are permitted to tender or exchange their shares for other securities, cash or property or (iv) the Company effects any reclassification of the Common Stock or any compulsory share exchange pursuant to which the Common Stock is effectively converted into or exchanged for other securities, cash or property (each “Fundamental Transaction”), then, upon any subsequent Conversion of this Debenture, the Holder shall have the right to receive, for each Debenture Share that would have been issuable upon such Conversion immediately prior to the occurrence of such Fundamental Transaction, the number of shares of Common Stock of the successor or acquiring corporation or of the Company, if it is the surviving corporation, and any consideration (the “Alternate Consideration”) receivable as a result of such transaction by a holder. For purposes of any such Conversion, the determination of the Conversion Price shall be appropriately adjusted to apply to such Alternate Consideration based on the amount of Alternate Consideration issuable in respect of one share of Common Stock in such Fundamental Transaction, and the Company shall apportion the Conversion Price among the Alternate Consideration in a reasonable manner reflecting the relative value of any different components of the Alternate Consideration.  If holders of Common Stock are given any choice as to the securities, cash or property to be received in a Fundamental Transaction, then the Holder shall be given the same choice as to the Alternate Consideration it receives upon any Conversion of this Debenture following such Fundamental Transaction.  To the extent necessary to effectuate the foregoing provisions, any successor to the Company or surviving entity in such Fundamental Transaction shall issue to the Holder a new Debenture consistent with the foregoing provisions and evidencing the Holder’s right to Conversion such Debenture into Alternate Consideration. The terms of any agreement pursuant to which a Fundamental Transaction is effected shall include terms requiring any such successor or surviving entity to comply with the provisions of this Section 3(c) and insuring that this Debenture (or any such replacement security) will be similarly adjusted upon any subsequent transaction analogous to a Fundamental Transaction.

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(d) (i) If the Company at any time while this Debenture is outstanding, shall sell or grant any option to purchase, or sell or grant any right to reprice its securities, or otherwise dispose of or issue (or announce any offer, sale, grant or any option to purchase or other disposition) any Common Stock or Common Stock Equivalents entitling any Person to acquire shares of Common Stock, at an effective price per share less than the then Conversion Price (such lower price, the “Base Share Price”) (if the holder of the Common Stock or Common Stock Equivalents so issued shall at any time, whether by operation of purchase price adjustments, reset provisions, make good provision adjustments, floating conversion, Conversion or exchange prices or otherwise, or due to Debentures, options or rights per share which are issued in connection with such issuance, be entitled to receive shares of Common Stock at an effective price per share which is less than the Conversion Price, such issuance shall be deemed to have occurred for less than the Conversion Price on such date of the Dilutive Issuance), then the Conversion Price shall be reduced and only reduced to equal the Base Share Price.  Such adjustment shall be made whenever such Common Stock or Common Stock Equivalents are issued.  (ii) Notwithstanding the above, no adjustment shall be made for existing arrangement or agreement, or arrangement or agreement described in the Disclosure Document in the Subscription Agreement, or issued pursuant to any existing incentive plan.

           (e) All calculations under this Section 2.6  shall be made to the nearest cent or the nearest share, as the case may be. For purposes of this Section 2.6, the number of shares of Common Stock deemed to be issued and outstanding as of a given date shall be the sum of the number of shares of Common Stock (excluding treasury shares, if any) issued and outstanding.

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2.7           Reservation of Shares. At all times throughout the life of the Debentures, the Company shall have sufficient amount of authorized and unissued common stock available in order to satisfy full conversion of the Debentures.  In case such amount of Common Stock is reasonably considered potentially insufficient, the Company shall call and hold a special meeting to increase the number of authorized common stock.  Management of the Company shall recommend to shareholders to vote in favor of increasing the number of authorized common stock and shall also vote all of its shares in favor of increasing the number of common shares authorized. Borrower represents that upon issuance, such shares will be duly and validly issued, fully paid and non-assessable.  Borrower agrees that its issuance of this Debenture shall constitute full authority to its officers, agents, and transfer agents who are charged with the duty of executing and issuing stock certificates to execute and issue the necessary certificates for shares of Common Stock upon the conversion of this Debenture.

2.8           Issuance of New Debenture.  Upon any partial conversion of this Debenture, a new Debenture containing the same date and provisions of this Debenture shall, at the request of the Holder, be issued by the Borrower to the Holder for the principal balance of this Debenture and interest which shall not have been converted or paid. Subject to the provisions of Article III, the Borrower will pay no costs, fees or any other consideration to the Holder for the production and issuance of a new Debenture.

ARTICLE III

ORDER OF PAYMENT

Any payment made by the Borrower to the Holder, on account of this Debenture shall be applied in the following order of priority: (i) first, to any amounts other than principal and accrued interest, if any, hereunder, (ii) second, to accrued interest, if any, through and including the date of payment, and (iv) then, to principal of the Debenture.

ARTICLE IV

NEGATIVE COVENANTS

So long as the Note remains outstanding, Maker will not, and will not permit any subsidiary to, without the consent of Holder to declare or pay any dividends or distributions on account of its capital stock or purchase, redeem, retire or otherwise acquire any of its capital stock or any securities convertible into, exchangeable for, or giving any person the right to acquire or otherwise subscribe for, any shares of the Borrowers or any subsidiary’s capital stock.

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ARTICLE V

MANDATORY REDEMPTION

5.1 Definitions.   The following terms shall have the following meanings:

“Change of Control” shall mean the existence or occurrence of any of the following: (a) the sale, conveyance or disposition of all or substantially all of the assets of the Company; (b) the completion of a transaction or series of related transactions in which more than 50% of the voting power of the Company is disposed of (other than as a direct result of normal, uncoordinated trading activities in the Common Stock generally); (c) the consolidation, merger or other business combination of the Company with or into any other entity, immediately following which the prior stockholders of the Company fail to own, directly or indirectly, at least 50% of the voting equity of the surviving entity; (d) a transaction or series of transactions in which any person or “group” (as such term is used in Sections 13(d) and 14(d) of the Exchange Act) acquires more than 50% of the voting equity of the Company; or (e) a transaction or series of transactions that constitutes or results in a “going private transaction” (as defined in Section 13(e) of the Exchange Act and the regulations thereunder.

“Listing Event” shall mean: (i) SEC stop trade order or principal market trading suspension of the Common Stock shall be in effect for 5 consecutive days or 5 days during a period of 10 consecutive days, excluding in all cases a suspension of all trading on a principal market, provided that Borrower shall not have been able to cure such trading suspension within 30 days of  such suspension, or list the Common Stock on another Principal Market within 30 days of such notice, or (ii) the delisting of such security from the principal market on which the common stock is listed or traded.  The principal market shall include any national stock exchange or NASDQ market.

“Mandatory Redemption Event” shall mean either: (i) a Change of Control, or (ii) a Listing Event.

“Redemption Amount” shall refer to 130% of the Principal Amount of the Debentures outstanding.

5.2 Redemption.  Upon any Mandatory Redemption Event, the Company shall redeem, in cash all the outstanding debentures.   The Company shall give the Holders the Notice of Redemption as provided in Section 5.3. Such redemption shall occur on the date provided in such notice at which time the Company shall pay the Redemption Amount to all Holders.  All accrued interest through such date shall also be paid with the Redemption Amount.

5.3 Notice.  Notice of Redemption, pursuant to this Article V, shall be provided by the Corporation to the Holder in writing (by notice as provided herein) not less than 10 nor more than 15 days prior to the date of redemption, which notice shall specify such redemption date.

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 5.4 Delivery of Debentures. Upon any redemption of the Debentures pursuant to Article V, the Holder shall either deliver the Debentures to the Companyat such address by express courier within 14 days after the date that the Holder receives payment therefore.

ARTICLE VI

EVENTS OF DEFAULT

The occurrence of any of the following events set forth in Sections 6.1 through 6.6, inclusive, shall be an “Event of Default”:

6.1   Failure to Pay Principal, Interest or other Fees.  Borrower fails to pay when due any installment of principal, interest or other fees hereon or on any other secured convertible debenture issued pursuant to the Subscription Agreement, and such failure shall continue for a period of ten (10) days following the date upon which any such payment was due.

6.2  Breach of Covenant.  Borrower breaches any covenant or other term or condition of this Debenture in any material respect and such breach, if subject to cure, continues for a period of fifteen (15) days after the occurrence thereof.

6.3    Breach of Representations and Warranties.  Any representation or warranty of Borrower made herein, or the Subscription Agreement, Security Agreement, Collateral Agent Agreement (“Transaction Document”), or any statement in the Disclosure Document, referred to in the Subscription Agreement, shall be false or misleading in any material respect.

6.4   Bankruptcy.  The Borrower shall commence, or there shall be commenced against the Borrower a case under any applicable bankruptcy or insolvency laws as now or hereafter in effect or any successor thereto, or the Borrower commences any other proceeding under any reorganization, arrangement, adjustment of debt, relief of debtors, dissolution, insolvency or liquidation or similar law of any jurisdiction whether now or hereafter in effect relating to the Borrower or there is commenced against the Borrower any such bankruptcy, insolvency or other proceeding which remains undismissed for a period of 60 days; or the Borrower is adjudicated insolvent or bankrupt; or any order of relief or other order approving any such case or proceeding is entered; or the Borrower suffers any appointment of any custodian or the like for it or any substantial part of its property which continues undischarged or unstayed for a period of 60 days; or the Borrower makes a general assignment for the benefit of creditors; or the Borrower shall fail to pay, or shall state that it is unable to pay, or shall be unable to pay, its debts generally as they become due; or the Borrower; or any corporate or other action is taken by the Borrower or any Subsidiary thereof for the purpose of effecting any of the foregoing.

6.5  Judgments.  Any money judgment, writ or similar final process shall be entered or filed against any Borrower or any of its Subsidiaries or any of their respective property or other assets for more than $100,000 in the aggregate for Borrower, and shall remain unvacated, unbonded or unstayed for a period of thirty (30) days.

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6.6  Default Under Other Agreements.  The occurrence of any Default under a Transaction Document.

ARTICLE VII

DEFAULT RELATED PROVISIONS

7.1    Default Interest Rate.  Following the occurrence and during the continuance of an Event of Default, interest on this Debenture shall accrue at the rate of 18% per annum, or such lower maximum amount of interest permitted to be charged under applicable law, and all outstanding Obligations, including unpaid interest, shall continue to accrue interest from the date of such Event of Default at such interest rate applicable to such Obligations until such Event of Default is cured or waived.

7.2    Conversion Privileges.  The conversion privileges set forth in Article II shall remain in full force and effect immediately from the date hereof and until this Debenture is paid in full.

7.3    Cumulative Remedies.  The remedies under this Debenture shall be cumulative.

ARTICLE VIII

ACTIONS OF A MAJORITY IN INTEREST

The Holders of 51% of the Principal Amount of the then outstanding Debentures (“Majority in Interest”) shall have the right to amend, or waive any provision of the Agreement other than the Principal Amount of any Debenture or calculation of accrued interest thereon.

ARTICLE IX

REGISTRATION

The Holders shall have the registration rights contained in the Subscription Agreement.

ARTICLE X

MISCELLANEOUS

10.1    Failure or Indulgence Not Waiver.  No failure or delay on the part of the Holder hereof in the exercise of any power, right or privilege hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any such power, right or privilege preclude other or further exercise thereof or of any other right, power or privilege.

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10.2    Notices.  Any notice herein required or permitted to be given shall be in writing and provided in accordance with the terms of the Subscription Agreement.

10.3    Amendment Provision.  The term “Debenture” and all reference thereto, as used throughout this instrument, shall mean this instrument as originally executed, or if later amended or supplemented by a Majority in Interest, then as so amended or supplemented, and any successor instrument as it may be amended or supplemented.

10.4     Assignability.  This Debenture shall be binding upon each Borrower and its successors and assigns, and shall inure to the benefit of the Holder and its successors and assigns, and may be assigned by the Holder in accordance with the requirements of the Purchase Agreement.

10.5   Severability.  If any provision of this Debenture is invalid, illegal or unenforceable, the balance of this Debenture shall remain in effect, and if any provision is inapplicable to any person or circumstance, it shall nevertheless remain applicable to all other persons and circumstances.  If it shall be found that any interest or other amount deemed interest due hereunder violates applicable laws governing usury, the applicable rate of interest due hereunder shall automatically be lowered to equal the maximum permitted rate of interest. The Borrower covenants (to the extent that it may lawfully do so) that it shall not at any time insist upon, plead, or in any manner whatsoever claim or take the benefit or advantage of, any stay, extension or usury law or other law which would prohibit or forgive the Borrower from paying all or any portion of the principal of or interest on this Debenture as contemplated herein, wherever enacted, now or at any time hereafter in force, or which may affect the covenants or the performance of this indenture, and the Borrower (to the extent it may lawfully do so) hereby expressly waives all benefits or advantage of any such law, and covenants that it will not, by resort to any such law, hinder, delay or impeded the execution of any power herein granted to the Holder, but will suffer and permit the execution of every such as though no such law has been enacted.

10.6   Governing Law; Consent to Jurisdiction; Waiver of Jury Trial.  This Debenture shall be governed by and interpreted in accordance with the laws of the State of New York for contracts to be wholly performed in such state and without giving effect to the principles thereof regarding the conflict of laws. Each of the parties consents to the exclusive jurisdiction of the state courts of the State of New York located in New York County and and the United States District Court for the Southern District of New York in connection with any dispute arising under this Agreement and hereby waives, to the maximum extent permitted by law, any objection, including any objection based on forum non convenes, to the bringing of any such proceeding in such jurisdictions. To the extent determined by such court, the Borrower shall reimburse the Holder for any reasonable legal fees and disbursements incurred by the Holder in enforcement of or protection of any of its rights under this Debenture. The Borrower and the Holder hereby waive a trial by jury in any action, proceeding or counterclaim brought by either of the parties hereto against the other in respect of any matter arising out of or in connection with this Agreement or the Debenture. EACH OF THE PARTIES HERETO WAIVES ANY RIGHT TO REQUEST A TRIAL BY JURY IN ANY LITIGATION WITH RESPECT TO THIS AGREEMENT AND REPRESENTS THAT COUNSEL HAS BEEN CONSULTED SPECIFICALLY AS TO THIS WAIVER.

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10.7    Maximum Payments.  Nothing contained herein shall be deemed to establish or require the payment of a rate of interest or other charges in excess of the maximum permitted by applicable law.  In the event that the rate of interest required to be paid or other charges hereunder exceed the maximum permitted by such law, any payments in excess of such maximum shall be credited against amounts owed by Borrowers to the Holder and thus refunded to the Borrowers

10.8    Notices.  Any and all notices or other communications or deliveries to be provided by the Borrower or Holder shall be delivered in accordance with the terms of the Purchase Agreement.

10.9    Replacement.  If this Debenture shall be mutilated, lost, stolen or destroyed, the Borrower shall execute and deliver, in exchange and substitution for and upon cancellation of a mutilated Debenture, or in lieu of or in substitution for a lost, stolen or destroyed Debenture, a new Debenture for the principal amount of this Debenture so mutilated, lost, stolen or destroyed but only upon receipt of evidence of such loss, theft or destruction of such Debenture, and of the ownership hereof, and indemnity, if requested, all reasonably satisfactory to the Borrower.

10.10  Construction.  Each party acknowledges that its legal counsel participated in the preparation of this Debenture and, therefore, stipulates that the rule of construction that ambiguities are to be resolved against the drafting party shall not be applied in the interpretation of this Debenture to favor any party against the other.

10.11   Assumption. As long as any of the Debentures remain issued and outstanding, the Company will not consummate any consolidation, merger, sale, transfer or other disposition of assets or shares, including any form of share exchange, unless prior to, or simultaneously with, the consummation thereof,  either (i) the Debenture is redeemed pursuant to Article V, or (ii) the successor corporation resulting from such consolidation or merger (if other than the Company), or the corporation purchasing or otherwise acquiring the assets of the Company, agrees to assume the Company’s continuing obligations hereunder

[Balance of page intentionally left blank; signature page follows.]

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IN WITNESS WHEREOF, Borrower has caused this Secured Convertible Debenture to be signed in its name effective as of this 5th day of May, 2011.

PAXTON ENERGY, INC.
	By:__________________________________________      Name: Charles Volk      Title:  Chief Executive Officer

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EXHIBIT A

NOTICE OF CONVERSION

(To be executed by the Holder in order to convert all or part of the Debenture

into Common Stock)

[Name and Address of Holder]

The undersigned hereby converts $_________ of the principal due on [specify applicable Date] under the Secured Convertible Debenture issued by Paxton Energy, Inc. (“Borrower”) dated as of May 5, 2011 by delivery of shares of Common Stock of Borrower on and subject to the conditions set forth in Article II of such Debenture.

1. Date of Conversion _______________________

2. Shares To Be Delivered: _______________________

______________________________

By:_______________________________

Name:_____________________________

Title:______________________________

EX-4.03

Exhibit 4.03

NEITHER THIS SECURITY NOR THE SECURITIES FOR WHICH THIS SECURITY IS EXERCISABLE HAVE BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OR THE SECURITIES COMMISSION OF ANY STATE IN RELIANCE UPON AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND IN ACCORDANCE WITH APPLICABLE STATE SECURITIES LAWS AS EVIDENCED BY A LEGAL OPINION OF COUNSEL TO THE TRANSFEROR TO SUCH EFFECT, THE SUBSTANCE OF WHICH SHALL BE REASONABLY ACCEPTABLE TO THE COMPANY.  THIS SECURITY AND THE SECURITIES ISSUABLE UPON EXERCISE OF THIS SECURITY MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR OTHER LOAN SECURED BY SUCH SECURITIES.

COMMON STOCK PURCHASE WARRANT

 PAXTON ENERGY, INC.

Warrant Shares: [_______] Initial Exercise Date: May 5, 2011

THIS COMMON STOCK PURCHASE WARRANT (the “Warrant”) certifies that, for value received, _____________ (the “Holder”) is entitled, upon the terms and subject to the limitations on exercise and the conditions hereinafter set forth, at any time on or after the date hereof (the “Initial Exercise Date”) and on or prior to the close of business on the five year anniversary of the Initial Exercise Date (the “Termination Date”) but not thereafter, to subscribe for and purchase from Paxton Energy, Inc., a Nevada corporation (the “Company”), up to ______ shares (the “Warrant Shares”) of Common Stock.  The purchase price of one share of Common Stock under this Warrant shall be equal to the Exercise Price, as defined in Section 2(b).

Section 1.            Definitions.  Capitalized terms used and not otherwise defined herein shall have the meanings set forth in that certain Subscription Agreement (the “Subscription Agreement”), dated May 5, 2011, among the Company and the investors signatory thereto.

Section 2.             Exercise.

a)           Exercise of Warrant.  Exercise of the purchase rights represented by this Warrant may be made, in whole or in part, at any time or times on or after the Initial Exercise Date and on or before the Termination Date by delivery to the Company (or such other office or agency of the Company as it may designate by notice in writing to the registered Holder at the address of the Holder appearing on the books of the Company) of a duly executed facsimile copy of the Notice of Exercise Form annexed hereto; and, within 3 Trading Days of the date said Notice of Exercise is delivered to the Company, the Company shall have received  payment of the aggregate Exercise Price of the shares thereby purchased by wire transfer or cashier’s check drawn on a United States bank.  Notwithstanding anything herein to the contrary, the Holder shall not be required to physically surrender this Warrant to the Company until the Holder has purchased all of the Warrant Shares available hereunder and the Warrant has been exercised in full, in which case, the Holder shall surrender this Warrant to the Company for cancellation within 3 Trading Days of the date the final Notice of Exercise is delivered to the Company.  Partial exercises of this Warrant resulting in purchases of a portion of the total number of Warrant Shares available hereunder shall have the effect of lowering the outstanding number of Warrant Shares purchasable hereunder in an amount equal to the applicable number of Warrant Shares purchased.  The Holder and the Company shall maintain records showing the number of Warrant Shares purchased and the date of such purchases. In the event of any dispute or discrepancy, the records of the Holder shall be controlling and determinative in the absence of manifest error.

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b)           Exercise Price.  The exercise price per share of the Common Stock under this Warrant shall be $0.30, subject to adjustment hereunder (the “Exercise Price”).

c)           Cashless Exercise.  If at any time after the six month anniversary of the date of the Original Issue Date, there is no effective Registration Statement registering, or no current prospectus available for, the resale of the Warrant Shares by the Holder, then this Warrant may also be exercised at such time by means of a “cashless exercise” in which the Holder shall be entitled to receive a certificate for the number of Warrant Shares equal to the quotient obtained by dividing [(A-B) (X)] by (A), where:

(A) =	the VWAP on the Trading Day immediately preceding the date of such election;
(B) =	the Exercise Price of this Warrant, as adjusted; and
(X) =	the number of Warrant Shares issuable upon exercise of this Warrant in accordance with the terms of this Warrant by means of a cash exercise rather than a cashless exercise.

Notwithstanding anything herein to the contrary, on the Termination Date, this Warrant shall be automatically exercised via cashless exercise pursuant to this Section 2(c).

For purposes of this Warrant, “VWAP” means, for any date, the price determined by the first of the following clauses that applies: (a) if the Common Stock is then listed or quoted on a Trading Market, the daily volume weighted average price of the Common Stock for such date (or the nearest preceding date) on the Trading Market on which the Common Stock is then listed or quoted as reported by Bloomberg L.P. (based on a Trading Day from 9:30 a.m. New York City time to 4:02 p.m. New York City time); (b) if the OTC Bulletin Board is not a Trading Market, the volume weighted average price of the Common Stock for such date (or the nearest preceding date) on the OTC Bulletin Board; (c) if the Common Stock is not then listed or quoted for trading on the OTC Bulletin Board and if prices for the Common Stock are then reported in the “Pink Sheets” published by Pink Sheets, LLC (or a similar organization or agency succeeding to its functions of reporting prices), the most recent bid price per share of the Common Stock so reported; or (d) in all other cases, the fair market value of a share of Common Stock as determined by an independent appraiser selected in good faith by the Purchasers of a majority in interest of the Securities then outstanding and reasonably acceptable to the Company, the fees and expenses of which shall be paid by the Company.

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d)           Exercise Limitations.  Holder shall not have the right to convert any portion of this Warrant, pursuant to Section 2 or otherwise, to the extent that after giving effect to such issuance after exercise  the Holder (together with the Holder’s Affiliates, and any other person or entity acting as a group together with the Holder or any of the Holder’s Affiliates), would beneficially own in excess of the Beneficial Ownership Limitation (as defined below). For purposes of this Section beneficial ownership shall be calculated in accordance with Section 13(d) of the Exchange Act and the rules and regulations promulgated thereunder. Holder is solely responsible for any schedules required to be filed in accordance therewith. The Company shall have no obligation to verify or confirm the accuracy of such filings.  In any case, the number of outstanding shares of Common Stock shall be determined after giving effect to the conversion or exercise of securities of the Company, including this Warrant, by the Holder or its Affiliates since the date as of which such number of outstanding shares of Common Stock was reported.  The “Beneficial Ownership Limitation” shall be 4.99% of the number of shares of the Common Stock outstanding immediately after giving effect to the issuance of shares of Common Stock issuable upon exercise of this Warrant.  The Holder, upon not less than 61 days’ prior notice to the Company, may increase or decrease the Beneficial Ownership Limitation provisions of this Section 2.3, provided that the Beneficial Ownership Limitation in no event exceeds 9.99% of the number of shares of the Common Stock outstanding immediately after giving effect to the issuance of shares of Common Stock upon exercise of this Warrant held by the Holder and the provisions of this Section 2.3 shall continue to apply.  Any such increase or decrease will not be effective until the 61st day after such notice is delivered to the Company.  The limitations contained in this paragraph shall apply to a successor holder of this Warrant.

e)           Mechanics of Exercise.

i.      Delivery of Certificates Upon Exercise.  Certificates for shares purchased hereunder shall be transmitted by the Transfer Agent to the Holder by crediting the account of the Holder’s prime broker with the Depository Trust Company through its Deposit Withdrawal Agent Commission (“DWAC”) system if the Company is then a participant in such system and either (A) there is an effective Registration Statement permitting the resale of the Warrant Shares by the Holder or (B) the shares are eligible for resale without volume or manner-of-sale limitations pursuant to Rule 144, and otherwise by physical delivery to the address specified by the Holder in the Notice of Exercise within 3 Trading Days from the delivery to the Company of the Notice of Exercise Form, surrender of this Warrant (if required) and payment of the aggregate Exercise Price as set forth above (the “Warrant Share Delivery Date”).  This Warrant shall be deemed to have been exercised on the date the Exercise Price is received by the Company.  The Warrant Shares shall be deemed to have been issued, and Holder or any other person so designated to be named therein shall be deemed to have become a holder of record of such shares for all purposes, as of the date the Warrant has been exercised by payment to the Company of the Exercise Price and all taxes required to be paid by the Holder, if any, pursuant to Section 2(e)(vi) prior to the issuance of such shares, have been paid.

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ii.      Delivery of New Warrants Upon Exercise.  If this Warrant shall have been exercised in part, the Company shall, at the request of a Holder and upon surrender of this Warrant certificate, at the time of delivery of the certificate or certificates representing Warrant Shares, deliver to Holder a new Warrant evidencing the rights of Holder to purchase the unpurchased Warrant Shares called for by this Warrant, which new Warrant shall in all other respects be identical with this Warrant.

iii.      Rescission Rights.  If the Company fails to cause the Transfer Agent to transmit to the Holder a certificate or the certificates representing the Warrant Shares pursuant to Section 2(e)(i) by the Warrant Share Delivery Date, then, the Holder will have the right to rescind such exercise.

iv.      Compensation for Buy-In on Failure to Timely Deliver Certificates Upon Exercise.  In addition to any other rights available to the Holder, if the Company fails to cause the Transfer Agent to transmit to the Holder a certificate or the certificates representing the Warrant Shares pursuant to an exercise on or before the Warrant Share Delivery Date, and if after such date the Holder is required by its broker to purchase (in an open market transaction or otherwise) or the Holder’s brokerage firm otherwise purchases, shares of Common Stock to deliver in satisfaction of a sale by the Holder of the Warrant Shares which the Holder anticipated receiving upon such exercise the Company shall  pay Holder $1,000.

v.      No Fractional Shares or Scrip.  No fractional shares or scrip representing fractional shares shall be issued upon the exercise of this Warrant.  As to any fraction of a share which Holder would otherwise be entitled to purchase upon such exercise, the Company shall, at its election, either pay a cash adjustment in respect of such final fraction in an amount equal to such fraction multiplied by the Exercise Price or round up to the next whole share.

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vi.      Charges, Taxes and Expenses.  Issuance of certificates for Warrant Shares shall be made without charge to the Holder for any issue or transfer tax or other incidental expense in respect of the issuance of such certificate, all of which taxes and expenses shall be paid by the Company, and such certificates shall be issued in the name of the Holder or in such name or names as may be directed by the Holder; provided, however, that in the event certificates for Warrant Shares are to be issued in a name other than the name of the Holder, this Warrant when surrendered for exercise shall be accompanied by the Assignment Form attached hereto duly executed by the Holder and the Company may require, as a condition thereto, the payment of a sum sufficient to reimburse it for any transfer tax incidental thereto.

vii.      Closing of Books.  The Company will not close its stockholder books or records in any manner which prevents the timely exercise of this Warrant, pursuant to the terms hereof.

Section 3.             Certain Adjustments.

a)      Stock Dividends and Splits. If the Company, at any time while this Warrant is outstanding: (i) pays a stock dividend or otherwise make a distribution or distributions on shares of its Common Stock or any other equity or equity equivalent securities payable in shares of Common Stock (which, for avoidance of doubt, shall not include any shares of Common Stock issued by the Company upon exercise of this Warrant), (ii) subdivides outstanding shares of Common Stock into a larger number of shares, (iii) combines (including by way of reverse stock split) outstanding shares of Common Stock into a smaller number of shares or (iv) issues by reclassification of shares of the Common Stock any shares of capital stock of the Company, then in each case the Exercise Price shall be multiplied by a fraction of which the numerator shall be the number of shares of Common Stock (excluding treasury shares, if any) outstanding immediately before such event and of which the denominator shall be the number of shares of Common Stock outstanding immediately after such event and the number of shares issuable upon exercise of this Warrant shall be proportionately adjusted such that the aggregate Exercise Price of this Warrant shall remain unchanged.  Any adjustment made pursuant to this Section 3(a) shall become effective immediately after the record date for the determination of stockholders entitled to receive such dividend or distribution and shall become effective immediately after the effective date in the case of a subdivision, combination or re-classification.

b)      Pro Rata Distributions.  If the Company, at any time while this Warrant is outstanding, shall distribute to all holders of Common Stock (and not to Holders of the Warrants) evidences of its indebtedness or assets (including cash and cash dividends) or rights or warrants to subscribe for or purchase any security other than the Common Stock (which shall be subject to Section 3(b)), then in each such case the Exercise Price shall be adjusted by multiplying the Exercise Price in effect immediately prior to the record date fixed for determination of stockholders entitled to receive such distribution by a fraction of which the denominator shall be the VWAP determined as of the record date mentioned above, and of which the numerator shall be such VWAP on such record date less the then per share fair market value at such record date of the portion of such assets or evidence of indebtedness so distributed applicable to one outstanding share of the Common Stock as determined by the Board of Directors in good faith.  In either case the adjustments shall be described in a statement provided to the Holder of the portion of assets or evidences of indebtedness so distributed or such subscription rights applicable to one share of Common Stock.  Such adjustment shall be made whenever any such distribution is made and shall become effective immediately after the record date mentioned above.

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c)      Fundamental Transaction. If, at any time while this Warrant is outstanding, (i) the Company effects any merger or consolidation of the Company with or into another Person, (ii) the Company effects any sale of all or substantially all of its assets in one or a series of related transactions, (iii) any tender offer or exchange offer (whether by the Company or another Person) is completed pursuant to which holders of Common Stock are permitted to tender or exchange their shares for other securities, cash or property or (iv) the Company effects any reclassification of the Common Stock or any compulsory share exchange pursuant to which the Common Stock is effectively converted into or exchanged for other securities, cash or property (each “Fundamental Transaction”), then, upon any subsequent exercise of this Warrant, the Holder shall have the right to receive, for each Warrant Share that would have been issuable upon such exercise immediately prior to the occurrence of such Fundamental Transaction, the number of shares of Common Stock of the successor or acquiring corporation or of the Company, if it is the surviving corporation, and any additional consideration (the “Alternate Consideration”) receivable as a result of such merger, consolidation or disposition of assets by a holder of the number of shares of Common Stock for which this Warrant is exercisable immediately prior to such event. For purposes of any such exercise, the determination of the Exercise Price shall be appropriately adjusted to apply to such Alternate Consideration based on the amount of Alternate Consideration issuable in respect of one share of Common Stock in such Fundamental Transaction, and the Company shall apportion the Exercise Price among the Alternate Consideration in a reasonable manner reflecting the relative value of any different components of the Alternate Consideration.  If holders of Common Stock are given any choice as to the securities, cash or property to be received in a Fundamental Transaction, then the Holder shall be given the same choice as to the Alternate Consideration it receives upon any exercise of this Warrant following such Fundamental Transaction.  To the extent necessary to effectuate the foregoing provisions, any successor to the Company or surviving entity in such Fundamental Transaction shall issue to the Holder a new warrant consistent with the foregoing provisions and evidencing the Holder’s right to exercise such warrant into Alternate Consideration. The terms of any agreement pursuant to which a Fundamental Transaction is effected shall include terms requiring any such successor or surviving entity to comply with the provisions of this Section 3(c) and insuring that this Warrant (or any such replacement security) will be similarly adjusted upon any subsequent transaction analogous to a Fundamental Transaction. Notwithstanding anything to the contrary, in the event of a Fundamental Transaction that is (1) an all cash transaction, (2) a “Rule 13e-3 transaction” as defined in Rule 13e-3 under the Exchange Act, or (3) a Fundamental Transaction involving a person or entity not traded on a national securities exchange, the Nasdaq Global Select Market, the Nasdaq Global Market, or the Nasdaq Capital Market, the Company or any successor entity shall pay at the Holder’s option, exercisable at any time concurrently with or within 30 days after the consummation of the Fundamental Transaction, an amount of cash equal to the value of this Warrant as determined in accordance with the Black Scholes Option Pricing Model obtained from the “OV” function on Bloomberg L.P. using (A) a price per share of Common Stock equal to the VWAP of the Common Stock for the Trading Day immediately preceding the date of consummation of the applicable  Fundamental Transaction, (B) a risk-free interest rate corresponding to the U.S. Treasury rate for a 30 day period immediately prior to the consummation of the applicable Fundamental Transaction, (C) an expected volatility equal to the 100 day volatility obtained from the “HVT” function on Bloomberg L.P. determined as of the Trading Day immediately following the public announcement of the applicable Fundamental Transaction and (D) a remaining option time equal to the time between the date of the public announcement of such transaction and the Termination Date.

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d)      Anti-Dilution Protection.

i.        If the Company at any time while this Warrant is outstanding, shall sell or grant any option to purchase, or sell or grant any right to reprice its securities, or otherwise dispose of or issue (or announce any offer, sale, grant or any option to purchase or other disposition) any Common Stock or Common Stock Equivalents entitling any Person to acquire shares of Common Stock, at an effective price per share less than the then Exercise Price (such lower price, the “Base Share Price”) (if the holder of the Common Stock or Common Stock Equivalents so issued shall at any time, whether by operation of purchase price adjustments, reset provisions, floating conversion, conversion or exchange prices or otherwise, or due to debentures, options or rights per share which are issued in connection with such issuance, be entitled to receive shares of Common Stock at an effective price per share which is less than the Exercise Price, such issuance shall be deemed to have occurred for less than the Exercise Price on such date of the Dilutive Issuance), then the Exercise Price shall be reduced and only reduced to equal the Base Share Price.  Such adjustment shall be made whenever such Common Stock or Common Stock Equivalents are issued.

ii.       Notwithstanding the above, no adjustment shall be made for  securities  issued pursuant existing arrangements or agreements, or arrangements or agreements described in the Disclosure Document  referred to in the in the Subscription Agreement or pursuant to any existing incentive plan.

e)      Calculations. All calculations under this Section 3 shall be made to the nearest cent or the nearest 1/100th of a share, as the case may be. For purposes of this Section 3, the number of shares of Common Stock deemed to be issued and outstanding as of a given date shall be the sum of the number of shares of Common Stock (excluding treasury shares, if any) issued and outstanding.

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f)      Notice to Holder.

i.   Adjustment to Exercise Price. Whenever the Exercise Price is adjusted pursuant to any provision of this Section 3, the Company shall promptly mail to the Holder a notice setting forth the Exercise Price after such adjustment and setting forth a brief statement of the facts requiring such adjustment.

ii.      Notice to Allow Exercise by Holder. If (A) the Company shall declare a dividend (or any other distribution in whatever form) on the Common Stock, (B) the Company shall declare a special nonrecurring cash dividend on or a redemption of the Common Stock, (C) the Company shall authorize the granting to all holders of the Common Stock rights or warrants to subscribe for or purchase any shares of capital stock of any class or of any rights, (D) the approval of any stockholders of the Company shall be required in connection with any reclassification of the Common Stock, any consolidation or merger to which the Company is a party, any sale or transfer of all or substantially all of the assets of the Company, of any compulsory share exchange whereby the Common Stock is converted into other securities, cash or property, or (E) the Company shall authorize the voluntary or involuntary dissolution, liquidation or winding up of the affairs of the Company, then, in each case, the Company shall cause to be mailed to the Holder at its last address as it shall appear upon the Warrant Register of the Company, at least 20 calendar days prior to the applicable record or effective date hereinafter specified, a notice stating (x) the date on which a record is to be taken for the purpose of such dividend, distribution, redemption, rights or warrants, or if a record is not to be taken, the date as of which the holders of the Common Stock of record to be entitled to such dividend, distributions, redemption, rights or warrants are to be determined or (y) the date on which such reclassification, consolidation, merger, sale, transfer or share exchange is expected to become effective or close, and the date as of which it is expected that holders of the Common Stock of record shall be entitled to exchange their shares of the Common Stock for securities, cash or other property deliverable upon such reclassification, consolidation, merger, sale, transfer or share exchange; provided that the failure to mail such notice or any defect therein or in the mailing thereof shall not affect the validity of the corporate action required to be specified in such notice.  The Holder is entitled to exercise this Warrant during the period commencing on the date of such notice to the effective date of the event triggering such notice.

Section 4.               Transfer of Warrant.

a)     Transferability.  Subject to compliance with any applicable securities laws and the conditions set forth in Section 4(d) hereof and to the provisions of the Purchase Agreement, this Warrant and all rights hereunder (including, without limitation, any registration rights) are transferable, in whole or in part, upon surrender of this Warrant at the principal office of the Company or its designated agent, together with a written assignment of this Warrant substantially in the form attached hereto duly executed by the Holder or its agent or attorney and funds sufficient to pay any transfer taxes payable upon the making of such transfer.  Upon such surrender and, if required, such payment, the Company shall execute and deliver a new Warrant or Warrants in the name of the assignee or assignees, as applicable, and in the denomination or denominations specified in such instrument of assignment, and shall issue to the assignor a new Warrant evidencing the portion of this Warrant not so assigned, and this Warrant shall promptly be cancelled.  The Warrant, if properly assigned, may be exercised by a new holder for the purchase of Warrant Shares without having a new Warrant issued.

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b)      New Warrants. This Warrant may be divided or combined with other Warrants upon presentation hereof at the aforesaid office of the Company, together with a written notice specifying the names and denominations in which new Warrants are to be issued, signed by the Holder or its agent or attorney.  Subject to compliance with Section 4(a), as to any transfer which may be involved in such division or combination, the Company shall execute and deliver a new Warrant or Warrants in exchange for the Warrant or Warrants to be divided or combined in accordance with such notice. All Warrants issued on transfers or exchanges shall be dated the Initial Exercise Date and shall be identical with this Warrant except as to the number of Warrant Shares issuable pursuant thereto.

c)      Warrant Register. The Company shall register this Warrant, upon records to be maintained by the Company for that purpose (the “Warrant Register”), in the name of the record Holder hereof from time to time.  The Company may deem and treat the registered Holder of this Warrant as the absolute owner hereof for the purpose of any exercise hereof or any distribution to the Holder, and for all other purposes, absent actual notice to the contrary.

d)      Transfer Restrictions. If, at the time of the surrender of this Warrant in connection with any transfer of this Warrant, the transfer of this Warrant shall not be either (i) registered pursuant to an effective registration statement under the Securities Act and under applicable state securities or blue sky laws or (ii) eligible for resale without volume or manner-of-sale restrictions pursuant to Rule 144, the Company may require, as a condition of allowing such transfer, that the Holder or transferee of this Warrant, as the case may be, comply with the provisions of the Purchase Agreement.

Section 5.       Piggyback Registration.

The Holder shall have the registration rights set forth in the Subscription agreement.

Section 6.       Miscellaneous.

a)     No Rights as Stockholder Until Exercise.  This Warrant does not entitle the Holder to any voting rights or other rights as a stockholder of the Company prior to the exercise hereof .

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b)      Loss, Theft, Destruction or Mutilation of Warrant. The Company covenants that upon receipt by the Company of evidence reasonably satisfactory to it of the loss, theft, destruction or mutilation of this Warrant or any stock certificate relating to the Warrant Shares, and in case of loss, theft or destruction, of indemnity or security reasonably satisfactory to it (which, in the case of the Warrant, shall not include the posting of any bond), and upon surrender and cancellation of such Warrant or stock certificate, if mutilated, the Company will make and deliver a new Warrant or stock certificate of like tenor and dated as of such cancellation, in lieu of such Warrant or stock certificate.

c)      Saturdays, Sundays, Holidays, etc.  If the last or appointed day for the taking of any action or the expiration of any right required or granted herein shall not be a Business Day, then, such action may be taken or such right may be exercised on the next succeeding Business Day.

d)      Authorized Shares.

The Company covenants that, during the period the Warrant is outstanding, it will reserve from its authorized and unissued Common Stock one hundred (100%) of the number of shares to provide for the issuance of the Warrant Shares upon the exercise of any purchase rights under this Warrant. In case such amount of Common Stock is reasonably considered potentially insufficient, the Company shall call and hold a special meeting to increase the number of authorized common stock. Management of the Company shall recommend to shareholders to vote in favor of increasing the number of authorized common stock and shall also vote all of its shares in favor of increasing the number of common shares authorized.

 The Company further covenants that its issuance of this Warrant shall constitute full authority to its officers who are charged with the duty of executing stock certificates to execute and issue the necessary certificates for the Warrant Shares upon the exercise of the purchase rights under this Warrant.  The Company will take all such reasonable action as may be necessary to assure that such Warrant Shares may be issued as provided herein without violation of any applicable law or regulation, or of any requirements of the Trading Market upon which the Common Stock may be listed.  The Company covenants that all Warrant Shares which may be issued upon the exercise of the purchase rights represented by this Warrant will, upon exercise of the purchase rights represented by this Warrant, be duly authorized, validly issued, fully paid and nonassessable and free from all taxes, liens and charges created by the Company in respect of the issue thereof (other than taxes in respect of any transfer occurring contemporaneously with such issue).

Except and to the extent as waived or consented to by the Holder, the Company shall not by any action, including, without limitation, amending its certificate of incorporation or through any reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms of this Warrant, but will at all times in good faith assist in the carrying out of all such terms and in the taking of all such actions as may be necessary or appropriate to protect the rights of Holder as set forth in this Warrant against impairment.  Without limiting the generality of the foregoing, the Company will (i) not increase the par value of any Warrant Shares above the amount payable therefor upon such exercise immediately prior to such increase in par value, (ii) take all such action as may be necessary or appropriate in order that the Company may validly and legally issue fully paid and nonassessable Warrant Shares upon the exercise of this Warrant and (iii) use commercially reasonable efforts to obtain all such authorizations, exemptions or consents from any public regulatory body having jurisdiction thereof, as may be, necessary to enable the Company to perform its obligations under this Warrant.

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Before taking any action which would result in an adjustment in the number of Warrant Shares for which this Warrant is exercisable or in the Exercise Price, the Company shall obtain all such authorizations or exemptions thereof, or consents thereto, as may be necessary from any public regulatory body or bodies having jurisdiction thereof.

e)      Jurisdiction. All questions concerning the construction, validity, enforcement and interpretation of this Warrant shall be determined in accordance with the provisions of the Subscription Agreement.

f)      Restrictions.  The Holder acknowledges that the Warrant Shares acquired upon the exercise of this Warrant, if not registered, will have restrictions upon resale imposed by state and federal securities laws.

g)      Nonwaiver and Expenses.  No course of dealing or any delay or failure to exercise any right hereunder on the part of Holder shall operate as a waiver of such right or otherwise prejudice Holder’s rights, powers or remedies, notwithstanding the fact that all rights hereunder terminate on the Termination Date.  If the Company willfully and knowingly fails to comply with any provision of this Warrant, which results in any material damages to the Holder, the Company shall pay to Holder such amounts as shall be sufficient to cover any costs and expenses including, but not limited to, reasonable attorneys’ fees, including those of appellate proceedings, incurred by Holder in collecting any amounts due pursuant hereto or in otherwise enforcing any of its rights, powers or remedies hereunder.

h)      Notices.  Any notice, request or other document required or permitted to be given or delivered to the Holder by the Company shall be delivered in accordance with the notice provisions of the Subscription Agreement.

i)      Limitation of Liability.  No provision hereof, in the absence of any affirmative action by Holder to exercise this Warrant to purchase Warrant Shares, and no enumeration herein of the rights or privileges of Holder, shall give rise to any liability of Holder for the purchase price of any Common Stock or as a stockholder of the Company, whether such liability is asserted by the Company or by creditors of the Company.

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j)      Remedies.  The Holder, in addition to being entitled to exercise all rights granted by law, including recovery of damages, will be entitled to specific performance of its rights under this Warrant.  The Company agrees that monetary damages would not be adequate compensation for any loss incurred by reason of a breach by it of the provisions of this Warrant and hereby agrees to waive and not to assert the defense in any action for specific performance that a remedy at law would be adequate.

k)      Successors and Assigns.  Subject to applicable securities laws, this Warrant and the rights and obligations evidenced hereby shall inure to the benefit of and be binding upon the successors of the Company and the successors and permitted assigns of Holder.  The provisions of this Warrant are intended to be for the benefit of all Holders from time to time of this Warrant and shall be enforceable by the Holder or holder of Warrant Shares.

l)      Amendment.  This Warrant may be modified or amended or the provisions hereof waived with the written consent of the Company and Holders holding Warrants at least equal to a majority of the Warrant Shares issuable upon exercise of all then outstanding Warrants.

m)      Severability.  Wherever possible, each provision of this Warrant shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Warrant shall be prohibited by or invalid under applicable law, such provision shall be ineffective to the extent of such prohibition or invalidity, without invalidating the remainder of such provisions or the remaining provisions of this Warrant.

n)      Headings.  The headings used in this Warrant are for the convenience of reference only and shall not, for any purpose, be deemed a part of this Warrant.

o)    Assumption.  As long as any of the Warrants remain issued and outstanding, it will not consummate any consolidation, merger, sale, transfer or other disposition of assets or shares, including any form of share exchange, unless prior to, or simultaneously with, the consummation thereof,  the successor corporation resulting from such consolidation or merger (if other than the Company), or the corporation purchasing or otherwise acquiring the assets of the Company, agrees to assume the Company’s continuing obligations hereunder

********************

IN WITNESS WHEREOF, the Company has caused this Warrant to be executed by its officer thereunto duly authorized as of the date first above indicated.

PAXTON ENERGY, INC.

By:__________________________________________

     Name: Charles Volk

     Title: Chief Executive Officer

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NOTICE OF EXERCISE

TO:           PAXTON ENERGY, INC.

(1)      The undersigned hereby elects to purchase ________ Warrant Shares of the Company pursuant to the terms of the attached Warrant (only if exercised in full), and tenders herewith payment of the exercise price in full, together with all applicable transfer taxes, if any.

(2)      Payment shall take the form of lawful money of the United States.

(3)      Please issue a certificate or certificates representing said Warrant Shares in the name of the undersigned or in such other name as is specified below:

_______________________________

The Warrant Shares shall be delivered to the following DWAC Account Number or by physical delivery of a certificate to:

_______________________________

_______________________________

_______________________________

(4)  Accredited Investor.  The undersigned is an “accredited investor” as defined in Regulation D promulgated under the Securities Act of 1933, as amended.

[SIGNATURE OF HOLDER]

Name of Investing Entity: _______________________________________________________________________

Signature of Authorized Signatory of Investing Entity: _________________________________________________

Name of Authorized Signatory: ___________________________________________________________________

Title of Authorized Signatory: ____________________________________________________________________

Date: _______________________________________________________________________________________

ASSIGNMENT FORM

(To assign the foregoing warrant, execute

this form and supply required information.

Do not use this form to exercise the warrant.)

FOR VALUE RECEIVED, [____] all of or [_______] shares of the foregoing Warrant and all rights evidenced thereby are hereby assigned to

_______________________________________________ whose address is

_______________________________________________________________.

_______________________________________________________________

Dated:  ______________, _______

Holder’s Signature:	_____________________________
Holder’s Address:	_____________________________
	_____________________________

Signature Guaranteed:  ___________________________________________

NOTE:  The signature to this Assignment Form must correspond with the name as it appears on the face of the Warrant, without alteration or enlargement or any change whatsoever, and must be guaranteed by a bank or trust company.  Officers of corporations and those acting in a fiduciary or other representative capacity should file proper evidence of authority to assign the foregoing Warrant.

EX-4.04

Exhibit 4.04

MORTGAGE, ASSIGNMENT,   SECURITY AGREEMENT AND FINANCING STATEMENT  BY PAXACQ, INC. AND PAXTON  PAXTON ENERGY, INC.   * * * * * * *
* *

BE IT KNOWN, that on the dates indicated on the signature pages, but to be effective as of ______, 2011 (the “Effective Date”), before the respective undersigned Notary(ies) Public(s), duly commissioned and qualified in and for the respective jurisdiction referenced on the signature page below therefor, and in the presence of the undersigned respective competent witnesses, personally came and appeared:

PaxAcq, Inc., a Louisiana corporation, with a mailing address of  8550 United Plaza Boulevard, Building II, Suite 305, Baton Rouge, Louisiana 70809, the last four digits of its U.S. federal taxpayer identification number being _______, appearing herein through its ____________________, ___________________, duly authorized hereunto, pursuant to resolutions of the board of directors, a copy of which is attached hereto as Exhibit 2 (“Paxton”), and

Paxton Energy, Inc., a Nevada corporation, with a mailing address of P.O. Box 1148, Zephyr Cove, NV 89448-1148, the last four digits of its U.S. federal taxpayer identification number being 9613, appearing herein through its Chief Executive Officer, Charles F. Volk, Jr., duly authorized hereunto, pursuant to resolutions of the board of directors, a copy of which is attached hereto as Exhibit 3 (“Paxton” and together with PaxAcq referred to herein as the “Borrower”).

The persons whose names and mailing addresses set forth on the Schedule A and appearing herein through its duly authorized representative, (singly a “Lender” and collectively the “Lenders”), who declared and agreed as follows:

Recitals

A. The Borrower is or will be indebted unto the Lender for loans made or to be made pursuant to the terms of a certain several Secured Convertible Debentures (as amended, supplemented or restated from time to time, the "Debentures") dated as of May 5, 2011, by and between the Borrower and Lenders which Debentures were issued pursuant to a separate Subscription Agreement (“Subscription Agreement”)

B. In order to secure the full and punctual payment and performance of the Indebtedness (as hereinafter defined), the Borrower has agreed to execute and deliver this Mortgage and to grant a mortgage lien, collateral assignment and continuing security interest in and to the Collateral (as hereinafter defined).

ARTICLE 1

General Terms

Section 1.1 Definitions.  As used in this Mortgage, the terms “Borrower”, “Lender” and “Debentures” and “Subscription Agreement” shall have the meanings indicated above.  As used in this Mortgage, the following additional terms shall have the meanings indicated:

“Accounts” means all “accounts” (as defined in the UCC) now owned or hereafter acquired by the Borrower (including accounts resulting from the sale of Hydrocarbons at the well head) now or hereafter arising in connection with the sale or other disposition of any Hydrocarbons, and all revenues and rights to payment relating to the Borrower’s services as operator of any Mineral Properties, and further means all rights accrued, accruing or to accrue to receive payments of any and every kind under all Contracts, including bonuses, rents and royalties which are payable out of or measured by production of any Hydrocarbons or are otherwise attributable to the Mineral Properties and all other revenues owing to the Borrower in connection with the Mineral Properties, including revenues from the treatment, transportation or storage of Hydrocarbons for third parties.

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“Advances” has the meaning set forth in Section 4.20 (“Advances by Lender”) of this Mortgage.

“As-Extracted Collateral” means all “as-extracted collateral” (as defined in the UCC) now owned or hereafter acquired by the Borrower related to, allocable to or produced, obtained or secured from the Mineral Properties.

“Collateral Documents” means collectively all mortgages, deeds of trust, pledges, security agreements and other documents by which the Borrower grants liens and security interests in immovable or movable property to the Lender to secure repayment of the Indebtedness.

“Contracts” means all contracts, operating agreements, farm-out or farm-in agreements, sharing agreements, limited or general partnership agreements, area of mutual interest agreements, mineral purchase agreements, contracts for the sale, exchange, transportation or processing of Hydrocarbons, rights-of-way, casements, surface leases, salt water disposal agreements, service contracts, permits, franchises, licenses, pooling or unitization agreements, unit designations and pooling orders now in effect or hereafter entered into by the Borrower affecting any of the Mineral Properties, Equipment or Hydrocarbons now or hereafter covered hereby, or which are useful or appropriate in drilling for, producing, treating, handling, storing, transporting or marketing oil, gas or other minerals produced from any lands affected by the Mineral Properties.

“Equipment” means all equipment now owned or hereafter acquired by the Borrower and now or hereafter located on or used or held for use in connection with the Mineral Properties or in connection with the operation thereof or the treating, handling, storing, transporting, processing, purchasing, exchanging or marketing of Hydrocarbons, including all wells, rigs, platforms, constructions, extraction plants, facilities, gas systems (for gathering, treating, injection and compression), water systems (for treating, disposal and injection), compressors, casing, tubing, rods, flow lines, pipelines, derricks, tanks, separators, pumps, machinery, tools and all other movable property and fixtures now or hereafter located upon and dedicated to be used (or held for use) in connection with any of the Mineral Properties, together with all additions, accessories, parts, attachments, special tools and accessions now and hereafter affixed thereto or used in connection therewith, and all replacements thereof and substitutions therefor.

“Event of Default” shall mean the occurrence of an Event of Default under the Debentures.

“General Intangibles” means all “general intangibles” (as defined in the UCC) now owned or hereafter acquired by the Borrower related to the Mineral Properties, the Equipment or the Hydrocarbons, the operation of the Mineral Properties or the Equipment (whether the Borrower is operator or non-operator), or the treating, handling, storing, transporting, processing, purchasing, exchanging or marketing of Hydrocarbons, or under which the proceeds of Hydrocarbons arise or are evidenced or governed, including (i) all contractual rights and obligations or indebtedness owing to the Borrower (other than Accounts) from whatever source arising in connection with the sale or other disposition of any Hydrocarbons, including all rights to payment owed or received by the Borrower pursuant to a “take-or-pay” provision or gas balancing arrangement, (ii) all Contracts and other general intangibles now or hereafter arising in connection with or resulting from Contracts, (iii) all insurance proceeds and unearned insurance premiums affecting all or any part of the Collateral, and (iv) all things in action, rights represented by judgments, claims arising out of tort and other claims relating to the Collateral, including the right to assert and otherwise to be the plaintiff and proper party of interest to commence and prosecute such action (whether as claims, counterclaims or otherwise, and whether involving matters arising from casualty, condemnation, indemnification, negligence, strict liability, other tort, contract or in any other manner).

“Hydrocarbons” mean all oil, gas, casinghead gas, condensate, distillate, other liquid and gaseous hydrocarbons, sulfur, and all other minerals, whether similar to the foregoing or not, produced, obtained or secured from or allocable to the Mineral Properties, and any products refined, processed, recovered or obtained therefrom, including oil in tanks.

“Indebtedness” shall mean all present and future amounts, liabilities and obligations of the Borrower to the Lender or to any successor or transferee thereof, whether said amounts, liabilities or obligations are liquidated or unliquidated, now existing or hereafter arising, including without limitation amounts, liabilities and obligations under and pursuant to the Debentures, in principal, interest, deferral and delinquency charges, prepayment premiums, costs and attorney's fees, as therein stipulated, and under and pursuant to all amendments, supplements and restatements to any of said documents.  The Indebtedness includes without limitation all amounts expended, advanced or incurred by the Lender, or for which the Borrower is otherwise obligated, under the terms of this Mortgage.

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“Lien” means any interest in property securing an obligation owed to, or a claim by, a Person other than the owner of the property, whether such interest is based on jurisprudence, statute or contract, and including the lien or security interest arising from a mortgage, encumbrance, privilege, pledge, security agreement, conditional sale or trust receipt or a lease, consignment or bailment for security purposes.  The term “Lien” shall include reservations, exceptions, encroachments, easements, servitudes, usufructs, rights-of-way, covenants, conditions, restrictions, leases and other title exceptions and encumbrances affecting property.  For the purposes of this Mortgage, the Borrower shall be deemed to be the owner of any property which it has accrued or holds subject to a conditional sale agreement, financing lease or other arrangement pursuant to which title to the property has been retained by or vested in some other Person for security purposes.

“Mineral Properties” means the oil, gas and mineral leases, mineral servitudes, subleases, farmouts, royalties, overriding royalties, net profits interests, production payments, operating rights and similar mineral interests and subleases and assignments of such mineral interests described in Exhibit A attached hereto and made a part hereof, whether such described interest of the Borrower may be presently owned or may be hereafter acquired, together with all interests of the Borrower in all other oil, gas and mineral interests and lands with which any of the Mineral Properties are now or hereafter may be pooled or unitized, in whole or in part, and all interests of the Borrower with respect to all unitization and pooling agreements and orders now or hereafter existing which are described in Exhibit A or which now or hereafter relate to the Mineral Properties, and all interests of the Borrower in agreements and rights now or hereafter in effect pertaining to the use or occupation of the surface of and subsurface depths under the land described either in Exhibit A or in the documents described in Exhibit A (or under any lands now or hereafter pooled or unitized therewith), and any other interests of the Borrower in, to or relating to all or any part of the land described either in Exhibit A or in the documents described in Exhibit A (or all or any part of the lands now or hereafter pooled or unitized therewith), and all extensions, renewals and corrections of any of the foregoing.

“Mortgage” means this Mortgage, Assignment, Security Agreement and Financing Statement, as amended or supplemented from time to time.

“Mortgaged Property” has the meaning set forth in Section 2.1 (“Hypothecation”) of this Mortgage.

 “Permitted Liens” means the Security Interests, and any other Liens in favor of the Lender  or permitted by the Lender in writing to be created or assumed or to otherwise exist on the Collateral (including the Liens permitted by the provisions of Section 4.2 (“Liens”) hereof).

“Person” means any individual, corporation, limited liability company, partnership, joint venture, association, joint stock company, trust, unincorporated organization, government or any agency or political subdivision thereof, or any other form of entity.

“Proceeds” means all cash and non-cash proceeds of, and all other profits, rentals or receipts, in whatever form, arising from the collection, sale, lease, exchange, assignment, licensing or other disposition of, or realization upon, Collateral, including all claims of the Borrower against third parties for loss of, damage to or destruction of, or for proceeds payable under, or unearned premiums with respect to, policies of insurance in respect of, any Collateral, and any condemnation or requisition payments with respect to any Collateral, and including proceeds of all such proceeds, in each case whether now existing or hereafter arising.

“Proceeds of Runs” has the meaning set forth in Section 2.3(“Assignment”) of this Mortgage.

"Security Interests" shall mean the mortgage lien, collateral assignment and security interests in the Collateral granted hereunder securing the Indebtedness.

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 “UCC” means the Uniform Commercial Code, Commercial Laws-Secured Transactions (Louisiana Revised Statutes 10:9-101 through 9-710) in the State of Louisiana, as amended from time to time; provided that if by reason of mandatory provisions of law, the perfection or the effect of perfection or non-perfection of the Security Interests in any Collateral is governed by the Uniform Commercial Code as in effect in a jurisdiction other than Louisiana, “UCC” means the Uniform Commercial Code as in effect in such other jurisdiction for purposes of the provisions hereof relating to such perfection or effect of perfection or non-perfection.

ARTICLE 2

Liens and Security Interests

Section 2.1 Hypothecation.  (a) In order to secure the full and punctual payment and performance of all present and future Indebtedness, the Borrower does by these presents specially mortgage, affect, hypothecate, pledge and assign unto and in favor of the Lender, the following described property, to-wit:

(1) The Mineral Properties, together with all rents, issues, profits, products and proceeds, whether now or hereafter existing or arising, from the Mineral Properties; and

(2) The Borrower’s rights in the improvements and other constructions now or hereafter located on the Mineral Properties, including the Equipment, to the extent (i) any such property should constitute or be deemed to constitute immovable property for the purposes of Louisiana law, including any buildings, platforms, wells, structures, towers, rigs or other immovable property or component parts thereof, or (ii) any such other property related to the Mineral Properties that is otherwise susceptible of mortgage pursuant to Louisiana Civil Code Article 3286 or Louisiana Mineral Code Article 203.

The descriptions of the Mineral Properties contained in Exhibit A are amplified by the explanations contained in Exhibit 1 attached hereto and made a part hereof.

All of the foregoing property and rights covered by and subject to this Mortgage are herein collectively referred to as the “Mortgaged Property.”

SUBJECT, however, to (i) the restrictions, exceptions, reservations, conditions, limitations and other matters, if any, set forth or specified in the specific descriptions of such properties and interests in Exhibit A, and (ii) the condition that the Lender shall not be liable in any respect for the performance of any covenant or obligation of the Borrower in respect of the Mortgaged Property.

The Mortgaged Property is to remain so specially mortgaged, affected and hypothecated unto and in favor of the Lender until the full and final payment or discharge of the Indebtedness, and the Borrower is herein and hereby bound and obligated not to sell or alienate the Mortgaged Property to the prejudice of this act.

(b)           In the event that the Borrower acquires additional undivided interests in some or all of the Mineral Properties, this Mortgage shall automatically encumber such additions or increases to the Borrower’s interest in the Mineral Properties without need of further act or document.  Further, in the event the Borrower becomes the owner of an interest in any part of the land described either in Exhibit A or in the documents described in Exhibit A or otherwise subject to or covered by the Mineral Properties, this Mortgage shall automatically encumber such ownership interest of the Borrower without need of further act or document.

Section 2.2 The Security Interests.  In order to secure the full and punctual payment and performance of all present and future Indebtedness, the Borrower hereby grants to the Lender a continuing security interest in and to all right, title and interest of the Borrower in, to and under the following property, whether now owned or existing or hereafter acquired or arising and regardless of where located (collectively, the “Collateral”):

(1) the Mineral Properties and Mortgaged Property;

(2) the Accounts;

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(3) the Hydrocarbons;

(4) the Equipment;

(5) the General Intangibles (including the Contracts);

(6) the As-Extracted Collateral;

(7) all engineering, seismic, reserve, production, accounting, title and legal data, reports and information and all books and records in any form including customer lists, credit files, computer programs, tapes, disks, punch cards, data processing software, transaction files, master files, printouts and other computer materials and records) of the Borrower pertaining to all or any of the items in clauses 1 through 6 above;

(8) all Proceeds and products of all or any of the Collateral described in clauses 1 through 7 above; and

(9) the Proceeds of Runs.

Section 2.3 Assignment.  To further secure the full and punctual payment and performance of all present and future Indebtedness, up to the maximum amount outstanding at any time and from time to time set forth in Section 2.5 (“Maximum Amount”) below, the Borrower does hereby absolutely, irrevocably and unconditionally assign, transfer, convey and deliver to the Lender all monies which accrue after 7:00 a.m. Central Time, U.S.A., on the Effective Date of this Mortgage, to the Borrower’s interest in the Mineral Properties and all present and future rents therefrom (which rents include without limitation all royalties, delay rentals, shut-in payments and other payments which are rentals under Title 31 of the Louisiana Revised Statutes) and all proceeds of the Hydrocarbons (which proceeds include without limitation all payments for Hydrocarbons not yet delivered, such as those received pursuant to “take or pay” arrangements) and of the products obtained, produced or processed from or attributable to the Mineral Properties now or hereafter (which monies, rents and proceeds are referred to herein as the “Proceeds of Runs”).  The Borrower hereby authorizes and directs all obligors of any Proceeds of Runs to pay and deliver to the Lender, upon request therefor by the Lender, all of the Proceeds of Runs accruing to the Borrower’s interest without further inquiry as to the rights of the Lender to receive the same.  The Lender hereby agrees that it will not make such request unless and until there is an occurrence of an Event of Default.  The Borrower agrees that such obligors shall have no responsibility to see to the application of any funds so paid to the Lender.

Section 2.4 Condemnation.  The Borrower hereby assigns to the Lender any and all awards that may be given or made in any proceedings by any legally constituted authority to condemn or expropriate the Collateral, or any part thereof, under power of eminent domain, and if there is such a condemnation or expropriation, the Lender may, at its election, either pay the net proceeds thereof toward the payment of the Indebtedness or pay the net proceeds thereof to the Borrower.

Section 2.5 Maximum Amount. (a) The maximum amount of the Indebtedness that may be outstanding at any time and from time to time that this Mortgage secures, including as a mortgage and as a collateral assignment, and including any Advances made and included within the Indebtedness, is ________________________________.

(b)           The Borrower acknowledges that this Mortgage secures all Indebtedness, whether such loans or advances made or incurred by the Lender or the Beneficiaries are optional or obligatory by the Lender or the Beneficiaries.  This Mortgage is and shall remain effective, even though the amount of the Indebtedness may now be zero or may later be reduced to zero, until all of the amounts, liabilities and obligations, present and future, comprising the Indebtedness have been incurred and are extinguished and a full and complete release of this Mortgage has been filed in the mortgage records for each parish in which any of the Mortgaged Property is located.

Section 2.6 Delivery of Transfer Orders.  Independent of the other provisions and authorities herein granted, the Borrower agrees to execute and deliver any and all transfer orders, letters in lieu thereof, division orders and other instruments that may be requested by the Lender or that may be required by any purchaser of any Hydrocarbons for the purpose of effectuating payment of the Proceeds of Runs to the Lender.  The Lender agrees, however, that it will not deliver such executed transfer orders, letters in lieu thereof or division orders unless and until there shall have occurred an Event of Default.  If under any existing sales agreements, other than division orders or transfer orders, any Proceeds of Runs are required to be paid by the purchaser to the Borrower so that under such existing agreements payment cannot be made of such Proceeds of Runs to the Lender, the Borrower’s interest in all Proceeds of Runs under such sales agreements and in all other Proceeds of Runs which for any reason may be paid to the Borrower after the occurrence of an Event of Default, when received by the Borrower, constitute trust funds in the Borrower’s hands and shall be immediately paid over to the Lender.

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Section 2.7 Change of Purchaser.  Should any Person now or hereafter purchasing or taking Hydrocarbons fail to make payment promptly to the Lender of the Proceeds of Runs upon the occurrence of an Event of Default, the Lender shall have the right to make, or to require the Borrower to make, a change of connection and the right to designate or approve the purchaser with whose facilities a new connection shall be made, and the Lender shall have no liability or responsibility in connection therewith so long as ordinary care is used in making such designation.

Section 2.8 Application.  All Proceeds of Runs from time to time in the hands of the Lender shall be applied by it toward the payment and prepayment of all Indebtedness at such times and in such manner as the Lender deems advisable, may be held by the Lender pending a resolution of any dispute as to the Lender’s right to collect such Proceeds of Runs, or may be delivered by the Lender to the Borrower without in any way reducing or paying the Indebtedness.

Section 2.9 Payment of Proceeds.  In the event that, for its convenience, the Lender should elect with respect to all or particular Mineral Properties or Contracts not to exercise immediately its right to receive Hydrocarbons or Proceeds of Runs after the occurrence of an Event of Default, then the purchasers or other Persons obligated to make such payment shall continue to make payment to the Borrower until such time as written demand has been made upon them by the Lender that payment be made direct to the Lender.  Such failure to notify such purchasers or other Persons shall not in any way waive, remit or release the right of the Lender to receive any payments not theretofore paid over to the Borrower before the giving of written notice.  In this regard, in the event payments are made direct to the Lender, and then, at the request of the Lender payments are, for a period or periods of time, paid to the Borrower, the Lender shall nevertheless have the right, effective upon written notice, to require future payments be again made to it.

ARTICLE 3

Representations and Warranties

The Borrower represents and warrants to the Lender that:

Section 3.1 Title.  The Collateral (including the Mineral Properties) is accurately, completely, adequately and sufficiently described herein and in Exhibit A as required by all applicable laws for this Mortgage to create a Lien on all of the Collateral.  The execution, delivery and performance of this Mortgage and the creation of the liens hereunder do not violate any provision of or constitute a default under any lease, operating agreement or other instrument affecting or comprising any of the Collateral or to which the Borrower is a party.  The Borrower represents and warrants to the Lender and Beneficiaries that (a) the Mineral Properties described in Exhibit A hereto are valid, subsisting leases and contracts, in full force and effect, (b) all producing wells located on the lands described in the documents described in Exhibit A (or under any lands now or hereafter pooled or unitized therewith) have been drilled, operated and produced in conformity with all applicable laws, rules and regulations of all regulatory authorities having jurisdiction, and are subject to no penalties on account of past production, and that such wells are in fact bottomed under and are producing from, and the well bores are wholly within the lands described in the documents described in Exhibit A (or in the case of wells located on properties unitized therewith, such unitized properties), (c) the Borrower, [to the extent of the interest specified in Exhibit A], has legal, valid and defensible title to each property right or interest constituting the Mineral Properties and the respective gross working interests and net revenue interests of the Borrower in and to the Hydrocarbons as set forth on Exhibit A hereto, and the Borrower’s percentage interests in the Mineral Properties, cash flow, net income and other distributions and in the cost of exploration, development and production, all as set forth in Exhibit A hereto, are true and correct in all material respects and accurately reflect the respective interests to which the Borrower is legally entitled, (d) the Borrower is not obligated, by virtue of any prepayment under any contract providing for the sale by the Borrower of Hydrocarbons which contains a “take or pay” clause or otherwise, to deliver Hydrocarbons at some future time without then or thereafter receiving full payment therefor, (e) there are no obligations under any Collateral that require the drilling of additional wells or operations to earn or to continue to hold any of the Collateral in force and effect except those under customary continuous operations provisions that may be found in one or more of the oil and gas and/or oil, gas and mineral leases or other instruments described on Exhibit A and (f) no agreement, contract or instrument set forth in Exhibit A contains any provision which would prevent the practical realization of the benefits of this Mortgage as to the Collateral, except to the extent that any of the Mineral Properties consists of leases granted by the State of Louisiana or agencies or political subdivisions thereof, which may require approval of this Mortgage by such governmental authority.  With respect to all wells existing on the date hereof, such shares of production and expenses are not subject to change (pursuant to non-consent provisions of operating agreements described in Exhibit A or otherwise) except, and only to the extent that, such changes are expressly described in Exhibit A.  The Borrower will warrant and forever defend title to the Collateral unto the Lender, against every person whomsoever lawfully claiming the same or any part thereof, and will maintain and preserve the Lien hereby created so long as any of the Indebtedness remains unpaid.

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Section 3.2 No Liens.  The Collateral is free from all Liens whatsoever, except for Permitted Liens.  Other than financing statements or other similar or equivalent documents or instruments with respect to the Security Interests and Permitted Liens, no financing statement, mortgage, security agreement or similar or equivalent document or instrument covering all or any part of the Collateral is on file or of record in any jurisdiction in which such filing or recording would be effective to perfect a Lien on such Collateral.  No Collateral is in the possession of any Person (other than the Borrower) asserting any claim thereto or security interest therein, except that the Lender or its designee may have possession of Collateral as contemplated hereby.

Section 3.3 Rents; Royalties.  All rents, royalties and other payments (except for those which are being contested in good faith and by appropriate proceedings and for which the Borrower has established adequate reserves and so long as the payment of same is not a condition to be met in order to maintain an oil, gas and/or other mineral lease of other agreement in force) due and payable under the Mineral Properties which are productive of oil and/or gas (or are included in units productive of oil and/or gas) and all other oil, gas and/or mineral leases, contracts and other agreements forming a part of the Collateral, have been and are being properly and timely paid, and the Borrower is not in default with respect to any obligations (and the Borrower is not aware of any default by any third party with respect to such third party’s obligations) under such leases, contracts and other agreements, or otherwise attendant to the ownership or operation of the Collateral, where such default could adversely affect the ownership or operation of the Collateral to which such obligations relate.  The Borrower is not currently accounting (and does not anticipate accounting) for any royalties, or overriding royalties or other payments out of production, on a basis (other than delivery in kind) where such payments are based other than on proceeds received by the Borrower from sale; the Borrower has advised the Lender in writing of situations, if any, where a contingent liability to so account may exist.

Section 3.4 Regulatory Matters.  All necessary regulatory filings have been properly made, and all environmental and other regulatory processes and requirements have been complied with, in connection with the issuance of the leases and the drilling, completion and operation of the wells on or attributable to the Mineral Properties, and the issuance and use of all rights of way and other surface uses necessary for the exploration, development and transportation to and from such wells, and all other operations related thereto.

Section 3.5 Consents and Preferential Rights.  There are no preferential purchase rights held by third parties affecting any part of the Collateral or rights held by third parties whose consent is required for  the assignment, conveyance, pledge or mortgage of any part of the Collateral (except for such consents as have been obtained), and further except to the extent that any of the Mineral Properties consists of leases granted by the State of Louisiana or agencies or political subdivisions thereof, which may require the approval of this Mortgage by such government authority.

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Section 3.6 Organizational Identification Number.  The organizational identification number assigned to PacAcq is ________________ and Paxton is  NV20041518144.

Section 3.7 Filing Location.  When UCC financing statement(s) have been filed for indexing in the Louisiana UCC records in the clerk of court of any parish in the State of Louisiana and with the Secretary of State of the State of Louisiana, the Security Interests shall constitute perfected security interests in the Collateral to the extent that a security interest therein may be perfected by filing pursuant to the UCC, prior to all other Liens and rights of others therein except for the Permitted Liens to the extent that such priority is afforded by the UCC.

ARTICLE 4

Covenants

Section 4.1 Taxes.  The Borrower will pay and discharge promptly when due all taxes, license fees, assessments and governmental charges or levies imposed upon it or upon its income or upon the Collateral or any part thereof (including production, severance, windfall profit, excise and other taxes assessed against or measured by the production of, or the value or proceeds of production of, Hydrocarbons; provided, however, the Borrower shall not be required to pay any such tax, assessment, charge or levy if the amount, applicability or validity thereof shall currently be contested in good faith by appropriate proceedings diligently conducted and if the contesting party shall have set up reserves therefor adequate under generally accepted accounting principles (provided that such reserves may be set up under generally accepted accounting principles).

Section 4.2 Liens.  The Borrower will not create, incur, assume or permit to exist any Lien on any portion of the Collateral, except for (i) the Security Interests hereof, (ii) taxes, assessments or governmental charges or levies if the same shall not at the time be delinquent or thereafter can be paid without penalty, or are being contested in compliance with the preceding Section 4.1 (“Taxes”), (iii) those imposed by law, such as carriers’, warehousemen’s and mechanics’ liens and other similar liens arising in the ordinary course of business would secure obligations not more than ninety (90) days past due or which are being contested in good faith by appropriate proceedings diligently conducted and for which adequate reserves shall have been set aside on its books under generally accepted accounting principles, (iv) utility easements, building restrictions, servitudes and such other encumbrances or charges against immovable property as are of a nature generally existing with respect to properties of a similar character as the Mortgaged Property and which do not in any material way affect the merchantability of the same or interfere with the use thereof and the business of the Borrower, (v) those reciprocal Liens arising under joint operating agreements that are customary in the oil, gas and mineral exploration and development business and that are entered into in the ordinary course of business and that are taken into account in computing the net revenue interests and working interests of the Borrower as set forth on Exhibit A, to the extent that such Liens do not materially impair the use of the property covered by such Lien for the purposes for which such property is held by the Borrower, and which amounts are not delinquent or which are being contested in good faith by appropriate proceedings with adequate reserves being set aside therefor on its books under generally accepted accounting principles and (vi) those consented to in writing by the Lender.

Section 4.3 Sale.  Except for (i) sales of severed Hydrocarbons in the ordinary course of the Borrower’s business, (ii) dispositions made in connection with a permitted (as provided below) release, surrender or abandonment of a lease, or (iii) in the absence of an Event of Default, collection of Accounts and General Intangibles, the Borrower will not sell, convey, lease or otherwise transfer or dispose of all or any portion of the Collateral.

Section 4.4 Compliance with Laws and Covenants.  The Borrower will observe and comply with all laws, statutes, codes, acts, ordinances, orders, judgments, decrees, injunctions, rules, regulations, certificates, franchises, permits, licenses, authorizations, directions and requirements of all federal, state, county, municipal and other governments, departments, commissions, boards, courts, authorities, officials and officers domestic or foreign, applicable to the Borrower or to the Collateral, except those being contested in good faith.

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Section 4.5 Operation of the Mortgaged Property.  Whether or not the Borrower is the operator of the Mortgaged Property, the Borrower will, at the Borrower’s own expense, (a) do all things necessary to keep unimpaired the Borrower’s rights in the Mortgaged Property (subject to any permitted abandonment provisions hereinbelow), (b) cause the lands described in Exhibit A to be maintained, developed, protected against drainage, and continuously operated for the production of hydrocarbons in a good and workmanlike manner as would a prudent operator, and in accordance with generally accepted practices and applicable operating agreements, and (c) cause to be paid, promptly as and when due and payable, all rentals and royalties payable in respect of the Mortgaged Property, and all expenses incurred in or arising from the operation or development of the Mortgaged Property.  The Borrower will observe and comply with all terms and provisions, express or implied, of the Mineral Properties, and all agreements and contracts of any type relating to the Mortgaged Property, in order to keep the same in full force and effect, including maintenance of productive capacity of each well or unit comprising the Mortgaged Property, and will not, without the prior written consent of the Lender, surrender, abandon or release (or otherwise reduce its rights under) any such lease, in whole or in part, so long as any well situated thereon (whether or not such well is located on the Mineral Properties), or located on any unit containing all or any part of such leases, is capable (or is subject to being made capable through drilling, reworking or other operations which it would be economically feasible to conduct) of producing hydrocarbons in commercial quantities (as determined without considering the effect of this Mortgage or the Indebtedness); provided, however, that the Borrower may, to the extent expressly required by the terms of any such lease under a “Pugh clause” or similar provision, or to the extent otherwise required by law, confirm to the lessor thereof that the lease has by its terms terminated as to any specified portion thereof on which no such well exists.  Without the express prior written consent of the Lender, the Borrower will not abandon or consent to the abandonment of any well producing from the Mortgaged Property (or properties unitized therewith) so long as such well is capable (or is subject to being made capable through drilling, reworking or other operations which it would be commercially feasible to conduct) of producing hydrocarbons in commercial quantities (as determined without considering the effect of this Mortgage or the Indebtedness but considering the cost of such drilling, reworking and other operations).  The Borrower will not without the express prior written consent of the Lender elect not to participate in a proposed operation on the Mortgaged Property where the effects of such election would be the forfeiture either temporarily (i.e., until a certain sum of money is received out of the forfeited interest) or permanently of any interest in the Mortgaged Property.

Section 4.5 Pooling and Unitization.  The Borrower has the right, and is hereby authorized, to pool or unitize all or any part of any tract of land described in Exhibit A, insofar as relates to the Mortgaged Property, with adjacent lands, leaseholds and other interests, when, in the reasonable judgment of the Borrower, it is necessary or advisable to do so in order to form a drilling unit to facilitate the orderly development of that part of the Mortgaged Property affected thereby, or to comply with the requirements of any law or governmental order or regulation relating to the spacing of wells or proration of the production therefrom; provided, however, that the Hydrocarbons produced from any unit so formed shall be allocated among the separately owned tracts or interests comprising the unit in proportion to the respective surface areas thereof; and provided further that the Borrower is not entitled to form any such unit without the written consent of the Lender (which consent shall not be unreasonably withheld) if the effect of such formation would be to decrease the amount of Hydrocarbons which would be subject to this Mortgage.  Any unit so formed may relate to one or more zones or horizons, and a unit formed for a particular zone or horizon need not conform in area to any other unit relating to a different zone or horizon, and a unit formed for the production of oil need not conform in area with any unit formed for the production of gas.  Immediately after formation of any such unit, the Borrower shall furnish to the Lender a true copy of the pooling agreement, declaration of pooling or other instrument creating such unit, in such number of counterparts as the Lender may reasonably request.  The interest in any such unit attributable to the Mortgaged Property (or any part thereof) included therein shall become a part of the Mortgaged Property and shall be subject to the Lien hereof in the same manner and with the same effect as though such unit and the interest of the Borrower therein were specifically described in Exhibit A.  The Borrower may enter into pooling or unitization agreements not hereinabove authorized only with the prior written consent of the Lender.

Section 4.6 Further Assurances.  The Borrower will keep the Lien of this Mortgage valid and unimpaired.  The Borrower will promptly (and in no event later than thirty (30) days after written notice from the Lender is received) (i) correct any defect, error or omission which may be discovered in the contents of this Mortgage or any financing statement relating thereto or in the execution or acknowledgment of this Mortgage or any financing statement; and (ii) execute, acknowledge, deliver and record such further instruments (including further security agreements, financing statements, continuation statements and assignments of accounts, contract rights, general intangibles and proceeds) and do such further acts as may be necessary, desirable or proper to carry out more effectively the purposes of this Mortgage and to more fully identify and subject to the Liens hereof any property intended to be covered hereby, including any renewals, additions, substitutions, replacements or accessions to the Collateral.

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Section 4.7 Notice of Changes.  The Borrower will not change its name, identity, state of organization, federal tax identification number or company structure in any manner unless it shall have given the Lender at least thirty (30) days’ prior written notice thereof.

ARTICLE 5

Remedies

Section 5.1 Remedies.  (a) Upon the happening of any Event of Default, the Lender may by written notice to the Borrower declare the entire principal amount of all Indebtedness then outstanding including interest accrued thereon to be immediately due and payable without presentment, demand, protest, notice of protest or dishonor or other notice of default of any kind, all of which are hereby expressly waived by the Borrower.

(b)           Upon the occurrence of any Event of Default, the Lender may take such action, without notice or demand, as it deems advisable to protect and enforce its rights against the Borrower and in and to the Collateral, including the following actions, each of which may be pursued concurrently or otherwise, at such time and in such order as the Lender may determine, in its sole discretion, without impairing or otherwise affecting the other rights and remedies of the Lender: (i) institute proceedings for the complete foreclosure of this Mortgage in which case the Collateral or any part thereof may be sold for cash or upon credit in one or more portions; or (ii) to the extent permitted and pursuant to the procedures provided by applicable law, institute proceedings for the partial foreclosure of this Mortgage for the portion of the Indebtedness then due and payable, subject to the continuing Lien of this Mortgage for the balance of the Indebtedness not then due; or (iii) institute an action, suit or proceeding in equity for the specific performance of any covenant, condition or agreement contained in this Mortgage or for a deficiency judgment; or (iv) apply for the appointment of a trustee, receiver, liquidator or conservator of the Collateral, without regard for the adequacy of the security for the Indebtedness and without regard for the solvency of the Borrower or of any person, firm or other entity liable for the payment of the Indebtedness; or (v) pursue such other remedies as the Lender may have under applicable law.

(c)           The proceeds or avails of any sale made under or by virtue of this Section, together with any other sums which then may be held by the Lender under this Mortgage, whether under the provisions of this Section or otherwise, shall be applied in such manner as the Lender, in its sole discretion, shall determine.

(d)           Upon any sale made under or by virtue of this Section, the Lender may bid for and acquire the Collateral or any part thereof and in lieu of paying cash therefor may make settlement for the purchase price by crediting upon the Indebtedness the net sales price after deducting therefrom the expenses of the sale and the costs of the action and any other sums which the Lender is authorized to deduct under this Mortgage.

Section 5.2 General Authority.  The Borrower hereby irrevocably appoints the Lender its agent and attorney in fact, with full power of substitution, in the name of the Borrower or the Lender, for the sole use and benefit of the Lender, but at the Borrower’s expense, to exercise, at any time and from time to time while an Event of Default has occurred and is continuing, all or any of the following powers with respect to all or any of the Collateral:

(i)           to endorse the name of the Borrower upon any check, draft or other instrument payable to the Borrower evidencing payment upon any Accounts or General Intangible,

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(ii)           to notify postal service authorities to change the address for delivery of the Borrower’s mail to a “lockbox” address designated and controlled by the Lender, and to receive, open and dispose of all mail addressed to the Borrower,

(iii)           to demand, sue for, collect, receive and give acquittance for any and all Accounts and other monies due or to become due for or as Collateral or by virtue thereof,

(iv)           to settle, compromise, compound, prosecute or defend any action or proceeding with respect to any of the Collateral, and

(v)           to extend the time of payment of any or all of the Collateral and to make any allowance and other adjustments with reference thereto.

The aforesaid mandate and power of attorney, being coupled with an interest, is irrevocable so long as any of the Indebtedness remains outstanding.

Section 5.3 Accounts and Contracts.  While an Event of Default has occurred and is continuing, (i) the Borrower will make no material change to the terms of any Account or Contract without the prior written permission of the Lender, and (ii) the Borrower upon request of the Lender will promptly notify (and the Borrower hereby authorizes the Lender so to notify) each account debtor in respect of any Account or General Intangible that such Collateral has been assigned to the Lender hereunder, and that any payments due or to become due in respect of such Collateral are to be made directly to the Lender or its designee.

Section 5.4 Sale.  Upon the occurrence of an Event of Default, the Lender may exercise all rights of a secured party under the UCC and other applicable law (including the Uniform Commercial Code as in effect in another applicable jurisdiction) and, in addition, the Lender may, without being required to give any notice, except as herein provided or as may be required by mandatory provisions of law, sell the Collateral or any part thereof at public or private sale, for cash, upon credit or for future delivery, and at such price or prices as the Lender may deem satisfactory.  The Lender may be the purchaser of any or all of the Collateral so sold at any public sale (or, if the Collateral is of a type customarily sold in a recognized market or is of a type which is the subject of widely distributed standard price quotations, at any private sale).  The Borrower will execute and deliver such documents and take such other action as the Lender deems necessary or advisable in order that any such sale may be made in compliance with law.  Upon any such sale the Lender shall have the right to deliver, assign and transfer to the purchaser thereof the Collateral so sold.  Each purchaser at any such sale shall hold the Collateral so sold to it absolutely and free from any claim or right of whatsoever kind, including any equity or right of redemption of the Borrower which may be waived, and the Borrower, to the extent permitted by law, hereby specifically waives all rights of redemption, stay or appraisal which it has or may have under any law now existing or hereafter adopted.  The Borrower agrees that ten (10) days’ prior written notice of the time and place of any sale or other intended disposition of any of the Collateral constitutes reasonable notification, except that shorter or no notice shall be reasonable as to any Collateral which is perishable or threatens to decline speedily in value or is of a type customarily sold on a recognized market.  The notice (if any) of such sale shall (1) in case of a public sale, state the time and place fixed for such sale, and (2) in the case of a private sale, state the day after which such sale may be consummated.  Any such public sale shall be held at such time or times within ordinary business hours and at such place or places as the Lender may fix in the notice of such sale.  At any such sale the Collateral may be sold in one lot as an entirety or in separate parcels, as the Lender may determine.  The Lender shall not be obligated to make any such sale pursuant to any such notice.  The Lender may, without notice or publication, adjourn any public or private sale or cause the same to be adjourned from time to time by announcement at the time and place fixed for the sale, and such sale may be made at any time or place to which the same may be so adjourned.  In case of any sale of all or any part of the Collateral on credit or for future delivery, the Collateral so sold may be retained by the Lender until the selling price is paid by the purchaser thereof, but the Lender shall not incur any liability in case of the failure of such purchaser to take up and pay for the Collateral so sold and, in case of any such failure, such Collateral may again be sold upon like notice.

Section 5.5 Set-Off.  Upon the occurrence of any Event of Default, the Lender shall have the right to set-off any funds of the Borrower in the possession of the Lender against any amounts then due by the Borrower to the Lender pursuant to the Mortgage.

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Section 5.6 Confession of Judgment.  For purposes of foreclosure under Louisiana executory process procedures, the Borrower hereby acknowledges the Indebtedness and confesses judgment in favor of the Lender for the full amount of the Indebtedness.

Section 5.7 Expenses.  The Borrower will pay all reasonable expenses, including reasonable attorneys’ fees, incurred in connection with the full protection and preservation of, and foreclosure, collection or other realization of or on, the Collateral or this Mortgage, or in connection with the enforcement of any of the Borrower’s obligations or the Lender’s rights and remedies set forth herein, whether or not suit or any foreclosure proceedings are filed.  All insurance expenses and all expenses of protecting, storing, warehousing, appraising, preparing for sale, handling, maintaining and shipping the Collateral, any and all excise, property, sales, and use taxes imposed by any federal, state or local authority on any of the Collateral, all expenses in respect of periodic appraisals and inspections of the Collateral to the extent the same may be requested from time to time, and all expenses in respect of the sale or other disposition thereof shall be borne and paid by the Borrower.

Section 5.8 Keeper.  In the event the Collateral, or any part thereof, is seized as an incident to an action for the recognition or enforcement of this Mortgage by executory process, ordinary process, sequestration, writ of fieri facias or otherwise, the Borrower and the Lender agree that the court issuing any such order shall, if petitioned for by the Lender, direct the applicable sheriff to appoint as a keeper of the Collateral, the Lender or any agent designated by the Lender or any person named by the Lender at the time such seizure is effected.  This designation is pursuant to Louisiana Revised Statutes 9:5131 through 5135 and 9:5136 through 5140.2, as the same may be amended, and the Lender shall be entitled to all the rights and benefits afforded thereunder.  The designation of keeper made herein shall not be deemed to require the Lender to provoke the appointment of such a keeper.

Section 5.9 Waivers.  The Borrower waives in favor of the Lender any and all homestead exemptions and other exemptions of seizure or otherwise to which the Borrower is or may be entitled under the constitution and statutes of the State of Louisiana insofar as the Collateral is concerned.  The Borrower further waives: (a) the benefit of appraisement as provided in Louisiana Code of Civil Procedure Articles 2332, 2336, 2723 and 2724, and all other laws conferring the same; (b) the notice of seizure required by Louisiana Code of Civil Procedure Articles 2293 and 2721; (c) the three days' delay provided by Louisiana Code of Civil Procedure Articles 2331 and 2722; and (d) the benefit of the other provisions of Louisiana Code of Civil Procedure Articles 2331, 2722 and 2723, not specifically mentioned above.

Section 5.10 Authentic Evidence.  Any and all declarations of facts made by authentic act before a notary public in the presence of two witnesses by a person declaring that such facts lie within his knowledge, shall constitute authentic evidence of such facts for the purpose of executory process.  The Borrower specifically agrees that such an affidavit by a representative of the Lender as to the existence, amount, terms and maturity of the Indebtedness and of a default thereunder shall constitute authentic evidence of such facts for the purpose of executory process.

Section 5.11 Assemble Collateral.  For the purpose of enforcing any and all rights and remedies under this Mortgage the Lender may (i) require the Borrower to, and the Borrower agrees that it will, at its expense and upon the request of the Lender, forthwith assemble all or any part of the Collateral as directed by the Lender and make it available at a place designated by the Lender which is, in its opinion, reasonably convenient to the Lender and the Borrower, whether at the premises of the Borrower or otherwise, and Lender shall be entitled to specific performance of this obligation, (ii) to the extent permitted by applicable law of this or any other state, enter, with or without process of law and without breach of the peace, any premise where any of the Collateral is or may be located, and without charge or liability to it seize and remove such Collateral from such premises, (iii) have access to and use the Borrower’s books and records relating to the Collateral, and (iv) prior to the disposition of the Collateral, store or transfer it without charge in or by means of any storage or transportation facility owned or leased by the Borrower, process, repair or recondition it or otherwise prepare it for disposition in any manner and to the extent the Lender deems appropriate and, in connection with such preparation and disposition, use without charge any trademark, trade name, copyright, patent or technical process used by the Borrower.

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ARTICLE 6

Miscellaneous

Section 6.1 Notices. Any notice or demand which, by provision of this Agreement, is required or permitted to be given or served by the Lender to or on the Borrower shall be deemed to have been sufficiently given and served for all purposes (if mailed) three calendar days after being deposited, postage prepaid, in the United States mail, registered or certified mail, or (if delivered by express courier) one Business Day after being delivered to such courier, or (if delivered in person) the same day as delivery, in each case addressed (until another address or addresses is given in writing by the Borrower to the Lender) as follows:

PaxAcq, Inc.
Attention: Stephen Spalding, CFO
Mailing Address:	P.O. Box 1148
	Zephyr Cove, NV 89448-1148
Courier Address:	295 Highway 50, Ste 2
	Stateline, NV 89449
Paxton Energy, Inc.
Attention: Stephen Spalding, CFO
Mailing Address:	P.O. Box 1148
	Zephyr Cove, NV 89448-1148
Courier Address:	295 Highway 50, Ste 2
	Stateline, NV 89449
With a copy to:
	James E. Burden, Esq.
	275 Battery St Ste 2600
	San Francisco, CA 94111-3356

Any notice or demand which, by any provision of this Agreement, is required or permitted to be given or served by the Borrower to or on the Lender shall be deemed to have been sufficiently given and served for all purposes (if mailed) three calendar days after being deposited, postage prepaid, in the United States mail, registered or certified mail, or (if delivered by express courier) one Business Day after being delivered to such courier, or (if delivered in person) the same day as delivery, in each case addressed (until another address or addresses are given in writing by the Lender to the Borrower) at the address provided in Schedule A, provided that if a Representative is appointed pursuant to Section 6.15 the address shall be that of the Representative.

Section 6.2 Amendment.  Neither this Mortgage nor any provisions hereof may be changed, waived, discharged or terminated orally or in any manner other than by an authentic instrument in writing signed by the party against whom enforcement of the change, waiver, discharge or termination is sought.

Section 6.3 Invalidity.  In the event that any one or more of the provisions contained in this Mortgage 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 Mortgage.

Section 6.4 Waivers.  No course of dealing on the part of the Lender, its officers, employees, consultants or agents, nor any failure or delay by the Lender with respect to exercising any of its rights, powers or privileges under this Mortgage shall operate as a waiver thereof.

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Section 6.5 Cumulative Rights.  The rights and remedies of the Lender under this Mortgage and the Collateral Documents shall be cumulative, and the exercise or partial exercise of any such right or remedy shall not preclude the exercise of any other right or remedy.

Section 6.6 Titles of Articles, Sections and Subsections.  All titles or headings to articles, sections, subsections or other divisions of this Mortgage or the exhibits hereto are only for the convenience of the parties and shall not be construed to have any effect or meaning with respect to the other content of such articles, sections, subsections or other divisions, such other content being controlling as to the agreement between the parties hereto.

Section 6.7 Singular and Plural.  Words used herein in the singular, where the context so permits, shall be deemed to include the plural and vice versa.  The definitions of words in the singular herein shall apply to such words when used in the plural where the context so permits and vice versa.

Section 6.8 Termination.  Upon full and final payment and performance of the Indebtedness, this Mortgage shall terminate, and the Lender shall pay to the Borrower all amounts then remaining in the possession of the Lender from collections on or proceeds of the Collateral.  Upon request of the Borrower, the Lender shall execute and deliver to the Borrower at the Borrower’s expense such termination statements as the Borrower may reasonably request to evidence such termination.

Section 6.9 Successors and Assigns.  All covenants and agreements contained by or on behalf of the Borrower in this Mortgage shall bind its successors and assigns and shall inure to the benefit of the Lender and its successors and assigns. The Borrower may not assign or transfer its rights or obligations under this Mortgage without the Lender’s prior written consent.  The Lender may not assign or transfer its rights or obligations under this Mortgage without the Borrower’s prior written consent.

Section 6.10 Governing Law.  This Mortgage is made under and shall be construed in accordance with and governed by the laws of the United States of America and the State of Louisiana.

Section 6.11 Certificates.  The production of mortgage, conveyance, tax research other certificates is waived by consent, and the Borrower and the Lender agree to hold me, Notary, harmless for failure to procure and attach same.

Section 6.12 No Paraph.  The Borrower and the Lender acknowledge that no promissory note or other instrument has been presented to the undersigned Notary Public to be paraphed for identification herewith.

Section 6.14 Counterparts.  This Mortgage may be executed in any number of counterparts, each of which will for all purposes be deemed to be an original.

Section 6.15  Majority in Interest Action/Representative Appointment.  The Lenders holding 51% of the Principal Amount of the then outstanding Debentures constituting a portion of Indebtedness secured hereby (“Majority in Interest”) shall have the right to (i) take any and all actions pursuant to this Agreement, including the amendment, or waiver any provision of this Agreement or (ii) designate a person, who need not be a lender, to act on behalf of all Lenders hereby in connection with this Agreement and take any action on or behalf of Lenders as set forth in this Agreement, including the amendment or waiver of any provision of this Agreement.

Section 6.16  Effectiveness of Security Interest upon Subsequent Acquisition.  Until the Mineral Properties are acquired by Borrower the security interests provided for herein are not effective.  Upon such acquisition Borrower shall promptly do all things to perfect such security interest provided for herein.  Any failure herein, after such acquisition, shall be deemed a default of a covenant under the Debentures and Borrower acknowledges to such extent the Debentures shall be deemed amended.

[Remainder of page intentionally left blank; signature pages follow]

14

Schedule

Lenders

Name Address

Additional Filing Jurisdictions

UNITED STATES OF AMERICA

STATE OF ______________________

COUNTY/PARISH OF _____________

THUS DONE AND PASSED in the jurisdiction listed immediately above on the ______ day of __________________, 2011 by the Borrower before me, Notary, in the presence of the undersigned witnesses who hereunto sign their names with the Borrower and me, Notary, after due reading of the whole.

WITNESSES:	BORROWER:
	PAXACQ, INC.,
	a Louisiana corporation
_______________________________	By: __________________________________
Name: __________________________	Name: ________________________________
(Please Print)	Title: _________________________________
_______________________________
Name: __________________________
(Please Print)

______________________________________________

_______________________________, NOTARY PUBLIC

My Commission expires: _________________________

Notarial Commission Number: _____________________

UNITED STATES OF AMERICA

STATE OF ______________________

COUNTY/PARISH OF _____________


THUS DONE AND PASSED in the jurisdiction listed immediately above on the ______ day of __________________, 2011 by the Borrower before me, Notary, in the presence of the undersigned witnesses who hereunto sign their names with the Borrower and me, Notary, after due reading of the whole.

WITNESSES:	BORROWER:
	PAXTON ENERGY, INC.,
	a Nevada corporation
_______________________________	By:  _________________________________
Name: __________________________	Name:  _______________________________
(Please Print)	Title:  ________________________________
_______________________________
Name: __________________________
(Please Print)

_____________________________________________

_______________________________, NOTARY PUBLIC

My Commission expires: _________________________

Notarial Commission Number: _____________________

EXHIBIT A

TO

MORTGAGE, ASSIGNMENT,

SECURITY AGREEMENT AND FINANCING STATEMENT

Mineral Properties

A 70% of 8/8ths working interest and a 51.975% of 8/8ths net revenue interest in that Oil and Gas Lease of Submerged Lands, effective as of July 1, 2010, issued  under the Outer Continental Shelf Lands Act, by the United States of America, Department of the Interior, Minerals Management Service (Gulf of Mexico Region), as Lessor, to Montecito Offshore, L.L.C., as Lessee, bearing Serial Number OCS-G 33597, covering approximately 546.875000 acres, described as follows:

NE1/4NE1/4; NE1/4NE1/4SE1/4; E1/2SE1/4NE1/4 of Block 179, Vermillion Area, OCS Leasing Map, Louisiana Map No. 3.

Subject to the terms and provisions of the Lease and the Stipulations set forth in Sale 213 Lease Addendum – RS20, which are part of the Lease and supersede any inconsistent provision of such Lease.

EXHIBIT 1

TO

MORTGAGE, ASSIGNMENT,

SECURITY AGREEMENT AND FINANCING STATEMENT

Introduction to Description of Mineral Properties

The Borrower and the Lender hereby agree and affirm that this Introduction to Description of Properties is an amplification and explanation of the terminology, format and information contained in Exhibit A and that this instrument shall be construed as a whole with reference to the entirety of its provisions (including all Exhibits).

1.           This instrument covers the Borrower’s entire interest in each of the mineral servitudes, mineral leases, mineral royalties and other mineral rights described in Exhibit A, as now owned or as hereafter acquired.  The inclusion of the Borrower’s “Revenue Interests,” “Working Interests” and undivided leasehold interests, by the listing of percentage, decimal or fractional numbers or otherwise, as well as the inclusion of depth limitations, spacing unit designations and agreements, well names and well arabic numbers, are in some instances for purposes of certain representations of the Borrower contained in this instrument and are generally for descriptive purposes.  The inclusion (or the inaccuracy thereof) of this information is not in any way a limitation or restriction on the interest of the Borrower being subjected to the lien and encumbrance of this instrument.  In the event that the Borrower acquires additional undivided interests in some or all of such mineral rights, this Mortgage shall automatically encumber such additions or increases to the Borrower’s interest in such mineral rights without need of further act or document.

2.           This instrument is intended to cover the entire interest of the Borrower in any lease described in Exhibit A.  Reference is made to the land descriptions contained in the documents of title recorded as described in Exhibit A.

3.           References in Exhibit A to instruments on file in the public records are made for all purposes.  Unless provided otherwise, all recording references in Exhibit A are to the official conveyance records of the parish or parishes in which the mortgaged property is located and in which records such documents are or in the past have been customarily recorded, whether Conveyance Records, Deed Records, Oil and Gas Records, Mineral Lease Records, Oil and Gas Lease Records or other records.

4.           A statement herein that a certain interest described herein is subject to the terms of certain described or referred to agreements, instruments or other matters shall not operate to subject such interest to any such agreement, instrument or other matter except to the extent that such agreement, instrument or matter is otherwise valid and presently subsisting nor shall such statement be deemed to constitute a recognition by the parties hereto that any such agreement, instrument or other matter is valid and presently subsisting or binding against the Lender.

EXHIBIT 2

TO

MORTGAGE, ASSIGNMENT,

SECURITY AGREEMENT AND FINANCING STATEMENT

CERTIFIED RESOLUTIONS OF PAXACQ, INC.

[See Attached.]

EXHIBIT 3

TO

MORTGAGE, ASSIGNMENT,

SECURITY AGREEMENT AND FINANCING STATEMENT

CERTIFIED RESOLUTIONS OF PAXTON ENERGY, INC.

[See Attached.]

SCHEDULE "A''
Client	Address
Alva Terry Staples	6705 E. Dorado Pl Greenwood Village CO 80111
Brio Capital	401 East 34th St Suite South 33c, NY NY 10016
Chris Wrolstad	1601 Arapahoe 4th Floor Denver CO 80202
Ellen J Ossello	1601 Arapahoe 4th Floor Denver CO 80202
E-R Equities	600 Central Avenue, Suite 365, Highland Park IL 60035
Gianna Ossello	1601 Arapahoe 4th Floor Denver CO 80202
Greg Merrill
Gregory G Sauber	1124 S . Gilpin St Denver CO 80210
Gregory J Erigero	29 Nunes Drive Novato, CA 94945
H Leigh Severance	14282 W. Caley Ave Aurora, CO 80016
H Leigh Severance Profit Sharing Plan	14282 W. Caley Ave Aurora, CO 80016
H Leigh Severance Profit Sharing Trust	14282 W. Caley Ave Aurora, CO 80016
Jennifer J Bishop Trust	8237 Swadley CT Arvada, CO 80005
John F Dexter	1876 Bocale CT Las Vegas NV 89123
John Huemoeller	1486 Quail CT, Golden CO 80403
White Sand	339 Collingwood San Francisco CA 94114
Gemini Strategies, LLC	619 South Vulcan Suite 203 Encinitas, CA 92024
Mark Herman	6940 NILE CT ARVADA, CO 80007
Mark Huemoeller	1486 Quail CT, Golden CO 80403
Micropipe	301 Mission Ave Ste 209 Oceanside CA 92054
Mike Barish
Mike L Conn	2182 East Terraridge Highlnd Rch CO 80126
Nextview Additional
Next View Capital LP	180 Crestview Drive Deerfield IL 60015
Next View Partners LLC Defined Benefit Pension Plan	180 Crestview Drive Deerfield IL 60015
Nicholas Ossello	1601 Arapahoe 4th Floor Denver CO 80202
Paul W Lewis	1930 Clover St, Rochester NY 14618
Daniel S & Patrica M Perkins	55 landmark Drive Long Lake MN 55356
Reed Madison	1601 Arapahoe 4th Floor Denver CO 80202
Robert E Wolta	5446 W 100th PL., Westminster, CO 80020
Rodney Dir	515 W Center Street, Visalia CA 93201
Ronald Sparkman	4737 Ponderosa Trail Littleton, CO 80125
Steve Ossello	1601 Arapahoe 4th Floor Denver CO 80202
W&O Enterprises, LLC	1601 Arapahoe St 4th Fl, Denver CO 80202

EX-99.1

Exhibit 99.1

Paxton Energy Closes on Bridge Financing

SAN FRANCISCO, CA--(Marketwire - 05/06/11) - Paxton Energy, Inc. (OTC.BB:PXTE - News) (Paxton), an energy turnaround company engaged in the acquisition, exploration, development and drilling of oil and natural gas properties, is pleased to announce that on May 5, 2011, the company completed a private placement of $2.55 million. The placement agent for the offering was Buckman, Buckman & Reid, Inc., a New Jersey based registered broker-dealer member of FINRA/SIPC. This offering was made to Accredited Investors pursuant to Regulation D.

The offering price for each unit of the placement was $30,000.  Each unit consisted of a $30,000 note and 200,000 warrants. Each note will mature one year from the date of the closing and will bear interest at 9% per annum. The warrants are exercisable for a period of five years at an exercise price of $0.30 per share. The maximum gross proceeds from the sale of the units offered was $2,550,000. Net proceeds will be used for acquisition, with the balance, if any, for working capital and other general corporate purposes.

About Paxton Energy, Inc.

Paxton engages in the acquisition, exploration, development and drilling of oil and natural gas properties. Paxton is an energy turnaround company whose strategy is to acquire cash flow producing properties with proven reserves, develop the fields by reworking existing wells and drilling new wells. Paxton was founded in 2004 and is based in Stateline, Nevada.

Cautionary Note to U.S. Investors

Effective January 1, 2010, the United States Securities and Exchange Commission (SEC) now permits oil and gas companies, in their filings with the SEC, to disclose not only "proved" reserves (i.e., quantities of oil and gas that are estimated to be recoverable with a high degree of confidence), but also "probable" reserves (i.e., quantities of oil and gas that are as likely as not to be recovered) as well as "possible" reserves (i.e., additional quantities of oil and gas that might be recovered, but with a lower probability than probable reserves). As noted above, statements of reserves are only estimates and may not correspond to the ultimate quantities of oil and gas recovered. Any reserve estimates provided in this press release that are not specifically designated as being estimates of proved reserves may include estimated reserves not necessarily calculated in accordance with, or contemplated by, the SEC's latest reserve reporting guidelines. Investors are urged to consider closely the disclosure in Paxton's Annual Report on Form 10-K available from Paxton at P.O. Box 1148, Zephyr Cove, NV 89448 (attn: Investor Relations). You can also obtain this report from the SEC by calling 1-800-SEC-0330 or from the SEC's website at www.sec.gov.

Safe Harbor

Statements about the Company's future expectations and all other statements in this press release other than historical facts, are "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, Section 21E of the Securities Exchange Act of 1934, and as that term is defined in the Private Securities Litigation Reform Act of 1995. The Company intends that such forward-looking statements be subject to the safe harbors created thereby.

The above information contains information relating to Paxton that is based on the beliefs of Paxton and/or its management as well as assumptions made by and information currently available to Paxton or its management. Paxton does not undertake any responsibility to update the forward-looking statements contained in this release.

Contact

Surety Financial Group, LLC

410-833-0078

Source: Paxton Energy, Inc.