Forward-Looking Information

This Form 10-Q quarterly report of Houston American Energy Corp. (the "Company") for the nine months ended September 30, 2009, contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which are intended to be covered by the safe harbors created thereby. To the extent that there are statements that are not recitations of historical fact, such statements constitute forward-looking statements that, by definition, involve risks and uncertainties. In any forward-looking statement, where we express an expectation or belief as to future results or events, such expectation or belief is expressed in good faith and believed to have a reasonable basis, but there can be no assurance that the statement of expectation or belief will be achieved or accomplished.

The actual results or events may differ materially from those anticipated and as reflected in forward-looking statements included herein. Factors that may cause actual results or events to differ from those anticipated in the forward-looking statements included herein include the Risk Factors described in Item 1A of our Form 10-K for the year ended December 31, 2008.

Readers are cautioned not to place undue reliance on the forward-looking statements contained herein, which speak only as of the date hereof. We believe the information contained in this Form 10-Q to be accurate as of the date hereof. Changes may occur after that date, and we will not update that information except as required by law in the normal course of our public disclosure practices.

Additionally, the following discussion regarding our financial condition and results of operations should be read in conjunction with the financial statements and related notes contained in Item 1 of Part 1 of this Form 10-Q, as well as the Risk Factors in Item 1A and the financial statements in Item 7 of Part II of our Form 10-K for the fiscal year ended December 31, 2008.

Critical Accounting Policies

The discussion and analysis of our financial condition and results of operations is based upon our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. We believe certain critical accounting policies affect the more significant judgments and estimates used in the preparation of our financial statements. A description of our critical accounting policies is set forth in our Form 10-K for the year ended December 31, 2008. As of, and for the quarter ended, September 30, 2009, there have been no material changes or updates to our critical accounting policies other than the following updated information relating to Unevaluated Oil and Gas Properties:

Unevaluated Oil and Gas Properties. Unevaluated oil and gas properties not subject to amortization include the following at September 30, 2009:

                                          September 30, 2009
                     Acquisition costs   $            286,933
                     Evaluation costs               1,898,703
                     Retention costs                   26,622
                     Total               $          2,212,258

The carrying value of unevaluated oil and gas prospects above is attributable, in full, to properties in the United States. We are maintaining our interest in these properties and development has or is anticipated to commence within the next twelve months.

Current Year Developments

Production Levels, Commodity Prices and Revenues

Our production levels and revenues during the quarter and nine months ended September 30, 2009, as compared to the same period in 2008, were affected by the sale of our Caracara prospect in 2008 and the sharp decline in oil and natural gas prices that began during the second half of 2008 and continued through the third quarter of 2009. As a result of depressed commodity prices, our operator in Colombia temporarily shut-in production from a majority of our Colombian properties and we had no sales in Colombia from February 13, 2009 through April 5, 2009.

During the nine months ended September 30, 2008, the Caracara prospect accounted for approximately 29,954 barrels of oil (net to the Company) produced, or 49% of our oil production, and $3,004,865 of revenues.

Drilling Activity

During the nine months ended September 30, 2009, we drilled 12 international wells in Colombia, as follows:

† Nine wells were drilled on concessions in which we hold a 12.5% working interest, of which four were in production at September 30, 2009, one was shut in, and four were dry holes.

† One well was drilled on a concession in which we hold a 6.25% working interest and was a dry hole.

† Two wells were drilled on a concession in which we hold a 1.6% working interest and both were in production at September 30, 2009

During the nine months ended September 30, 2009, we drilled one domestic well, the Wilberts & Sons #1 (Home Run Prospect) which was a dry hole and re-completed one domestic well, the Allar # 1 which was placed into production on May 27, 2009.

At September 30, 2009, drilling operations were ongoing in Colombia on 1 well.

Domestic Leasehold Activity

During the nine months ended September 30, 2009, we acquired interests in four additional prospects in Louisiana, the N. Jade and W. Jade prospects, acquired for $67,480, and the Profit Island and North Profit Island prospects, acquired for $350,644. Subsequent to purchasing our interest in the Profit and North Profit Island prospects, on July 16, 2009 we received $353,896 from the sale of part of our interest in the Profit Island and North Profit Island prospects. We still retain an interest in both of the prospects.

During the nine months ended, September 30, 2009, we acquired (1) a 2.5% working interest in over 4,500 acres under lease within a 50,000 acre area of mutual interest (AMI) in Karnes County, Texas, for a purchase price of $75,000, and (2) a 1.25% Overriding Royalty in the same leases and all acreage within the AMI, for a purchase price of $100,000. Per the contract, we will be carried to the completion point on the first well.

Colombian Farm-Outs and Participations.

In June 2009, we entered into a farmout agreement with Shona Energy Limited pursuant to which we will pay 25% of designated Phase 1 geological and seismic costs relating to the Serrania Contract for Exploration and Production relating to the approximately 110,769 acre Serrania Block in Colombia and for which we will receive a 12.5% interest in the Serrania Contract.

In September 2009, we elected to participate for our percentage interest (12.5%) in the Los Picachos Technical Evaluation Agreement (the "TEA"). The TEA was entered into in August 2009 by and between the Columbian National Hydrocarbons Agency (the "ANH") and Hupecol Operating Co. LLC and encompasses an 86,235 acre region located to the west and northwest of the Serrania block, which is located in the municipalities of Uribe and La Macarena in the Department of Meta in the Republic of Colombia. As a result of the election to participate, we agreed to pay our proportionate share, or 12.5%, of the acquisition costs and costs for the minimum work program contained in the TEA.

On October 16, 2009, we announced the approval by the ANH of a Farmout Agreement and Joint Operating Agreement with SK Energy Co. LTD., a Korean multinational conglomerate ("SK"), relating to the CPO 4 Contract for Exploration and Production (the "CPO 4 Contract") covering the 345,452 net acre CPO 4 Block located in the Western Llanos Basin in the Republic of Colombia.

Under the Joint Operating Agreement, effective retroactive to May 31, 2009, SK will act as operator of the CPO 4 Block and we agreed to pay 25.0% of all past and future cost related to the CPO 4 block as well as an additional 12.5% of the Seismic Acquisition Costs incurred during the Phase 1 Work Program, for which we will receive a 25.0% interest in the CPO 4 Block. Our share of the past costs is $194,584.

The Phase 1 Work Program consists of reprocessing approximately 400 kilometers of existing 2-D seismic data, the acquisition, processing and interpretation of a 2-D seismic program containing approximately 620 kilometers of data and the drilling of two exploration wells. The Phase 1 Work Program is estimated to be completed by June 17, 2012. Our costs for the entire Phase 1 Work Program are estimated to total approximately $15,000,000 over the next three years.

Acquisition Activity

In light of our debt-free capital structure, solid cash position and low overhead and in response to conditions in the oil and gas market, in particular the non-economical cost and capital structures of many operators and financiers following the sharp decline in commodity prices during the second half of 2008 continuing into early 2009, during the first half of 2009, we began actively seeking opportunistic oil and gas acquisitions.

Pursuant to those efforts, on February 4, 2009, we entered into a letter agreement (the "Letter Agreement") with Yazoo Pipeline Co., L.P. ("Yazoo"), Sterling Exploration & Production Co., L.L.C. ("Sterling"), and Matagorda Operating Company (together with Yazoo and Sterling, the "Debtors"), pursuant to which we agreed to provide debtor-in-possession financing ("DIP Financing") to the Debtors subject to approval of the Letter Agreement by the U.S. Bankruptcy Court for the Southern District of Texas (the "Bankruptcy Court"). On February 4, 2009, the Bankruptcy Court entered an order approving the DIP Financing on the terms set out in the Letter Agreement.

Under the terms of the Letter Agreement, we agreed to advance to the Debtors up to $300,000, with all advances bearing interest at 10% per annum and being repayable in full ninety (90) days from approval of the DIP Financing by the Bankruptcy Court, or the earlier consummation of a sale of the principal assets of the Debtors to our company. Under the Letter Agreement, we and the Debtors agreed to commence negotiations and due diligence with respect to the potential acquisition by our company of the principal assets of the Debtors based on certain financial terms described in the Letter Agreement. Advances were made under the Letter Agreement in the total amount of $115,724.

Pursuant to our rights under the Letter Agreement, after conducting due diligence with respect to the Debtors, we determined to terminate negotiations with the Debtors with respect to the potential acquisition of the assets of the Debtors. On April 10, 2009, the Debtors repaid the DIP Financing in full in the amount of $117,897, including principal and interest, and at September 30, 2009 no amounts were owed to us relative to the DIP Financing.

We intend to continue to seek out and evaluate opportunities to acquire existing oil and gas assets and operations where we determine attractive returns on invested capital can be realized in current market conditions and superior returns can be derived from a recovery in primary prices. There is no assurance, however, that we will be successful in our efforts to identify and acquire oil and gas assets or operations or that any acquisitions that may be consummated will provide the returns expected by management.

Possible Hupecol Transaction

In September 2009, we were advised that Hupecol LLC had retained Scotia Waterous for purposes of evaluating a possible transaction (a "Transaction") involving the monetization of five exploration and production contracts covering approximately 413,000 acres comprising the Leona Block, La Cuerva Block, Dorotea Block, Las Garzas Block and Cabiona Block in Colombia. The Transaction may involve the sale of some or all of the assets and operations of the subject properties, an exchange or trade of assets, or other similar transaction and may be effected in a single transaction or a series of transactions. Scotia Waterous has established a process whereby interested parties may evaluate a potential Transaction with the objective of completing one or more Transactions before year-end 2009.

We are an investor in Hupecol and our interest in the assets and operations of Hupecol that would be included in any Transaction represent a substantial portion of our assets and operations in Colombia and are our principal revenue producing assets and operations. We intend to closely monitor the nature and progress of the Transaction in order to protect the interests of our company and our shareholders. However, we have no effective ability to alter or prevent a Transaction and are unable to predict whether or not a Transaction will in fact occur or the nature or timing of any such Transaction. Further, we are unable to estimate the actual value that we might derive from any such Transaction and whether any such Transaction will ultimately be beneficial to our company and our shareholders.

Seismic Activity

During the nine months ended September 30, 2009, our operator in Colombia acquired approximately 155 square miles of additional seismic and geological data. The additional data relates primarily to the Serrania and La Cuerva concessions where we hold 12.5% and 1.59% working interest, respectively. Our share of the costs of such data acquisition was $438,875.

Compensation Expense - Stock Options

During the nine months ended September 30, 2009, we granted 120,000 stock options to our Chief Financial Officer and 26,665 stock options to our non-employee directors. Our total non-cash compensation expense for the three and nine months ended September 30, 2009 was $268,627 and $811,501, respectively.

Results of Operations

Oil and Gas Revenues. Total oil and gas revenues increased 2.3% to $2,403,996 in the three months ended September 30, 2009 compared to $2,350,782 in the three months ended September 30, 2008. For the nine month period, oil and gas revenues decreased 53.8% to $3,983,256 in the 2009 period from $8,616,868 in the 2008 period.

The decrease in revenue for the nine month period is principally due to (1) the sale of our Caracara interest during 2008, which accounted for $3,004,865 of our revenue in the 2008 nine month period, (2) lower oil and gas prices during the 2009 period and (3) the cessation of production and sales from the majority of our Colombian properties for 52 days during the 2009 nine month period.

The following table sets forth the gross and net producing wells, net oil and gas production volumes and average hydrocarbon sales prices for the quarter and nine months ended September 30, 2009 and 2008:

                                           Three Months Ended          Nine Months Ended
                                              September 30,              September 30,
                                            2009          2008         2009          2008
Gross producing wells                            27           19            23           39
Net producing wells                            2.38         1.59          2.25         1.61
Net oil and gas production (BOE)             35,131       23,995        71,274       88,243
Average sales price - BOE (per barrel)   $    68.43     $  97.96     $   55.89     $  97.65

The change in gross and net producing wells reflects the 2008 sale of our Caracara interest offset by the increase in average working interest during 2009, while the change in net oil and gas production reflects the same factors plus the effects of the temporary cessation of production of a majority of our Colombian properties during the 2009 period. Giving pro forma effect to exclude sales revenues from the Caracara interest, which was sold in June 2008, oil and gas revenues for the first nine months of 2008 would have been $5,612,003.

Oil and gas sales revenues for the first nine months of 2009 and 2008, by region, were as follows:

                                      Columbia         U.S.           Total
            2009 Nine Month Period
            Oil sales                $ 3,865,361     $  51,090     $ 3,916,451
            Gas sales                $         -     $  66,805     $    66,805
            2008 Nine Month Period
            Oil sales                $ 8,206,600     $ 146,153     $ 8,352,753
            Gas sales                $         -     $ 264,115     $   264,115

Lease Operating Expenses. Lease operating expenses, excluding joint venture expenses relating to our Columbian operations discussed below, increased 36.6% to $1,021,312 in the 2009 quarter from $747,740 in the 2008 quarter. For the nine month period, lease operating expenses decreased 5.2% to $2,644,359 in the 2009 period from $2,789,630 in the 2008 period.

The increase in lease operating expenses as a percentage of revenues, from 32.4% of revenues for the 2008 nine month period to 66.4% of revenues for the 2009 period, was primarily attributable to the temporary cessation of production from a majority of our Colombian properties during the 2009 period as discussed above, the steep decline in oil and gas prices and an increase in our average working interest following the Caracara sale, as well as increased cost in Colombia relating to personnel expenses, facilities and equipment expenses, catering expenses, road maintenance, as well environmental services expenses. Following is a summary comparison of lease operating expenses for the periods.

                                       Columbia         U.S.           Total
             Quarter       - 2009     $   991,090     $  30,222     $ 1,021,312
                           - 2008     $   714,443     $  33,297     $   747,740

             Nine Months   - 2009     $ 2,604,799     $  39,560     $ 2,644,359
                           - 2008     $ 2,673,584     $ 116,046     $ 2,789,630

Hupecol, our operator in Colombia, has implemented cost cutting measures in order to improve field economics from our Colombian operations. We have also seen declines in drilling and operating costs in the Llanos Basin which, together, are expected to result in improved margins during the balance of 2009 and beyond.

Joint Venture Expenses. Our allocable share of joint venture expenses attributable to the Colombian Joint Venture totaled $48,780 during the 2009 quarter and $43,225 during the 2008 quarter. For the nine month period, joint venture expenses totaled $127,487 during 2009 as compared to $144,919 during 2008.

The decrease in joint venture expenses for the nine months ended September 30, 2009, was attributable to a decrease in drilling activity.

Depreciation and Depletion Expense. Depreciation and depletion expense was $580,020 and $147,311 for the quarters ended September 30, 2009 and 2008, respectively, and $1,121,752 and $913,214 for the nine months ended September 30, 2009 and 2008, respectively.

The increase in depreciation and depletion is due to increased production accompanying an increase in our average working interest position, and a decrease in Colombian reserves primarily attributable to lower commodity prices.

General and Administrative Expenses. General and administrative expense increased by 1.8% to $620,642 during the 2009 quarter from $609,398 during the 2008 quarter and decreased by 23% to $2,013,955 during the 2009 nine month period from $2,616,714 during the 2008 period.

The decrease in general and administrative expense was primarily attributable to decreases in employee compensation and professional fees, including a decrease of $750,000 related to cash bonuses paid in 2008 not repeated in 2009, $400,320 related to restricted stocks grants in 2008 and partially offset by a $355,187 increase in the stock option portion of stock based compensation.

Gain on Sale of Oil and Gas Properties. The sale of our Caracara assets resulted in a gain of $7,615,236 during the 2008 nine month period.

Other Income. Other income consists of interest earned on cash balances and marketable securities. Other income totaled $9,350 during the 2009 quarter as compared to $72,427 during the 2008 quarter and $53,886 during the 2009 nine month period as compared to $232,870 during the 2008 period.

The decrease in other income resulted from the sale of the balance of our marketable securities during early 2008 and a reduction in interest rates on short-term cash investments, partially offset by interest earned on DIP Financing provided to the Creditors under the Letter Agreement.

Income Tax Expense/Benefit. Income tax expense decreased to a benefit of $285,986 during the 2009 quarter from an expense of $76,703 during the 2008 quarter and to a benefit of $932,777 during the 2009 nine month period from an expense of $5,130,141 during the 2008 period. The income tax benefit during 2009 was primarily attributable to net operating losses generated in Colombia and the United States and the refund during the third quart of 2009 of approximately $548,000.

The decrease in income tax expense during the 2009 quarter and nine month period was attributable to higher commodity prices and the one time sale of the Caracara assets which resulted in profitable operations during 2008 as compared to 2009, when we incurred a loss from operations due to the steep decline in oil and gas prices and other factors discussed above. Currently, the Company expects to be able to utilize the incremental foreign tax credit carry forward and net operating loss generated during the 2009 periods and therefore, no additional valuation allowance has been recorded to date. The Company recorded no U.S. income tax liability in the 2009 or 2008 quarter or nine month periods.

Financial Condition

Liquidity and Capital Resources. At September 30, 2009, we had a cash balance of $4,709,078 and working capital of $6,827,191 compared to a cash balance of $9,910,694 and working capital of $10,536,834 at December 31, 2008. The change in working capital during the nine month period was primarily attributable to the drilling of wells, the acquisition of oil and gas properties, payment of dividends and the payment of operating cost in Colombia.

Operating activities used $2,169,874 of cash during the 2009 nine month period as compared to $895,248 used during the 2008 period. Excluding the decrease in operating cash from the gain on the Caracara sale in 2008, the change in operating cash flow was primarily attributable to the current net loss, increases in current receivables and decreases in current payables.

Investing activities used $2,191,699 during the 2009 nine month period compared to $12,517,693 provided during the 2008 period. The funds used in investing activities principally reflect investments in oil and gas properties and assets of $3,704,208 during the 2009 period and $7,180,675 during the 2008 period. For the 2009 period, funds used in investing activities was partially offset by the receipt of $1,158,613 in monies from the escrow account related to the sale of the Caracara assets. For the 2008 period, funds used in investing activities were more than offset by funds provided by the sale of marketable securities of $9,650,000 and the net funds provided by the sale of the Caracara assets of $10,146,655.

Financing activities used $840,043 during the 2009 period, consisting of cash dividends paid. Financing activities used $187,015 during the 2008 period, consisting of cash dividends paid of $562,015 partially offset by $375,000 of proceeds from the exercise of warrants.

Long-Term Liabilities. At September 30, 2009, we had long-term liabilities of $269,891 as compared to $205,524 at December 31, 2008. Long-term liabilities at September 30, 2009 and December 31, 2008 consisted of a reserve for plugging costs and a deferred rent obligation.

Capital and Exploration Expenditures and Commitments. Our principal capital and exploration expenditures relate to ongoing efforts to acquire, drill and complete prospects. We expect that future capital and exploration expenditures, other than anticipated capital expenditures associated with our interest in the CPO 4 Contract, will be funded principally through funds on hand and funds generated from operations.

During the first nine months of 2009, we invested $3,704,208 for the acquisition and development of oil and gas properties, consisting of (1) drilling of 12 wells in Colombia $2,325,438, (2) seismic cost in Colombia $426,017, (3) delay rentals on U.S. properties $19,112, (4) leasehold costs on U.S. properties $644,094, and (5) drilling of one U.S. well $289,547.

At September 30, 2009, our only material contractual obligation requiring determinable future payments was a lease relating to the Company's executive offices which was unchanged when compared to the 2008 Form 10-K.

At September 30, 2009, our acquisition and drilling budget for the balance of 2009 totaled approximately $2,119,584, which consisted of the drilling of three wells in Colombia for $1,125,000, additional seismic cost of $800,000, and payment to SK of past cost related to the CPO 4 block of $194,584. Our acquisition and drilling budget has historically been subject to substantial fluctuation over the course of a year based upon successes and failures in drilling and completion of prospects and the identification of additional prospects during the course of a year. In particular, we note that, in light of the sharp decline in commodity prices during the second half of 2008 and early 2009, we expect to see an increase in asset acquisition opportunities as operators and financiers are faced with uneconomical cost and capital structures resulting in forced liquidations of holdings. We intend to evaluate, and as appropriate pursue, asset acquisition opportunities. Should we pursue any such opportunities, our acquisition and drilling budget could be materially altered.

Management anticipates that, depending on the timing of activities relating to the CPO 4 Contract, our current financial resources combined with expected operating cash flows will meet our anticipated objectives and business operations, including planned property acquisitions and drilling activities, for at least the next 12 months without the need for additional capital. Management presently anticipates that our expenditures relating to the CPO 4 Contract will be approximately $15 million through 2011. We do not presently have adequate funds on hand to finance our anticipated expenditures on the CPO 4 contract and expect to seek additional financing to support our undertakings in that regard. The timing, amount and terms of funding that we may seek to support our CPO 4 Contract undertakings is dependent upon the timing of development of the CPO 4 Block, the results of efforts to sell a portion of our assets, and the results of our operations generally, in addition to prevailing market conditions. Further, management continues to evaluate producing property acquisitions as well as a number of drilling prospects. It is possible that we . . .