Forward-Looking Information

This Form 10-Q quarterly report of Houston American Energy Corp. (the "Company") for the quarter and nine months ended September 30, 2008, 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 the Company expresses 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 this report and of the Company's Form 10-K for the year ended December 31, 2007.

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

Additionally, the following discussion regarding the Company's 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 the Company's Form 10-K for the fiscal year ended December 31, 2007.

Critical Accounting Policies

The Company's discussion and analysis of its financial condition and results of operations are based upon the Company's financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The Company believes certain critical accounting policies affect its more significant judgments and estimates used in the preparation of its financial statements. A description of the Company's critical accounting policies is set forth in the Company's Form 10-K for the year ended December 31, 2007. As of, and for the nine months ended, September 30, 2008, there have been no material changes or updates to the Company's 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, 2008:

                                          September 30, 2008
                     Acquisition costs   $             58,097
                     Evaluation costs               1,201,577
                     Retention costs                   20,624
                     Total               $          1,280,298

The carrying value of unevaluated oil and gas prospects include $88,114 expended for properties in the South American country of Colombia at September 30, 2008. We are maintaining our interest in these properties and development has or is anticipated to commence within the next twelve months.

Current Year Developments

Drilling Activity

During the nine months ended September 30, 2008, we drilled 12 international wells in Colombia, as follows:

? Ten wells were drilled on concessions in which we hold a 12.5% working interest; of which, at September 30, 2008, seven were in production, two were dry holes and one was awaiting completion.

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

? One well drilled on a concession in which we hold a 1.6% working interest, was sold as part of the Caracara transaction and was in production at the time of that sale.

During the nine months ended September 30, 2008, one domestic well, the Petro Hunt Wilberts A. Sons et.al. well, located in Louisiana on our North Bayou Henry lease, was drilled and was a dry hole. The well drilled on our Caddo Lake prospect during the fourth quarter of 2007 was waiting on a pipeline connection and completion at September 30, 2008. Subsequent to September 30, pipeline construction and connection to the well was completed and well completion operations began.

At September 30, 2008, we planned to drill two domestic wells on the Home Run and West Klondite prospects in Louisiana and eight additional international wells over the balance of 2008.

Sale of Caracara Assets

In June 2008, we, through Hupecol Caracara LLC as owner/operator under the Caracara Association Contract, sold all of our interest in the Caracara Association Contract and related assets. As a result of the sale of the Caracara assets, we received net proceeds, after deduction of fees and expenses of the transaction, of $11,546,510, realized a gain on the sale of $7,615,236 and eliminated from oil and gas properties costs subject to amortization associated with the Caracara assets totaling $3,977,907.

Pursuant to the terms of the sale of the Caracara assets, on the closing date of the sale, a portion of the purchase price was deposited in escrow to settle post-closing adjustments under the purchase and sale agreement. The funds deposited in escrow will be released to us, or to the purchaser, based on post-closing adjustments 12 months following closing. Our proportionate interest in the escrow deposit, totaling $1,673,551, has been recorded as Other Current Assets.

The net proceeds and the gain realized from the sale of the Caracara assets may be adjusted based on post-closing adjustments.

Colombian taxes attributable to the sale of the Caracara assets, totaling $4,394,575, were recorded and paid at the time of closing.

Production from the Caracara prospect accounted for $0 and $3,004,865 of our revenues during the quarter and nine months ended September 30, 2008.

Lease operating expense from the Caracara prospect accounted for $20,716 and $464,790 of our lease operating expense during the quarter and nine months ended September 30, 2008.

Leasehold Activity

During the nine months ended September 30, 2008, we acquired, through our 1.594674% interest in Hupecol Caracara LLC, an interest in the La Cuerva Contract covering approximately 75 square miles in Colombia.

During the nine months ended September 30, 2008, we acquired interests in two additional prospects in South Louisiana for which we advanced leasehold costs of approximately $7,770. We sold our interest in one of the prospects - the North Henry Bayou prospect - during the nine month period, retaining a 4.5% carried interest in the prospect, for which we received $60,301 and sold our interest in the second prospect - the Home Run prospect - during the nine month period for which we received $213,395.

Seismic Activity

During the nine months ended September 30, 2008, our operator in Colombia acquired approximately 65 miles of additional seismic and geological data. The additional data relates primarily to prospects in which we hold a 12.5% working interest. Our share of the costs of such data acquisition was $309,061. The operator also acquired additional seismic data on the La Cuerva prospect. Our share of this cost was $41,030.

At September 30, 2008, we planned to shoot an additional 41 square miles combined of seismic on the Las Garzas and Leona contracts over the balance of 2008.

Executive Compensation - Restricted Stock, Stock Options and Bonus Payments

During the nine months ended September 30, 2008, the Company recognized compensation expense, in addition to salaries, to its two executive officers consisting of (1) $400,320 attributable to grants of 55,600 shares of restricted stock discussed above in Note 5, (2) payment of cash bonuses totaling $750,000, which bonuses were contingent on the completion of the sale of the Caracara assets and were paid in June 2008, and (3) $433,303 attributable to grants of stock options.

Dividend

During the quarter ended September 30, 2008, we declared and paid cash dividends to our shareholders of $0.02 per share, or an aggregate of $562,015.

Macroeconomic Impact on Oil and Natural Gas Prices

Late in the third quarter of 2008 and accelerating during the early fourth quarter of 2008, the United States and global economies suffered a severe disruption in credit and financial markets that have been accompanied by economic contraction and a sharp drop in the price of oil and natural gas due to a projected decline in demand for oil and natural gas. We have not historically entered into hedging transactions to reduce our exposure to commodity price risks. As a result of such macroeconomic conditions and our unhedged position, we anticipate the prices at which we sell oil and natural gas will decline markedly during the fourth quarter of 2008 and for the foreseeable future and that our total revenues and profitability will decline as well.

Results of Operations

Oil and Gas Revenues. Total oil and gas revenues increased 101.1% to $2,350,782 in the quarter ended September 30, 2008 when compared to the quarter ended September 30, 2007. For the first nine months of 2008, oil and gas revenues increased 173.2%, to $8,616,868, when compared to the first nine months of 2007.

The increase in oil and gas revenue for both the quarter and nine months over 2007 is principally due to increased production resulting from the development of the Colombian fields, particularly fields in which we hold a higher working interest (12.5%), and higher oil prices, partially offset by the sale of 34 producing wells as part of the Caracara transaction during the second quarter of 2008. During the third quarter of 2008, we had interests in 12 producing wells in Colombia and 7 producing wells in the U.S as compared to 31 producing wells in Colombia and 8 producing wells in the U.S. during the 2007 third quarter.

Oil and gas revenues from the Caracara prospect totaled $0 and $3,004,865 during the quarter and the nine months ended September 30, 2008, respectively, as compared to oil and gas revenues of $ 792,529 and $ 2,162,174 during the quarter and nine months ended September 30, 2007.

The following table sets forth a comparison of hydrocarbon prices for the quarter and nine month periods:

                                            Quarter Ended September 30,           Nine Months Ended September 30,
Hydrocarbon prices:                           2008               2007                2008                  2007

Oil - Average price per barrel              $      99.74       $      62.57       $         99.46         $     61.12
Gas - Average price per mcf                 $      11.89       $       6.33       $         10.33         $      6.68

As noted above, we anticipate that our average prices realized from the sale of oil and gas will decline markedly in the fourth quarter of 2008.

The following table sets forth a comparison of oil and gas sales by region for the quarter and nine month periods.

                    Quarter Ended September 30,            Nine Months Ended September 30,
Sales:                  2008               2007              2008                   2007

Oil Colombia      $      2,191,499       $ 896,463     $      8,206,600       $      2,751,117
    US                      52,678          40,979              146,153                102,777
    Total - Oil   $      2,244,177       $ 937,442     $      8,352,753       $      2,853,894

Gas Colombia      $              -       $       -     $              -       $              -
    US                     106,605         231,387              264,115                300,020
    Total - Gas   $        106,605       $ 231,387     $        264,115       $        300,020

Natural Gas production was down in the third quarter of 2008 as compared to the third quarter of 2007 due to natural production declines related to our domestic wells.

Lease Operating Expenses. Lease operating expenses, excluding joint venture expenses relating to our Colombian operations discussed below, increased 42.5% to $747,740 in the 2008 quarter from $524,630 in the 2007 quarter. For the nine months ended September 30, 2008, lease operating expenses, excluding joint venture expenses, increased 96.5%, to $2,789,630, compared to the 2007 six month period.

The increase in lease operating expenses was attributable to the increase in the number of wells operated during the 2008 period and increased activities on prospects in which we hold a higher working interest (12.5%) during 2008 as compared to 2007, partially offset by the elimination of lease operating expenses on the Caracara prospect following the sale of the prospect in June 2008.

                                               Quarter Ended September 30,             Nine Months Ended September 30,
Lease Operating Expenses:                       2008                 2007                2008                   2007

Colombia                                   $      714,443       $      472,089     $      2,673,584       $      1,321,744
U.S.                                               33,297               52,541              116,046                 97,698
Total                                      $      747,740       $      524,630     $      2,789,630       $      1,419,442

Joint Venture Expenses. Our allocable share of joint venture expenses attributable to the Colombian Joint Venture totaled $43,225 during the 2008 quarter and $20,237 for the 2007 quarter. For the nine months ended September 30, 2008, joint venture expenses for Colombia totaled $144,919 as compared to $99,291 for the nine months ended September 30, 2007. The increase in joint venture expenses was attributable to an increase in drilling activity in concessions in which we own a higher working interest.

Depreciation and Depletion Expense. Depreciation and depletion expense was $147,311 and $449,120 for the quarters ended September 30, 2008 and 2007, respectively, and $913,214 and $1,115,877 for the nine months ended September 30, 2008 and 2007, respectively. The decrease for both the quarter and nine months is due to the sale of our interest in the Caracara prospect, partially offset by a 71.58% increase in the depletable cost pool attributable to drilling results on prospects in which we hold a higher working interest (12.5%).

General and Administrative Expenses. General and administrative expense increased by 48.4% to $609,398 during the quarter ended September 30, 2008 from $410,752 in the 2007 quarter. For the nine months ended September 30, 2008, general and administrative expenses increased 103.6%, to $2,616,714, compared to the 2007 nine month period. The increase in general and administrative expense was primarily attributable to increases, during the second quarter, in compensation expense relating to one time restricted stock grants ($400,320) and cash bonuses payable on closing of the Caracara sale ($750,000).

Gain on sale of oil & gas properties. The sale of our Caracara assets resulted in a gain of $7,615,236 during the quarter and nine months ended September 30, 2008. The gain realized may be subject to adjustment based on post-closing adjustments.

Other Income. Other income consists of interest earned on cash balances and marketable securities.

Interest income decreased 49.8% from $144,209 during the quarter ended September 30, 2007 to $72,427 during the quarter ended September 30, 2008 and decreased 53.9% from $504,763 during the nine months ended September 30, 2007 to $232,870 during the nine months ended September 30, 2008. The decrease in interest income was attributable to reduced interest rates on short term cash investments.

Income Tax Expense. Income tax expense increased to $76,703 during the 2008 quarter compared to a tax benefit of $366,891 during the 2007 quarter. For the nine months ended September 30, 2008, income tax expense increased to $5,130,141, as compared to a tax benefit of $261,466 during the 2007 period. The increase in income tax expense during the 2008 quarter was attributable to the increase in revenue and profitability of operations in Colombia and the increase during the nine month period was attributable to the sale of the Caracara assets and, to a lesser extent, the increase in revenue and profitability of operations in Colombia. Income tax expense during the 2008 and 2007 periods was entirely attributable to operations in Colombia. The Company recorded no U.S. income tax liability in the 2008 or 2007 periods.

Financial Condition

Liquidity and Capital Resources. At September 30, 2008, we had a cash balance of $11,853,248 and working capital of $13,730,046 compared to a cash balance of $417,818 and working capital of $10,358,502 at December 31, 2007. The increase in working capital during the period was primarily attributable to the receipt of proceeds from the sale of the Caracara assets and, to a lesser extent, increased revenues from wells producing in Colombia.

Operations used cash during the 2008 period totaled $895,248 as compared to $1,049,835 of cash provided by operations during the 2007 period. The adverse change in operating cash flows was attributable to taxes arising from the sale of the Caracara assets ($4,394,575) and the payment of cash bonuses ($750,000) during the 2008 period.

Investing activities provided $12,517,693 during the 2008 period compared to $510,318 used during the 2007 period. The funds provided by investing activities reflect the receipt of proceeds from the sale of the Caracara assets ($9,872,959) and the Home Run and North Henry Bayou prospects ($273,696), as well as the sale of marketable securities $9,650,000 during the 2008 period and the sale of marketable securities $4,150,000 during the 2007 period. Funds used in investing activities consisted primarily of investments in oil and gas properties and assets of ($7,180,675) during the 2008 period and ($4,660,318) during the 2007 period.

Financing activities used $187,015 during the 2008 period, consisting of cash dividends paid in the amount of $562,015, partially offset by the receipt of $375,000 from the exercise of outstanding warrants. We had no financing activities during the 2007 period.

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 will be funded principally through funds generated from operations and funds on hand, including funds generated from the sale of our interest in the Caracara prospect.

During the nine months of 2008, we invested approximately $7,180,675 for the acquisition and development of oil and gas properties, consisting of (1) drilling of twelve wells in Colombia ($6,193,176), (2) seismic and geological costs in Colombia ($488,740), (3) delay rentals on U.S. properties ($33,458),
(4) leasehold costs on U.S. properties ($6,475) and (5) capital expenditures on U.S. wells ($458,826).

At September 30, 2008, 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 2007 Form 10-K.

At September 30, 2008, our acquisition and drilling budget for the balance of 2008 totaled approximately $3,000,000, which consisted of the drilling of eight wells in Colombia, two wells in the United States, and seismic and infrastructure cost. 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.

Management anticipates that 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 continues to evaluate producing property acquisitions as well as a number of drilling prospects. It is possible, although not anticipated, that we may require and seek additional financing if additional drilling prospects are pursued beyond those presently under consideration.

Off-Balance Sheet Arrangements

We had no off-balance sheet arrangements or guarantees of third party obligations at September 30, 2008.

Inflation

We believe that inflation has not had a significant impact on operations since inception.