SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549




FORM
10-K/A


(Amendment
No. 3)





(Mark
One)


x
            ANNUAL
      REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934





For the
Fiscal Year Ended December 31, 2007





£
            TRANSITION
      REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934





For the
transition period from ____________ to _____________





Commission
File No. 1-32955





HOUSTON
      AMERICAN ENERGY CORP.(Exact
      name of registrant specified in its charter)





Delaware
              
              76-0675953(State
      or other jurisdiction of incorporation or organization)
              
              (I.R.S.
      Employer Identification No.)





801
      Travis Street, Suite 1425, Houston, Texas 77002(Address
      of principal executive offices)(Zip code)





Issuer's
telephone number, including area
code:           (713)
222-6966





Securities
registered pursuant to Section 12(b) of the Act:





Title
      of each class
              
              Name
      of each exchange on which each is registeredCommon
      Stock, $0.001 par value
              
              The
      Nasdaq Stock Market LLC





Securities
registered pursuant to Section 12(g) of the Act:





None(Title
      of Class)





Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.


Yes £      No
x





Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or 15(d) of the Exchange Act.


Yes £      No
x





Indicate
by check mark whether the registrant: (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports); and (2) has been subject to such filing requirements for
the past 90 days.


Yes x      No
£





Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.      x





Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company.  See definition of “accelerated filer,” “large accelerated
filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange
Act.  (Check one)





Large
      accelerated filer  £
              Accelerated
      filer o
              Non-accelerated
      filer  £
              smaller
      reporting company x





Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).


Yes £      No
x





The
aggregate market value of the voting and non-voting common equity held by
non-affiliates of the registrant on June 29, 2007, based on the closing sales
price of the registrant’s common stock on that date, was approximately
$59,142,658. Shares of common stock held by each current executive officer and
director and by each person known by the registrant to own 5% or more of the
outstanding common stock have been excluded from this computation in that such
persons may be deemed to be affiliates.





The
number of shares of the registrant’s common stock, $0.001 par value, outstanding
as of February 29, 2008 was 27,920,172.





DOCUMENTS
INCORPORATED BY REFERENCE





Portions
of the Company's Proxy Statement for its 2008 Annual Meeting are incorporated by
reference into Part III of this Report.







1




EXPLANATORY
NOTE





This
Amendment No. 3 to the Annual Report on Form 10-K of Houston American Energy
Corp. (the "Company") amends the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 2007 (the "Original Filing"), which was filed
with the Securities and Exchange Commission on March 28, 2008, as amended by
Amendment No. 1, filed June 20, 2008 and Amendment No. 2, filed October 3, 2008.
The Company is filing this Amendment No. 3 for the purpose of expanding and/or
correcting certain engineering disclosures under (1) Item 1. Business, (2) Item
1A. Risk Factors, and (3) Note 9 – Supplemental Information on Oil and Gas
Exploration, Development and Production Activities (Unaudited), in the financial
statements.
 
 Except
as described above, this Amendment No. 3 does not amend any other information
set forth in the Original Filing, as previously amended, and the Company has not
updated disclosures contained therein to reflect any events that occurred at a
date subsequent to the date of the Original Filing.


TABLEOF CONTENTS





PagePART
      IItem
      1.
                                                    
                                                    Business
                                                    3Item
      1A.
                                                    
                                                    Risk Factors
                                                    10Item
      1B.
                                                    
                                                    Unresolved Staff Comments
                                                    16Item
      2.
                                                    
                                                    Properties
                                                    16Item
      3.
                                                    
                                                    Legal Proceedings
                                                    16Item
      4.
                                                    
                                                    Submission of Matters to a Vote of Security
      Holders
                                                    16PART
      IIItem
      5.
                                                    
                                                    Market for Registrant’s Common Equity, Related Stockholder
      Matters and Issuer Purchases of Equity Securities
                                                    17Item
      6.
                                                    
                                                    Selected Financial Data
                                                    17Item
      7.
                                                    
                                                    Management’s Discussion and Analysis of Financial Conditions
      and Results of Operations
                                                    18Item
      7A.
                                                    
                                                    Quantitative and Qualitative Disclosures About Market
      Risk
                                                    24Item
      8.
                                                    
                                                    Financial Statements and Supplementary Data
                                                    24Item
      9.
                                                    
                                                    Changes in and Disagreements With Accountants on Accounting and
      Financial Disclosure
                                                    25Item
      9A.
                                                    
                                                    Controls and Procedures
                                                    25Item
      9B.
                                                    
                                                    Other Information
                                                    26PART
      IIIItem
      10.
                                                    
                                                    Directors, Executive Officers and Corporate
      Governance
                                                    27Item
      11.
                                                    
                                                    Executive Compensation
                                                    27Item
      12.
                                                    
                                                    Security Ownership of Certain Beneficial Owners and Management
      and Related Stockholder Matters
                                                    27Item
      13.
                                                    
                                                    Certain Relationships and Related Transactions, and Director
      Independence
                                                    27Item
      14.
                                                    
                                                    Principal Accountant Fees and Services
                                                    27PART
      IVItem
      15.
                                                    
                                                    Exhibits and Financial Statement Schedules
                                                    28SIGNATURES


2
 Table of Contents




FORWARD-LOOKING
STATEMENTS





This
annual report on Form 10-K contains forward-looking statements within the
meaning of the federal securities laws.  These forwarding-looking
statements include without limitation statements regarding our expectations and
beliefs about the market and industry, our goals, plans, and expectations
regarding our properties and drilling activities and results, our intentions and
strategies regarding future acquisitions and sales of properties, our intentions
and strategies regarding the formation of strategic relationships, our beliefs
regarding the future success of our properties, our expectations and beliefs
regarding competition, competitors, the basis of competition and our ability to
compete, our beliefs and expectations regarding our ability to hire and retain
personnel, our beliefs regarding period to period results of operations, our
expectations regarding revenues, our expectations regarding future growth and
financial performance, our beliefs and expectations regarding the adequacy of
our facilities, and our beliefs and expectations regarding our financial
position, ability to finance operations and growth and the amount of financing
necessary to support operations.  These statements are subject to
risks and uncertainties that could cause actual results and events to differ
materially.  We undertake no obligation to update forward-looking
statements to reflect events or circumstances occurring after the date of this
annual report on Form 10-K.





As used
in this annual report on Form 10-K, unless the context otherwise requires, the
terms “we,” “us,” “the Company,” and “Houston American” refer to Houston
American Energy Corp., a Delaware corporation.





PART
I





Item1.
            Business





General





Houston
American Energy Corp. is an oil and gas exploration and production
company.  Our oil and gas exploration and production activities are
focused on properties in the U.S. onshore Gulf Coast Region, principally Texas
and Louisiana, and development of concessions in the South American country of
Colombia.  We seek to utilize the contacts and experience of our
executive officers, particularly John F. Terwilliger and James Jacobs, to
identify favorable drilling opportunities, to use advanced seismic techniques to
define prospects and to form partnerships and joint ventures to spread the cost
and risks to us of drilling.





Exploration
Projects





Our
exploration projects are focused on existing property interests, and future
acquisition of additional property interests, in the onshore Texas Gulf Coast
region, Colombia and Louisiana.





Each of
our exploration projects differs in scope and character and consists of one or
more types of assets, such as 3-D seismic data, leasehold positions, lease
options, working interests in leases, partnership or limited liability company
interests or other mineral rights.  Our percentage interest in each
exploration project (“Project Interest”) represents the portion of the interest
in the exploration project we share with other project
partners.  Because each exploration project consists of a bundle of
assets that may or may not include a working interest in the project, our
Project Interest simply represents our proportional ownership in the bundle of
assets that constitute the exploration project.  Therefore, our
Project Interest in an exploration project should not be confused with the
working interest that we will own when a given well is drilled.  Each
exploration project represents a negotiated transaction between the project
partners.  Our working interest may be higher or lower than our
Project Interest.





Our
principal exploration projects as of December 31, 2007 consisted on the
following:





-
Domestic Exploration Properties:





Webster Parish,
Louisiana.  In Webster Parish, Louisiana, we hold a 7.5%
working interest at an 8.3% net revenue interest carried to point of sales for
the first well in over 4,000 acres known as the South Sibley
Prospect.  Drilling of a 10,600-foot well on the South Sibley
Prospect, was completed in May 2005 with multiple pay sands
identified.  Sales from the well commenced June 28, 2005.





We also
hold a 7.5% working interest at a 6.055% net revenue interest in the Holley #1
well and associated 640-acre unit, acquired in December 2005, in Webster Parish,
Louisiana.


3
 Table of Contents




Acadia Parish,
Louisiana.  In Acadia Parish, Louisiana, we hold a 3% working
interest and a 2.25% net revenue interest until payout in a 620-acre leasehold
known as the Crowley Prospect.  Between 2004 and 2005, the Hoffpauer
#1 (formerly the Baronet #1) and the Baronet #2 wells were drilled and commenced
production.  The Baronet #2 was reworked in 2006 and in 2007; both the
Hoffpauer #1 and the Baronet #2 were plugged and abandoned.  The
Baronet #3, a replacement well for the Baronet #2, was drilled in the second
quarter of 2007 and commercial production began in July 2007.  We own
a 17.5% working interest and 13.125% net revenue interest in the Baronet #3
well.





Caddo Parish,
Louisiana.  In Caddo Parish, Louisiana, we hold a 33.5% working
interest, subject to payment of 35% of the costs of the initial well, and a
25.125% net revenue interest in the 640-acre Caddo Lake Prospect with options to
additional leases covering 4,400 acres.  After payout, we will own a
27.25% working interest and 20.4375% net revenue interest in the initial well
and any additional wells.  In November 2007, we drilled a 10,000-foot
test well on the Caddo Lake Prospect. At December 31, 2007, the well was
awaiting a pipeline connection prior to testing.





Vermilion Parish,
Louisiana.  In Vermilion Parish, Louisiana, we hold an 8.25%
working interest with a 6.1875% net revenue interest, subject to a 25% working
interest back in at payout, in the 425 acre Sugarland Prospect.  The
Broussard #1 well, a 12,900-foot test well, was drilled on the Sugarland
Prospect in December 2005, with indications of multiple pay sands, and was
completed in January 2006.  Sales from the Broussard #1 began in March
2006. The Broussard #1 was re-completed in February 2007 and, as a result, was
plugged and abandoned.





Jim Hogg County,
Texas.  In Jim Hogg County, Texas, we hold a 4.375% working
interest, subject to payment of 5.8334% of costs to the casing point in the
first well, in the 500 acre Hog Heaven Prospect.  The Weil #1 well, a
6,200-foot test well, was drilled on the Hog Heaven Prospect in November
2005.  Electric log and sidewall core analysis indicated multiple pay
sands in the Weil #1 well.  The well was completed in January 2006 and
production and sales commenced in March 2006.  The Weil #2 was drilled
as a dry hole during 2007.





Hardeman County,
Texas.  In Hardeman County, Texas, we hold a 10% working
interest with a 7.5% net revenue interest in the 91.375 acre West Turkey
Prospect.  The DDD-Evans #1, an 8,500-foot test well, was drilled on
the West Turkey Prospect in April 2006 and production began in May 2006. At
December 31, 2007, the DDD-Evans #1 was producing, but at non-commercial
levels.




-
Colombian Exploration Properties:




Llanos Basin,
Colombia.  In the Llanos Basin, Colombia, at December 31, 2007,
we held interests in (1) a 232,050 acre tract known as the Cara Cara concession,
(2) the Tambaqui Association Contract covering 4,400 acres in the State of
Casanare, Colombia, (3) two concessions, the Dorotea Contract and the Cabiona
Contract, totaling over 137,000 acres, (4) the Surimena concession covering
approximately 69,000 acres, (5) the Las Garzas concession covering approximately
103,000 acres, (6) the Leona concession covering approximately 70,343 acres, and
(7) the Camarita concession covering approximately 166,000 acres.  See
“—Possible Sale of Cara Cara Concession.”





Our
interest in each of the described concessions and contracts in Colombia is held
through an interest in Hupecol, LLC and affiliated entities.  We hold
a 12.5% working interest in each of the prospects of Hupecol other than the Cara
Cara concession, the Surimena concession and the Tambaqui Association
Contract.  We hold a 1.116% working interest in the Cara Cara
concession, a 6.25% working interest in the Surimena concession and a 12.6%
working interest, with an 11.31% net revenue interest, in the Tambaqui
Association Contract.





The first
well drilled in the Cara Cara concession, the Jaguar #1 well, was completed in
April 2003 with initial production of 892 barrels of oil per day.  In
conjunction with the efforts to develop the Cara Cara concession, Hupecol
acquired 50 square miles of 3D seismic grid surrounding the Jaguar #1 well and
other prospect areas.  That data is being utilized to identify
additional drill site opportunities to develop a field around the Jaguar #1 well
and in other prospect areas within the grid.





Our
working interest in the Cara Cara concession and the Tambaqui Association
Contract are subject to an escalating royalty of 8% on the first 5,000 barrels
of oil per day, increasing to 20% at 125,000 barrels of oil per
day.  Our interest in the Tambaqui Association Contract is subject to
reversionary interests of Ecopetrol, the state owned Colombian oil company, that
could cause 50% of the working interest to revert to Ecopetrol after we have
recouped four times our initial investment.  Our working interest in
the additional concessions is subject to an escalating royalty ranging from 8%
to 20% depending upon production volumes and pricing and an additional 6% to 10%
per concession when 5,000,000 barrels of oil have been produced on that
concession.


4
 Table of Contents




In
December 2003, we exercised our right to participate in the acquisition, through
Hupecol, of over 3,000 kilometers of seismic data in Colombia covering in excess
of 20 million acres.  The seismic data is being utilized to map
prospects in key areas with a view to delineating multiple drilling
opportunities.  We will hold a 12.5% interest in all prospects
developed by Hupecol arising from the acquired seismic data, including the
Cabiona and Dorotea concessions acquired in the fourth quarter of 2004, the
Surimena concession acquired in the second quarter of 2005, the Las Garzas
concession acquired in November 2005, the Jagueyes TEA acquired in May 2005 and
the Simon TEA acquired in June 2005.  During 2006 we acquired 3D
seismic data on the Las Garzas contract, the Jagueyes TEA and the Simon TEA. As
a result of seismic evaluation, the Jagueyes TEA was converted to the Leona
concession and the Simon TEA was converted to the Camarita concession during
2006.





During
2007, Hupecol drilled (1) 18 wells on the Cara Cara concession with production
commencing on 13 wells and 5 of the wells being dry holes, (2) 5 wells on the
Dorotea and Cabiona concessions with production commencing on 2 wells and 3 of
the wells being dry holes, (3) 1 dry hole on the Las Garzas concession, (4) 1
producing well on the Leona concession, and (5) 1 dry hole on the Camarita
concession.





2008
Drilling Plans





As of
January 1, 2008, we plan to drill a total of 15 wells during 2008, of which 1
well is planned to be drilled on our domestic exploration projects and 14 wells
are planned to be drilled on our Colombian exploration projects.  The
following table reflects planned drilling activities during 2008:





Location
                
                Prospect
      Name
                
                #
      of Planned WellsCaddo
      Parish, LA
                
                Caddo
      Lake Prospect
                
                1Llanos
      Basin, Colombia
                
                Cara
      Cara Concession
                
                1Llanos
      Basin, Colombia
                
                Dorotea
      Concession
                
                7Llanos
      Basin, Colombia
                
                Cabiona
      Concession
                
                3Llanos
      Basin, Colombia
                
                Las
      Garzas Concession
                
                1Llanos
      Basin, Colombia
                
                Leona
      Concession
                
                1Llanos
      Basin, Colombia
                
                Camarita
      Concession
                
                1





Our
planned drilling activity is subject to change from time to time without notice.
Additional wells are expected to be drilled at locations to be determined based
on the results of the planned drilling projects. See “—Possible Sale of Cara
Cara Concession.”





Other
Holdings





In
addition to our principal exploration projects, we hold various interests in
producing wells in Vermilion Parish, Louisiana, Plaquemines Parish, Louisiana,
Matagorda County, Texas, and Ellis County, Oklahoma.  We have no
present plans to conduct additional drilling activities on those
prospects.


5
 Table of Contents


The
following table sets forth certain information about our oil and gas holdings at
December 31, 2007:





Acres
      Leased or Under Option at December 31, 2007(1)Project
      Area
                              
                              Project
      Gross
                              
                              
                              Project
      Net
                              
                              
                              Company
      Net
                              
                              
                              Project
      InterestTEXAS:Jim
      Hogg County
                              
                              
                              340.00
                              
                              
                              
                              340.0
                              
                              
                              
                              14.89
                              
                              
                              
                              4.38
                              %Wilbarger
      CountyWest
      Fargo Prospect
                              
                              
                              900.00
                              
                              
                              
                              900.00
                              
                              
                              
                              135.00
                              
                              
                              
                              15.00
                              %Obenhaus
      Prospect
                              
                              
                              1,340.00
                              
                              
                              
                              1,340.00
                              
                              
                              
                              201.00
                              
                              
                              
                              15.00
                              %Hardeman
      County
                              
                              
                              91.38
                              
                              
                              
                              91.38
                              
                              
                              
                              9.14
                              
                              
                              
                              10.00
                              %Matagorda
      CountyS.W.
      Pheasant Prospect
                              
                              
                              779.00
                              
                              
                              
                              779.00
                              
                              
                              
                              27.27
                              
                              
                              
                              3.50
                              %Nacogdoches
      County
                              
                              
                              80.94
                              
                              
                              
                              80.94
                              
                              
                              
                              80.94
                              
                              
                              
                              100.00
                              %Texas
      Sub-Total
                              
                              
                              3,531.32
                              
                              
                              
                              3,531.32
                              
                              
                              
                              468.24LOUISIANA:Webster
      Parish
                              
                              
                              6,244.00
                              
                              
                              
                              4,457.00
                              
                              
                              
                              334.28
                              
                              
                              
                              7.50
                              %Caddo
      Parish (2)
                              
                              
                              5,040.00
                              
                              
                              
                              5,040.00
                              
                              
                              
                              1,373.40
                              
                              
                              
                              27.25
                              %Vermilion
      ParishLaFurs
      F-16 Well
                              
                              
                              830.00
                              
                              
                              
                              830.00
                              
                              
                              
                              18.68
                              
                              
                              
                              2.25
                              %Acadia
      Parish
                              
                              
                              620.00
                              
                              
                              
                              620.00
                              
                              
                              
                              18.60
                              
                              
                              
                              3.00
                              %Plaquemines
      Parish
                              
                              
                              300.00
                              
                              
                              
                              300.00
                              
                              
                              
                              5.40
                              
                              
                              
                              1.80
                              %Louisiana
      Sub-Total
                              
                              
                              13,034.00
                              
                              
                              
                              11,247.00
                              
                              
                              
                              1,750.36OKLAHOMAJenny
      #1-14
                              
                              
                              160.00
                              
                              
                              
                              160.00
                              
                              
                              
                              3.78
                              
                              
                              
                              2.36
                              %Oklahoma
      Sub-Total
                              
                              
                              160.00
                              
                              
                              
                              160.00
                              
                              
                              
                              3.78COLOMBIACara
      Cara Concession
                              
                              
                              232,050.00
                              
                              
                              
                              232,500.00
                              
                              
                              
                              2,594.70
                              
                              
                              
                              1.116
                              %Tambaqui
      Assoc. Contract (3)
                              
                              
                              4,403.00
                              
                              
                              
                              4,403.00
                              
                              
                              
                              555.00
                              
                              
                              
                              12.6
                              %Dorotea
      Concession
                              
                              
                              51,321.00
                              
                              
                              
                              51,321.00
                              
                              
                              
                              6,415.00
                              
                              
                              
                              12.5
                              %Cabiona
      Concession
                              
                              
                              86,066.00
                              
                              
                              
                              86,066.00
                              
                              
                              
                              10,758.00
                              
                              
                              
                              12.5
                              %Surimena
      Concession
                              
                              
                              69,189.00
                              
                              
                              
                              69,189.00
                              
                              
                              
                              4,324.00
                              
                              
                              
                              6.25
                              %Las
      Garzas Concession
                              
                              
                              103,784.00
                              
                              
                              
                              103,784.00
                              
                              
                              
                              12,973.00
                              
                              
                              
                              12.5
                              %Leona
      Concession
                              
                              
                              70,343.00
                              
                              
                              
                              70,343.00
                              
                              
                              
                              8,793.00
                              
                              
                              
                              12.5
                              %Camarita
      Concession
                              
                              
                              166,301.00
                              
                              
                              
                              166,301.00
                              
                              
                              
                              20,788.00
                              
                              
                              
                              12.5
                              %Colombia
      Sub-Total
                              
                              
                              783,457.00
                              
                              
                              
                              783,457.00
                              
                              
                              
                              67,200.70Total
                              
                              
                              800,182.32
                              
                              
                              
                              798,395.32
                              
                              
                              
                              69,423.08







(1)
              Except
      as otherwise noted, all acreage is held under leases. Project Gross Acres
      refers to the number of acres within a project.  Project Net
      Acres refers to leaseable acreage by tract.  Company Net Acres
      are either leased or under option in which we own an undivided
      interest.  Company Net Acres were determined by multiplying the
      Project Net Acres leased or under option by our working interest
      therein.
 
 (2)
              Includes
      an option to lease 4,360 Project Gross and Project Net Acres and 1,188.10
      Company Net Acres.  Upon exercise of the option, we will be
      obligated to pay $218,000 and to drill one well every 180 days to maintain
      the lease.
 
 (3)
              The
      project interest is the working interest in the concession and not
      necessarily the working interest in the
  well.




6
 Table of Contents


Drilling
Activities





In 2007,
we drilled 3 domestic wells and 26 wells in Colombia, consisting of 11
exploratory and 18 developmental wells of which 18 were completed and 11 were
dry holes.





The
following table sets forth certain information regarding the actual drilling
results for each of the years 2007 and 2006 as to wells drilled in each such
individual year:





Exploratory
      Wells (1)
                                        
                                        
                                        Developmental
      Wells (1)Gross
                                        
                                        
                                        Net
                                        
                                        
                                        Gross
                                        
                                        
                                        Net2007Productive
                                        
                                        
                                        4
                                        
                                        
                                        
                                        0.53366
                                        
                                        
                                        
                                        14
                                        
                                        
                                        
                                        0.43392Dry
                                        
                                        
                                        7
                                        
                                        
                                        
                                        0.56607
                                        
                                        
                                        
                                        4
                                        
                                        
                                        
                                        0.158482006Productive
                                        
                                        
                                        3
                                        
                                        
                                        
                                        0.350
                                        
                                        
                                        
                                        7
                                        
                                        
                                        
                                        0.111Dry
                                        
                                        
                                        7
                                        
                                        
                                        
                                        0.816
                                        
                                        
                                        
                                        0
                                        
                                        
                                        
                                        0





(1)
            Gross
      wells represent the total number of wells in which we owned an interest;
      net wells represent the total of our net working interests owned in the
      wells.





At
December 31, 2007, one well was being drilled in Colombia.





Seismic
Activity





During
2007, we conducted no seismic operations.





Productive
Well Summary





The
following table sets forth certain information regarding our ownership as of
December 31, 2007 of productive gas and oil wells in the areas
indicated:





Gas
                                      
                                      
                                      OilGross
                                      
                                      
                                      Net
                                      
                                      
                                      Gross
                                      
                                      
                                      NetTexas
                                      
                                      
                                      2
                                      
                                      
                                      
                                      0.07875
                                      
                                      
                                      
                                      1
                                      
                                      
                                      
                                      0.10Louisiana
                                      
                                      
                                      5
                                      
                                      
                                      
                                      0.56300
                                      
                                      
                                      
                                      0
                                      
                                      
                                      
                                      0Oklahoma
                                      
                                      
                                      1
                                      
                                      
                                      
                                      0.02360
                                      
                                      
                                      
                                      0
                                      
                                      
                                      
                                      0Colombia
                                      
                                      
                                      0
                                      
                                      
                                      
                                      0
                                      
                                      
                                      
                                      39
                                      
                                      
                                      
                                      1.00444Total
                                      
                                      
                                      8
                                      
                                      
                                      
                                      0.66535
                                      
                                      
                                      
                                      40
                                      
                                      
                                      
                                      1.10444


7
 Table of Contents




Volume,
Prices and Production Costs





The
following table sets forth certain information regarding the production volumes,
average prices received (net of transportation costs) and average production
costs associated with our sales of gas and oil for the periods
indicated:





Year
      Ended December 31,2007
                  
                  
                  2006Net
      Production:Gas
      (Mcf):North
      America
                  
                  
                  44,250
                  
                  
                  
                  78,905South
      America
                  
                  
                  0
                  
                  
                  
                  0Oil
      (Bbls):North
      America
                  
                  
                  2,078
                  
                  
                  
                  7,673South
      America
                  
                  
                  69,127
                  
                  
                  
                  48,058Average
      sales price:Gas
      ($ per Mcf)
                  
                  
                  6.90
                  
                  
                  
                  6.75Oil
      ($ per Bbl)
                  
                  
                  65.61
                  
                  
                  
                  55.55Average
      production expense and Taxes ($ per Bbls):North
      America
                  
                  
                  13.80
                  
                  
                  
                  9.52South
      America
                  
                  
                  24.75
                  
                  
                  
                  17.04





Natural
Gas and Oil Reserves





The
following table summarizes the estimates of our historical net proved reserves
as of December 31, 2007 and 2006, and the present value attributable to these
reserves at these dates.  The reserve data and present values were
prepared by Aluko & Associates, Inc., independent petroleum engineering
consultants:





At
      December 31,2007
                  
                  
                  2006Net
      proved reserves (1):Natural
      gas (Mcf)
                  
                  
                  135,649
                  
                  
                  
                  425,750Oil
      (Bbls)
                  
                  
                  1,285,239
                  
                  
                  
                  392,356Standardized
      measure of discounted future net cash flows (2)
                  
                  $
                  55,951,503
                  
                  
                  $
                  8,082,337





(1)
            At
      December 31, 2007, net proved reserves, by region, consisted of 1,281,227
      barrels of oil in South America and 4,012 barrels of oil in North America;
      all natural gas reserves were in North
America.





(2)
            The
      standardized measure of discounted future net cash flows represents the
      present value of future net revenues after income tax discounted at 10%
      per annum and has been calculated in accordance with SFAS No. 69,
      “Disclosures About Oil and Gas Producing Activities” (see Note 7 –
      Supplemental Information on Oil and Gas Exploration, Development and
      Production Activities (Unaudited)) and in accordance with current SEC
      guidelines, and does not include estimated future cash inflows from
      hedging.  The standardized measure of discounted future net cash
      flows attributable to our reserves was prepared using prices in effect at
      the end of the respective periods presented, discounted at 10% per
      annum.


8
 Table of Contents




In
accordance with applicable requirements of the Securities and Exchange
Commission, we estimate our proved reserves and future net cash flows using
sales prices and costs estimated to be in effect as of the date we make the
reserve estimates.  We hold the estimates constant throughout the life
of the properties, except to the extent a contract specifically provides for
escalation.  Gas prices, which have fluctuated widely in recent years,
affect estimated quantities of proved reserves and future net cash
flows.  Any estimates of natural gas and oil reserves and their values
are inherently uncertain, including many factors beyond our
control.  The reserve data contained in this report represent only
estimates.  Reservoir engineering is a subjective process of
estimating underground accumulations of natural gas and oil that cannot be
measured in an exact manner.  The accuracy of reserve estimates is a
function of the quality of available data and of engineering and geological
interpretation and judgment.  As a result, estimates of different
engineers, including those we use, may vary.  In addition, estimates
of reserves may be revised based upon actual production, results of future
development and exploration activities, prevailing natural gas and oil prices,
operating costs and other factors, which revision may be
material.  Accordingly, reserve estimates may be different from the
quantities of natural gas and oil that we are ultimately able to recover and are
highly dependent upon the accuracy of the underlying assumptions.  Our
estimated proved reserves have not been filed with or included in reports to any
federal agency.





Leasehold
Acreage





The
following table sets forth as of December 31, 2007, the gross and net acres of
proved developed and proved undeveloped and unproven gas and oil leases which we
hold or have the right to acquire:





Proved
      Developed
                  
                  
                  Proved
      Undeveloped
                  
                  
                  UnprovenGross
                  
                  
                  Net
                  
                  
                  Gross
                  
                  
                  Net
                  
                  
                  Gross
                  
                  
                  NetTexas
                  
                  
                  1,210.38
                  
                  
                  
                  51.30
                  
                  
                  
                  0
                  
                  
                  
                  0
                  
                  
                  
                  2,320.94
                  
                  
                  
                  416.94Louisiana
                  
                  
                  3,670.00
                  
                  
                  
                  313.08
                  
                  
                  
                  0
                  
                  
                  
                  0
                  
                  
                  
                  9,364.00
                  
                  
                  
                  1437.28Oklahoma
                  
                  
                  160.00
                  
                  
                  
                  3.78
                  
                  
                  
                  0
                  
                  
                  
                  0
                  
                  
                  
                  0
                  
                  
                  
                  0Colombia
                  
                  
                  12,160.00
                  
                  
                  
                  281.42
                  
                  
                  
                  2,240.00
                  
                  
                  
                  134.28
                  
                  
                  
                  769,057.00
                  
                  
                  
                  66,785.00Total
                  
                  
                  17,200.38
                  
                  
                  
                  649.58
                  
                  
                  
                  2,240.00
                  
                  
                  
                  134.28
                  
                  
                  
                  780,741.94
                  
                  
                  
                  68,639.22





During
2007, we acquired interests in the 640 acre Caddo Lake Prospect in Caddo Parish,
Louisiana with an option to acquire additional leases covering 4,400 acres.
During 2007, we relinquished interests in various leases in Texas covering
approximately 664 gross acres and 80 net acres and leases in Louisiana covering
approximately 425 gross acres and 35 net acres.  Also during 2007, a
30% interest in our Cara Cara Concession reverted to Ecopetrol pursuant to the
terms of the concession, reducing our interest in the concession from
approximately 1.59% to 1.116% and resulting in an approximately 1,094 acre
reduction in our net acreage in Colombia.





Title
to Properties





Title to
properties is subject to royalty, overriding royalty, carried working, net
profits, working and other similar interests and contractual arrangements
customary in the gas and oil industry, liens for current taxes not yet due and
other encumbrances.  As is customary in the industry in the case of
undeveloped properties, little investigation of record title is made at the time
of acquisition (other than preliminary review of local records).





Investigation,
including a title opinion of local counsel, generally is made before
commencement of drilling operations.





Marketing





At
January 1, 2008, we had no contractual agreements to sell our gas and oil
production and all production was sold on spot markets.


9
 Table of Contents


Possible
Sale of Cara Cara Concession





On July
17, 2007, our management was advised that Hupecol LLC had retained an investment
bank for purposes of evaluating a possible transaction involving the
monetization of Hupecol assets. Pursuant to that engagement, in March 2008,
Hupecol Caracara LLC, as owner/operator under the Caracara Association Contract,
entered into a Purchase and Sale Agreement to sell all of its interest in the
Caracara Association Contract and related assets for a sale price of $920
million, subject to certain closing adjustments based on oil price fluctuations
and operations between the effective date of the sale, January 1, 2008, and the
closing date.  Pursuant to our investment in Hupecol Caracara LLC, we
hold a 1.594674% interest in the Caracara assets being sold and will receive our
proportionate interest in the net sale proceeds after deduction of commissions
and transaction expenses.





Completion
of the sale of the Caracara assets is subject to satisfaction of various
conditions set out in the Purchase and Sale Agreement, including the granting of
all consents and approvals of the Colombian governmental authorities required
for the transfer of the assets to the purchaser.





Employees





As of
March 1, 2008, we had 2 full-time employees and no part time
employees.  The employees are not covered by a collective bargaining
agreement, and we do not anticipate that any of our future employees will be
covered by such agreements.





Item1A.
            Risk
      Factors





Our
business activities and the value of our securities are subject to significant
hazards and risks, including those described below. If any of such events should
occur, our business, financial condition, liquidity and/or results of operations
could be materially harmed, and holders and purchasers of our securities could
lose part or all of their investments.




A
substantial or extended decline in oil and natural gas prices may adversely
affect our business, financial condition or results of operations and our
ability to meet our capital expenditure obligations and financial
commitments.





The price
we receive for our oil and natural gas production heavily influences our
revenue, profitability, access to capital and future rate of growth. Oil and
natural gas are commodities and, therefore, their prices are subject to wide
fluctuations in response to relatively minor changes in supply and demand.
Historically, the markets for oil and natural gas have been volatile. These
markets will likely continue to be volatile in the future. The prices we receive
for our production, and the levels of our production, depend on numerous factors
beyond our control. These factors include, but are not limited to, the
following:





·
              changes
      in global supply and demand for oil and natural
  gas;


·
              the
      actions of the Organization of Petroleum Exporting Countries, or
      OPEC;


·
              the
      price and quantity of imports of foreign oil and natural
    gas;


·
              political
      conditions, including embargoes, in or affecting other oil-producing
      activity;


·
              the
      level of global oil and natural gas exploration and production
      activity;


·
              the
      level of global oil and natural gas
inventories;


·
              weather
      conditions;


·
              technological
      advances affecting energy consumption;
and


·
              the
      price and availability of alternative
fuels.




Lower oil
and natural gas prices may not only decrease our revenues on a per unit basis
but also may reduce the amount of oil and natural gas that we can produce
economically. Lower prices will also negatively impact the value of our proved
reserves. A substantial or extended decline in oil or natural gas prices may
materially and adversely affect our future business, financial condition,
results of operations, liquidity or ability to finance planned capital
expenditures.


10
 Table of Contents





A
substantial percentage of our properties are undeveloped; therefore the risk
associated with our success is greater than would be the case if the majority of
our properties were categorized as proved developed producing.




Because
a substantial percentage of our properties are unproven or proved undeveloped,
we will require significant additional capital to prove and develop such
properties before they may become productive. At December 31, 2007,
approximately 26.96% of our proved reserves were producing.  Further,
because of the inherent uncertainties associated with drilling for oil and gas,
some of these properties may never be developed to the extent that they result
in positive cash flow. Even if we are successful in our development efforts, it
could take several years for a significant portion of our undeveloped properties
to be converted to positive cash flow.




While our
current business plan is to fund the development costs with funds on hand and
cash flow from our other producing properties, if such funds are not sufficient
we may be forced to seek alternative sources for cash, through the issuance of
additional equity or debt securities, increased borrowings or other
means.





Drilling
for and producing oil and natural gas are high risk activities with many
uncertainties that could adversely affect our business, financial condition or
results of operations.




Our
future success will depend on the success of our exploitation, exploration,
development and production activities. Our oil and natural gas exploration and
production activities are subject to numerous risks beyond our control,
including the risk that drilling will not result in commercially viable oil or
natural gas production. Our decisions to purchase, explore, develop or otherwise
exploit prospects or properties will depend in part on the evaluation of data
obtained through geophysical and geological analyses, production data and
engineering studies, the results of which are often inconclusive or subject to
varying interpretations. Please read “—Reserve estimates depend on many
assumptions that may turn out to be inaccurate” (below) for a discussion of the
uncertainty involved in these processes. Our cost of drilling, completing and
operating wells is often uncertain before drilling commences. Overruns in
budgeted expenditures are common risks that can make a particular project
uneconomical. Further, many factors may curtail, delay or cancel drilling,
including the following:





·
              delays
      imposed by or resulting from compliance with regulatory
      requirements;


·
              pressure
      or irregularities in geological
formations;


·
              shortages
      of or delays in obtaining equipment and qualified
    personnel;


·
              equipment
      failures or accidents;


·
              adverse
      weather conditions;


·
              reductions
      in oil and natural gas
prices;


·
              title
      problems; and


·
              limitations
      in the market for oil and natural
gas.




If
oil and natural gas prices decrease, we may be required to take write-downs of
the carrying values of our oil and natural gas properties, potentially
negatively impacting the trading value of our securities.




Accounting
rules require that we review periodically the carrying value of our oil and
natural gas properties for possible impairment. Based on specific market factors
and circumstances at the time of prospective impairment reviews, and the
continuing evaluation of development plans, production data, economics and other
factors, we may be required to write down the carrying value of our oil and
natural gas properties.  A write-down could constitute a non-cash
charge to earnings. It is likely the cumulative effect of a write-down could
also negatively impact the trading price of our securities.





Reserve
estimates depend on many assumptions that may turn out to be inaccurate. Any
material inaccuracies in these reserve estimates or underlying assumptions will
materially affect the quantities and present value of our reserves.




The
process of estimating oil and natural gas reserves is complex. It requires
interpretations of available technical data and many assumptions, including
assumptions relating to economic factors. Any significant inaccuracies in these
interpretations or assumptions could materially affect the estimated quantities
and present value of reserves shown in this report.





In order
to prepare our estimates, we must project production rates and timing of
development expenditures. We must also analyze available geological,
geophysical, production and engineering data. The extent, quality and
reliability of this data can vary. The process also requires economic
assumptions about matters such as oil and natural gas prices, drilling and
operating expenses, capital expenditures, taxes and availability of funds.
Therefore, estimates of oil and natural gas reserves are inherently
imprecise.


11
 Table of Contents




Actual
future production, oil and natural gas prices, revenues, taxes, development
expenditures, operating expenses and quantities of recoverable oil and natural
gas reserves most likely will vary from our estimates. Any significant variance
could materially affect the estimated quantities and present value of our
reserves. In addition, we may adjust estimates of proved reserves to reflect
production history, results of exploration and development, prevailing oil and
natural gas prices and other factors, many of which are beyond our
control.  During the years ended December 31, 2006 and 2007, revisions
to prior estimates resulted in significant negative revisions to our proved
reserves.  Negative revisions during fiscal year 2006 amounted to
40.8% of prior year-end proved gas reserves and 39.7% of prior year-end proved
oil reserves.  Negative revisions during fiscal year 2007 amounted to
57.7% of prior year-end proved natural gas reserves and 40.2% of prior year-end
proved oil reserves.


You
should not assume that the present value of future net revenues from our proved
reserves, as reported from time to time, is the current market value of our
estimated oil and natural gas reserves. In accordance with SEC requirements, we
generally base the estimated discounted future net cash flows from our proved
reserves on prices and costs on the date of the estimate. Actual future prices
and costs may differ materially from those used in the present value estimate.
If future values decline or costs increase it could negatively impact our
ability to finance operations, and individual properties could cease being
commercially viable, affecting our decision to continue operations on producing
properties or to attempt to develop properties. All of these factors would have
a negative impact on earnings and net income, and most likely the trading price
of our securities.





We
are dependent upon third party operators of our oil and gas
properties.





Under the
terms of the Operating Agreements related to our oil and gas properties, third
parties act as the operator of our oil and gas wells and control the drilling
activities to be conducted on our properties. Therefore, we have limited control
over certain decisions related to activities on our properties, which could
affect our results of operations. Decisions over which we have limited control
include:





·
            the
      timing and amount of capital
expenditures;


·
            the
      timing of initiating the drilling and recompleting of
    wells;


·
            the
      extent of operating costs; and


·
            the
      level of ongoing production.




Prospects
that we decide to drill may not yield oil or natural gas in commercially viable
quantities.




Our
prospects are properties on which we have identified what we believe, based on
available seismic and geological information, to be indications of oil or
natural gas. Our prospects are in various stages of evaluation, ranging from a
prospect that is ready to drill to a prospect that will require substantial
additional seismic data processing and interpretation. There is no way to
predict in advance of drilling and testing whether any particular prospect will
yield oil or natural gas in sufficient quantities to recover drilling or
completion costs or to be economically viable. This risk may be enhanced in our
situation, due to the fact that a significant percentage of our reserves are
currently unproved reserves. The use of seismic data and other technologies and
the study of producing fields in the same area will not enable us to know
conclusively prior to drilling whether oil or natural gas will be present or, if
present, whether oil or natural gas will be present in commercial quantities. We
cannot assure you that the analogies we draw from available data from other
wells, more fully explored prospects or producing fields will be applicable to
our drilling prospects.




We
may incur substantial losses and be subject to substantial liability claims as a
result of our oil and natural gas operations.




We are
not insured against all risks. Losses and liabilities arising from uninsured and
underinsured events could materially and adversely affect our business,
financial condition or results of operations. Our oil and natural gas
exploration and production activities are subject to all of the operating risks
associated with drilling for and producing oil and natural gas, including the
possibility of:





·
              environmental
      hazards, such as uncontrollable flows of oil, natural gas, brine, well
      fluids, toxic gas or other pollution into the environment, including
      groundwater and shoreline
contamination;


·
              abnormally
      pressured formations;


·
              mechanical
      difficulties, such as stuck oil field drilling and service tools and
      casing collapse;


·
              fires
      and explosions;


·
              personal
      injuries and death; and


·
              natural
      disasters.


12
 Table of Contents


Any of
these risks could adversely affect our ability to conduct operations or result
in substantial losses to our company. We may elect not to obtain insurance if we
believe that the cost of available insurance is excessive relative to the risks
presented. In addition, pollution and environmental risks generally are not
fully insurable. If a significant accident or other event occurs and is not
fully covered by insurance, then it could adversely affect us.




We
are subject to complex laws that can affect the cost, manner or feasibility of
doing business.




Exploration,
development, production and sale of oil and natural gas are subject to extensive
federal, state, local and international regulation. We may be required to make
large expenditures to comply with governmental regulations. Matters subject to
regulation include:





·
              discharge
      permits for drilling
operations;


·
              drilling
      bonds;


·
              reports
      concerning operations;


·
              the
      spacing of wells;


·
              unitization
      and pooling of properties;
and


·
              taxation.





Under
these laws, we could be liable for personal injuries, property damage and other
damages. Failure to comply with these laws also may result in the suspension or
termination of our operations and subject us to administrative, civil and
criminal penalties. Moreover, these laws could change in ways that substantially
increase our costs. Any such liabilities, penalties, suspensions, terminations
or regulatory changes could materially adversely affect our financial condition
and results of operations.





Our
operations may incur substantial liabilities to comply with the environmental
laws and regulations.




Our oil
and natural gas operations are subject to stringent federal, state and local
laws and regulations relating to the release or disposal of materials into the
environment or otherwise relating to environmental protection. These laws and
regulations may require the acquisition of a permit before drilling commences,
restrict the types, quantities and concentration of substances that can be
released into the environment in connection with drilling and production
activities, limit or prohibit drilling activities on certain lands lying within
wilderness, wetlands and other protected areas, and impose substantial
liabilities for pollution resulting from our operations. Failure to comply with
these laws and regulations may result in the assessment of administrative, civil
and criminal penalties, incurrence of investigatory or remedial obligations or
the imposition of injunctive relief. Changes in environmental laws and
regulations occur frequently, and any changes that result in more stringent or
costly waste handling, storage, transport, disposal or cleanup requirements
could require us to make significant expenditures to maintain compliance, and
may otherwise have a material adverse effect on our results of operations,
competitive position or financial condition as well as the industry in general.
Under these environmental laws and regulations, we could be held strictly liable
for the removal or remediation of previously released materials or property
contamination regardless of whether we were responsible for the release or if
our operations were standard in the industry at the time they were
performed.





Our
operations in Colombia are subject to risks relating to political and economic
instability.





We
currently have interests in multiple oil and gas concessions in Colombia and
anticipate that operations in Colombia will constitute a substantial element of
our strategy going forward.  The political climate in Colombia is
unstable and could be subject to radical change over a very short period of
time.  In the event of a significant negative change in the political
or economic climate in Colombia, we may be forced to abandon or suspend our
operations in Colombia.





Our
operations in Colombia are controlled by Hupecol which may carry out
transactions affecting our Colombian assets and operations without our
consent.





We are an
investor in Hupecol and our interest in the assets and operations of Hupecol
represent all of our assets and operations in Colombia and are our principal
assets and operations.  On July 17, 2007, Hupecol advised us that it
had retained an investment bank for purposes of evaluating a possible
transaction involving monetization of Hupecol’s assets.  In March
2008, Hupecol Caracara LLC, as owner/operator of the Caracara Association
Contract, entered into a Purchase and Sale Agreement to sell all of its interest
in the Caracara prospect.  If that transaction is completed, we will
receive our proportionate interest in the net sale proceeds and will relinquish
all of our interest in the Caracara prospect.  There is no assurance
as to when, or if, the planned sale of the Caracara prospect will be
completed.  If the planned sale is completed there is no assurance
that we will be able to reinvest the proceeds received in a manner that will
adequately replace the revenues generated by, and the reserves attributable to,
the Caracara prospect.  Further, it is possible that Hupecol will
carry out similar sales in the future. Our management intends to closely monitor
the nature and progress of future transactions by Hupecol in order to protect
our interests.  However, we have no effective ability to alter or
prevent a transaction and are unable to predict whether or not any such
transactions will in fact occur or the nature or timing of any such
transaction.


13
 Table of Contents


Unless
we replace our oil and natural gas reserves, our reserves and production will
decline, which would adversely affect our cash flows and income.




Unless we
conduct successful development, exploitation and exploration activities or
acquire properties containing proved reserves, our proved reserves will decline
as those reserves are produced. Producing oil and natural gas reservoirs
generally are characterized by declining production rates that vary depending
upon reservoir characteristics and other factors. Our future oil and natural gas
reserves and production, and, therefore our cash flow and income, are highly
dependent on our success in efficiently developing and exploiting our current
reserves and economically finding or acquiring additional recoverable reserves.
If we are unable to develop, exploit, find or acquire additional reserves to
replace our current and future production, our cash flow and income will decline
as production declines, until our existing properties would be incapable of
sustaining commercial production.




Our
success depends on our management team and other key personnel, the loss of any
of whom could disrupt our business operations.





Our
success will depend on our ability to retain John F. Terwilliger, our principal
executive officer, and to attract other experienced management and
non-management employees, including engineers, geoscientists and other technical
and professional staff. We will depend, to a large extent, on the efforts,
technical expertise and continued employment of such personnel and members of
our management team. If members of our management team should resign or we are
unable to attract the necessary personnel, our business operations could be
adversely affected.




The
unavailability or high cost of drilling rigs, equipment, supplies, personnel and
oil field services could adversely affect our ability to execute on a timely
basis our exploration and development plans within our budget.




Shortages
or the high cost of drilling rigs, equipment, supplies or personnel could delay
or adversely affect our development and exploration operations. As the price of
oil and natural gas increases, the demand for production equipment and personnel
will likely also increase, potentially resulting, at least in the near-term, in
shortages of equipment and personnel. In addition, larger producers may be more
likely to secure access to such equipment by virtue of offering drilling
companies more lucrative terms. If we are unable to acquire access to such
resources, or can obtain access only at higher prices, not only would this
potentially delay our ability to convert our reserves into cash flow, but could
also significantly increase the cost of producing those reserves, thereby
negatively impacting anticipated net income.




If
our access to markets is restricted, it could negatively impact our production,
our income and ultimately our ability to retain our leases.




Market
conditions or the unavailability of satisfactory oil and natural gas
transportation arrangements may hinder our access to oil and natural gas markets
or delay our production. The availability of a ready market for our oil and
natural gas production depends on a number of factors, including the demand for
and supply of oil and natural gas and the proximity of reserves to pipelines and
terminal facilities. Our ability to market our production depends in substantial
part on the availability and capacity of gathering systems, pipelines and
processing facilities owned and operated by third parties. Our failure to obtain
such services on acceptable terms could materially harm our
business.





We may
operate in areas with limited or no access to pipelines, thereby necessitating
delivery by other means, such as trucking, or requiring compression facilities.
Such restrictions on our ability to sell our oil or natural gas have several
adverse affects, including higher transportation costs, fewer potential
purchasers (thereby potentially resulting in a lower selling price) or, in the
event we were unable to market and sustain production from a particular lease
for an extended time, possibly causing us to lose a lease due to lack of
production.


14
 Table of Contents





We
may need additional financing to support operations and future capital
commitments.





While we
presently believe that our operating cash flows and funds on hand will support
our ongoing operations and anticipated future capital requirements, a number of
factors could result in our needing additional financing, including reductions
in oil and natural gas prices, declines in production, unexpected developments
in operations that could decrease our revenues, increase our costs or require
additional capital contributions and commitments to new acquisition or drilling
programs.  We have no commitments to provide any additional financing,
if needed, and may be limited in our ability to obtain the capital necessary to
support operations, complete development, exploitation and exploration programs
or carry out new acquisition or drilling programs. We have not thoroughly
investigated whether this capital would be available, who would provide it, and
on what terms.  If we are unable, on acceptable terms, to raise the
required capital, our business may be seriously harmed or even
terminated.




Competition
in the oil and natural gas industry is intense, which may adversely affect our
ability to compete.




We
operate in a highly competitive environment for acquiring properties, marketing
oil and natural gas and securing trained personnel. Many of our competitors
possess and employ financial, technical and personnel resources substantially
greater than ours, which can be particularly important in the areas in which we
operate. Those companies may be able to pay more for productive oil and natural
gas properties and exploratory prospects and to evaluate, bid for and purchase a
greater number of properties and prospects than our financial or personnel
resources permit. Our ability to acquire additional prospects and to find and
develop reserves in the future will depend on our ability to evaluate and select
suitable properties and to consummate transactions in a highly competitive
environment. Also, there is substantial competition for capital available for
investment in the oil and natural gas industry. We may not be able to compete
successfully in the future in acquiring prospective reserves, developing
reserves, marketing hydrocarbons, attracting and retaining quality personnel and
raising additional capital.





The
price of our common stock may fluctuate significantly, and this may make it
difficult for you to resell common stock when you want or at prices you find
attractive.





The price
of our common stock constantly changes. We expect that the market price of our
common stock will continue to fluctuate.





Our stock
price may fluctuate as a result of a variety of factors, many of which are
beyond our control.  These factors include:





·
            quarterly
      variations in our operating
results;


·
            operating
      results that vary from the expectations of management, securities analysts
      and investors;


·
            changes
      in expectations as to our future financial
  performance;


·
            announcements
      by us, our partners or our competitors of leasing and drilling
      activities;


·
            the
      operating and securities price performance of other companies that
      investors believe are comparable to
us;


·
            future
      sales of our equity or equity-related
  securities;


·
            changes
      in general conditions in our industry and in the economy, the financial
      markets and the domestic or international political
    situation;


·
            fluctuations
      in oil and gas prices;


·
            departures
      of key personnel; and


·
            regulatory
      considerations.





In
addition, in recent years, the stock market in general has experienced extreme
price and volume fluctuations.  This volatility has had a significant
effect on the market price of securities issued by many companies for reasons
often unrelated to their operating performance.  These broad market
fluctuations may adversely affect our stock price, regardless of our operating
results.





The
sale of a substantial number of shares of our common stock may affect our stock
price.





Future
sales of substantial amounts of our common stock or equity-related securities in
the public market or privately, or the perception that such sales could occur,
could adversely affect prevailing trading prices of our common stock and could
impair our ability to raise capital through future offerings of equity or
equity-related securities.  No prediction can be made as to the
effect, if any, that future sales of shares of common stock or the availability
of shares of common stock for future sale, will have on the trading price of our
common stock.


15
 Table of Contents




Our
charter and bylaws, as well as provisions of Delaware law, could make it
difficult for a third party to acquire our company and also could limit the
price that investors are willing to pay in the future for shares of our common
stock.





Delaware
corporate law and our charter and bylaws contain provisions that could delay,
deter or prevent a change in control of our company or our
management.  These provisions could also discourage proxy contests and
make it more difficult for our stockholders to elect directors and take other
corporate actions without the concurrence of our management or board of
directors.  These provisions:





·
            authorize
      our board of directors to issue “blank check” preferred stock, which is
      preferred stock that can be created and issued by our board of directors,
      without stockholder approval, with rights senior to those of our common
      stock;


·
            provide
      for a staggered board of directors and three-year terms for directors, so
      that no more than one-third of our directors could be replaced at any
      annual meeting;


·
            provide
      that directors may be removed only for cause;
  and


·
            establish
      advance notice requirements for submitting nominations for election to the
      board of directors and for proposing matters that can be acted upon by
      stockholders at a meeting.





We are
also subject to anti-takeover provisions under Delaware law, which could also
delay or prevent a change of control.  Taken together, these
provisions of our charter and bylaws, Delaware law may discourage transactions
that otherwise could provide for the payment of a premium over prevailing market
prices of our common stock and also could limit the price that investors are
willing to pay in the future for shares of our common stock.





Our
management owns a significant amount of our common stock, giving them influence
or control in corporate transactions and other matters, and their interests
could differ from those of other shareholders.





At March
1, 2008, our directors and executive officers owned approximately 46.5 percent
of our outstanding common stock.  As a result, our current directors
and executive officer are in a position to significantly influence or control
the outcome of matters requiring a shareholder vote, including the election of
directors, the adoption of any amendment to our certificate of incorporation or
bylaws, and the approval of mergers and other significant corporate
transactions. Such level of control of the company may delay or prevent a change
of control on terms favorable to the other shareholders and may adversely affect
the voting and other rights of other shareholders.





Item1B.
            Unresolved
      Staff Comments





Not
applicable





Item2.
            Properties





We
currently lease approximately 4,739 square feet of office space in Houston,
Texas as our executive offices.  Management anticipates that our space
will be sufficient for the foreseeable future.  The average monthly
rental under the lease, which expires on May 31, 2012, is $6,682.





A
description of our interests in oil and gas properties is included in “Item 1.
Business.”





Item3.
            Legal
      Proceedings





We may
from time to time be a party to lawsuits incidental to our
business.  As of March 1, 2008, we were not aware of any current,
pending, or threatened litigation or proceedings that could have a material
adverse effect on our results of operations, cash flows or financial
condition.





Item4.
            Submission
      of Matters to a Vote of Security
Holders





Not
applicable


16
 Table of Contents




PART
II





Item5.
            Market
      For Registrant’s Common Equity, Related Stockholder Matters and Issuer
      Purchases of Equity Securities





Our
common stock is listed on the Nasdaq Capital Market (“Nasdaq”) under the symbol
“HUSA.”  From July 28, 2006 until July 5, 2007, our common stock
traded on the American Stock Exchange and prior to July 28, 2006 traded on the
over-the-counter electronic bulletin board.   The following table
sets forth the range of high and low sale prices of our common stock for each
quarter during the past two fiscal years.





High
                      
                      
                      LowCalendar
      Year 2007
                      
                      Fourth
      Quarter
                      
                      $
                      4.44
                      
                      
                      $
                      2.46Third
      Quarter
                      
                      
                      6.10
                      
                      
                      
                      2.29Second
      Quarter
                      
                      
                      6.14
                      
                      
                      
                      4.71First
      Quarter
                      
                      
                      7.35
                      
                      
                      
                      3.23Calendar
      Year 2006
                      
                      Fourth
      Quarter
                      
                      $
                      7.95
                      
                      
                      $
                      2.28Third
      Quarter
                      
                      
                      3.25
                      
                      
                      
                      2.25Second
      Quarter
                      
                      
                      4.94
                      
                      
                      
                      2.90First
      Quarter
                      
                      
                      3.85
                      
                      
                      
                      2.95





At
February 29, 2008, the closing price of the common stock on Nasdaq was
$4.27.





As of
February 29, 2008, there were approximately 2,059 record holders of our common
stock.





We have
not paid any cash dividends since inception and presently anticipate that all
earnings, if any, will be retained for development of our business and that no
dividends on our common stock will be declared in the foreseeable
future.  Any future dividends will be subject to the discretion of our
Board of Directors and will depend upon, among other things, future earnings,
operating and financial condition, capital requirements, general business
conditions and other pertinent facts.  Therefore, there can be no
assurance that any dividends on our common stock will be paid in the
future.





The
following table provides information as of December 31, 2007 with respect to the
shares of our common stock that may be issued under our existing equity
compensation plans.





Plan
      Category
                
                Number
      of securities to be issued upon exercise of outstanding options, warrants
      and
                  rights
      (a)
                
                
                Weighted-average
      exercise price of outstanding options, warrants and
                  rights
      (b)
                
                
                Number
      of securities remaining available for future issuance under equity
      compensation plans (excluding securities reflected in column
      (a))Equity
      compensation plans approved by security holders (1)
                
                
                339,000
                
                
                
                3.12
                
                
                
                161,000Equity
      compensation plans not approved by security holders
                
                
                -
                
                
                
                -
                
                
                
                -Total
                
                
                339,000
                
                
                
                3.12
                
                
                
                161,000





(1)
            Consists
      of 500,000 shares reserved for issuance under the Houston American Energy
      Corp. 2005 Stock Option Plan.  The stock option plan was adopted
      by the board of directors in August 2005 and approved by shareholders in
      January 2006.





Item6.
            Selected
      Financial Data




Not
applicable


17
 Table of Contents




Item7.
            Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations





General





Houston
American Energy was incorporated in April 2001 for the purposes of seeking oil
and gas exploration and development prospects.  Since inception, we
have sought out prospects utilizing the expertise and business contacts of John
F. Terwilliger, our founder and principal executive officer. Through the third
quarter of 2002, the acquisition targets were in the Gulf Coast region of Texas
and Louisiana, where Mr. Terwilliger has been involved in oil and gas
exploration for over 30 years. In the fourth quarter 2002, we initiated
international efforts through a Colombian joint venture more fully described
below.  Domestically and internationally, the strategy is to be a
non-operating partner with exploration and production companies that have much
larger resources and operations.





Overview
of Operations





Our
operations are exclusively devoted to natural gas and oil exploration and
production.





Our
focus, to date and for the foreseeable future, is the identification of oil and
gas drilling prospects and participation in the drilling and production of
prospects.  We typically identify prospects and assemble various
drilling partners to participate in, and fund, drilling
activities.  We may retain an interest in a prospect for our services
in identifying and assembling prospects without any contribution on our part to
drilling and completion costs or we may contribute to drilling and completion
costs based on our proportionate interest in a prospect.





We derive
our revenues from our interests in oil and gas production sold from prospects in
which we own an interest, whether through royalty interests, working interest or
other arrangements.  Our revenues vary directly based on a combination
of production volumes from wells in which we own an interest, market prices of
oil and natural gas sold and our percentage interest in each
prospect.





Our well
operating expenses vary depending upon the nature of our interest in each
prospect.  We may bear no interest or a proportionate interest in the
costs of drilling, completing and operating prospects on which we own an
interest.  Other than well drilling, completion and operating
expenses, our principal operating expenses relate to our efforts to identify and
secure prospects, comply with our various reporting obligations as a publicly
held company and general overhead expenses.





Business
Developments During 2007





Drilling
Activities





During
2007, we drilled 26 international wells in Colombia, as follows:





·
            8
      wells were drilled on concessions in which we hold a 12.5% working
      interest, of which 1 was in production as of December 31, 2007, 2 were
      temporarily shut in due to mechanical problems or weather conditions and 5
      were either dry holes or were ultimately abandoned, including 1 well that
      was converted to a water disposal
well.





·
            18
      wells were drilled on concessions in which we hold a 1.116% working
      interest, of which 13 were in production as of December 31, 2007 and 5
      were dry holes.





During
2007, we drilled three domestic wells, of which 1 was in production as of
December 31, 2007, 1 was a dry hole and 1 was awaiting a pipeline connection
before testing and completion.





At
December 31, 2007, we had 1 well in Colombia being drilled and no domestic wells
being drilled.





Leasehold
Activity





During
2007, we acquired an interest in a 640-acre prospect known as the Caddo Lake
Prospect in Caddo Parish, Louisiana with a right to participate in drilling on
an additional 4,400 acres.  We paid 35% of the costs of the initial
well drilled on the Caddo Lake Prospect and have a 33.5% Working Interest
(25.125% Net Revenue Interest) until well payout. After well payout, we will own
a 27.25% Working Interest and 20.4375% Net Revenue Interest. On all additional
well costs after the initial well and on all additional lease costs, we will
have a 27.25% Working Interest with a 20.4375% Net Revenue
Interest.


18
 Table of Contents




During
2007, we relinquished interests in various leases in Texas covering
approximately 664 gross acres and 80 net acres and leases in Louisiana covering
approximately 425 gross acres and 35 net acres.  Also during 2007, a
30% interest in our Cara Cara Concession reverted to Ecopetrol pursuant to the
terms of the concession, reducing our interest in the concession from
approximately 1.59% to 1.116% and resulting in an approximately 1,094 acre
reduction in our net acreage in Colombia.





Seismic
Activity





During
2007, we conducted no new seismic activity.





Possible
Sale of Cara Cara Concession





On July
17, 2007, our management was advised that Hupecol LLC had retained an investment
bank for purposes of evaluating a possible transaction involving the
monetization of Hupecol assets.  Pursuant to that engagement, in March
2008, Hupecol Caracara LLC, as owner/operator under the Caracara Association
Contract, entered into a Purchase and Sale Agreement to sell all of its interest
in the Caracara Association Contract and related assets for a gross sale price
of $920 million, subject to certain closing adjustments based on oil price
fluctuations and operations between the effective date of the sale, January 1,
2008, and the closing date.  Pursuant to our investment in Hupecol
Caracara LLC, we hold a 1.594674% interest in the Caracara assets being sold and
will receive our proportionate interest in the net sale proceeds after deduction
of commissions and transaction expenses.





Completion
of the sale of the Caracara assets is subject to satisfaction of various
conditions set out in the Purchase and Sale Agreement, including the granting of
all consents and approvals of the Colombian governmental authorities required
for the transfer of the assets to the purchaser.





Hupecol
Tax Allocation Credits





In August
2007, we were advised that Hupecol would be adjusting the division of interests
among the members of the various Hupecol entities to reflect revised Colombian
tax allocations among the various Hupecol entities.  Specifically,
Hupecol advised that Colombian tax attributes were allocated among the Hupecol
entities without taking into account the specific contributions of each
individual entity resulting in an improper shifting of tax expenses and benefits
among the Hupecol entities and, in turn, the members of each of the Hupecol
entities, including our company.





As a
result of the adjustment by Hupecol, during 2007, we received a net credit from
Hupecol for excess Colombian taxes allocated to us in the amount of
$662,688.  The credit is reflected in our financial statements as a
credit to income tax expense.





Corporate
Developments





During
2007, our compensation committee engaged a compensation consultant, as called
for by the terms of employment of our chief financial officer, to review the
compensation arrangements of our senior executives with a view to adjusting such
compensation to reflect industry compensation practices. Following that review,
the compensation committee approved increases in base salary of our chief
executive officer and our chief financial officer, the payment of one-time cash
bonuses to each and the grant of shares of restricted stock to each, which
grants are subject to approval of the same by our shareholders.





Critical
Accounting Policies





The
following describes the critical accounting policies used in reporting our
financial condition and results of operations.  In some cases,
accounting standards allow more than one alternative accounting method for
reporting. Such is the case with accounting for oil and gas activities described
below.  In those cases, our reported results of operations would be
different should we employ an alternative accounting method.





Full Cost Method of Accounting for
Oil and Gas Activities.  We follow the full cost method of
accounting for oil and gas property acquisition, exploration and development
activities.  Under this method, all productive and nonproductive costs
incurred in connection with the exploration for and development of oil and gas
reserves are capitalized.  Capitalized costs include lease
acquisition, geological and geophysical work, delay rentals, costs of drilling,
completing and equipping successful and unsuccessful oil and gas wells and
related internal costs that can be directly identified with acquisition,
exploration and development activities, but does not include any cost related to
production, general corporate overhead or similar activities.  Gain or
loss on the sale or other disposition of oil and gas properties is not
recognized unless significant amounts of oil and gas reserves are
involved.  No corporate overhead has been capitalized as of December
31, 2007.  The capitalized costs of oil and gas properties, plus
estimated future development costs relating to proved reserves are amortized on
a units-of-production method over the estimated productive life of the reserves.
Unevaluated oil and gas properties are excluded from this
calculation.  The capitalized oil and gas property costs, less
accumulated amortization, are limited to an amount (the ceiling limitation)
equal to the sum of: (a) the present value of estimated future net revenues from
the projected production of proved oil and gas reserves, calculated at prices in
effect as of the balance sheet date and a discount factor of 10%; (b) the cost
of unproved and unevaluated properties excluded from the costs being amortized;
(c) the lower of cost or estimated fair value of unproved properties included in
the costs being amortized; and (d) related income tax effects.  Excess
costs are charged to proved properties impairment expense.


19
 Table of Contents




Unevaluated Oil and Gas
Properties.  Unevaluated oil and gas properties consist
principally of our cost of acquiring and evaluating undeveloped leases, net of
an allowance for impairment and transfers to depletable oil and gas
properties.  When leases are developed, expire or are abandoned, the
related costs are transferred from unevaluated oil and gas properties to
depletable oil and gas properties. Additionally, we review the carrying costs of
unevaluated oil and gas properties for the purpose of determining probable
future lease expirations and abandonments, and prospective discounted future
economic benefit attributable to the leases.  We record an allowance
for impairment based on a review of present value of future cash
flows.  Any resulting charge is made to operations and reflected as a
reduction of the carrying value of the recorded asset.  Unevaluated
oil and gas properties not subject to amortization include the following at
December 31, 2007 and 2006:





At
      December 31, 2007
                  
                  
                  At
      December 31, 2006Acquisition
      costs
                  
                  $
                  192,843
                  
                  
                  $
                  180,197Evaluation
      costs
                  
                  
                  719,102
                  
                  
                  
                  520,352Retention
      costs
                  
                  
                  86,861
                  
                  
                  
                  0Total
                  
                  $
                  998,806
                  
                  
                  $
                  700,549





The
carrying value of unevaluated oil and gas prospects include $13,330 and $151,039
expended for properties in South America at December 31, 2007 and December 31,
2006, respectively.  We are maintaining our interest in these
properties and development has or is anticipated to commence within the next
twelve months.





Subordinated Convertible Notes and
Warrants - Derivative Financial Instruments.The Subordinated
Convertible Notes and Warrants issued during 2005 have been accounted for in
accordance with SFAS 133 and EITF No. 00-19, "Accounting for Derivative
Financial Instruments Indexed to, and Potentially Settled in, a Company's Own
Stock."





We
identified the following instruments and derivatives requiring evaluation and
accounting under the relevant guidance applicable to financial
derivatives:





·
            Subordinated
      Convertible Notes


·
            Conversion
      feature


·
            Conversion
      price reset feature


·
            Company’s
      optional redemption right


·
            Warrants


·
            Warrants
      exercise price reset feature





We
identified the conversion feature; the conversion price reset feature and our
optional early redemption right within the Convertible Notes to represent
embedded derivatives.  These embedded derivatives were bifurcated from
their respective host debt contracts and accounted for as derivative liabilities
in accordance with EITF 00-19.  The conversion feature, the conversion
price reset feature and our optional early redemption right within the
Convertible Notes were bundled together as a single hybrid compound instrument
in accordance with SFAS No. 133 Derivatives Implementation Group Implementation
Issue No. B-15, “Embedded Derivatives:  Separate Accounting for
Multiple Derivative Features Embedded in a Single Hybrid
Instrument.”


20
 Table of Contents


We
identified the common stock warrant to be a detachable
derivative.  The warrant exercise price reset provision was identified
as an embedded derivative within the common stock warrant.  The common
stock warrant and the embedded warrant exercise price reset provision were
accounted for as a separate single hybrid compound instrument.





The
single compound embedded derivatives within Subordinated Convertible Notes and
the derivative liability for Warrants were recorded at fair value at the date of
issuance (May 4, 2005); and were marked-to-market each quarter with changes in
fair value recorded to our income statement as “Net change in fair value of
derivative liabilities.”  We utilized a third party valuation firm to
fair value the single compound embedded derivatives under the following
methods:  a layered discounted probability-weighted cash flow approach
for the single compound embedded derivatives within Subordinated Convertible
Notes; and the Black-Scholes model for the derivative liability for Warrants
based on a probability weighted exercise price.





The fair
value of the derivative liabilities was subject to the changes in the trading
value of our common stock.  As a result, our financial statements were
subject to fluctuations from quarter-to-quarter based on factors, such as the
price of our stock at the balance sheet date, the amount of shares converted by
note holders and/or exercised by warrant holders.  Consequently, our
financial position and results of operations varied from quarter-to-quarter
based on conditions other than our operating revenues and expenses.





In May
2006, each of the Subordinated Convertible Notes and Warrants accounted for as
derivative financial instruments was converted or
exercised.  Accordingly, for subsequent periods, we have no derivative
financial instruments requiring account under SFAS 133.





Stock-Based
Compensation.  We account for stock-based compensation in
accordance with the provisions of SFAS 123(R).  We use the
Black-Scholes option-pricing model, which requires the input of highly
subjective assumptions.  These assumptions include estimating the
volatility of our common stock price over the vesting term, dividend yield, an
appropriate risk-free interest rate and the number of options that will
ultimately not complete their vesting requirements
(“forfeitures”).  Changes in the subjective assumptions can materially
affect the estimated fair value of stock-based compensation and consequently,
the related amount recognized on the Statements of Operations.





Results
of Operations





Year
Ended December 31, 2007 Compared to Year Ended December 31, 2006





Oil and Gas
Revenues.  Total oil and gas revenues increased $1,774,441, or
55.4%, to $4,977,172 in fiscal 2007 compared to $3,202,731 in fiscal
2006.  The increase in revenue is due to (a) increased production
resulting from the development of the Colombian fields and (b) increases in oil
and natural gas prices, partially offset by declines in U.S.
production.  We had interests in 39 producing wells in Colombia and 7
producing wells in North America during 2007 as compared to 22 producing wells
in Colombia and 11 producing wells in North America during
2006.  Average prices from sales were $65.61 per barrel of oil and
$6.90 per mcf of gas during 2007 as compared to $55.55 per barrel of oil and
$6.75 per mcf of gas during 2006.  Following is a summary comparison,
by region, of oil and gas sales for the periods.








Colombia
                  
                  
                  North
      America
                  
                  
                  TotalYear
      ended 2007Oil
      sales
                  
                  $
                  4,531,640
                  
                  
                  $
                  140,313
                  
                  
                  $
                  4,671,953Gas
      sales
                  
                  
                  0
                  
                  
                  
                  305,219
                  
                  
                  
                  305,219Year
      ended 2006Oil
      sales
                  
                  $
                  2,565,105
                  
                  
                  $
                  95,363
                  
                  
                  $
                  2,660,468Gas
      sales
                  
                  
                  0
                  
                  
                  
                  542,263
                  
                  
                  
                  542,263





Lease Operating
Expenses.  Lease operating expenses, excluding joint venture
expenses relating to our Colombia operations discussed below, increased 81% to
$1,841,119 in 2007 from $1,017,440 in 2006.  The increase in lease
operating expenses was attributable to the increase in the number of wells
operated during 2007 (46 wells as compared to 33 wells) partially offset by
improved operating efficiencies.  Additionally operations have
increased in workovers as well as in the Dorotea and Cabiona areas where we have
a higher working interest (12.5%), which increased the amount of operating
expense we incurred during the period.


21
 Table of Contents


Following
is a summary comparison of lease operating expenses for the years ended December
31, 2007 and 2006.





Colombia
                  
                  
                  North
      America
                  
                  
                  TotalYear
      ended 2007
                  
                  $
                  1,710,689
                  
                  
                  $
                  130,430
                  
                  
                  $
                  1,841,119Year
      ended 2006
                  
                  
                  819,273
                  
                  
                  
                  198,167
                  
                  
                  
                  1,017,440





Joint Venture
Expenses.  Joint venture expenses totaled $149,200 in 2007
compared to $167,023 in 2006.  The joint venture expenses represent
our allocable share of the indirect field operating and region administrative
expenses billed by the operator of the Colombian concessions.  The
decrease in joint venture expenses was attributable to the operator reducing the
personnel working on undrilled contract areas.





Depreciation and Depletion
Expense.  Depreciation and depletion expense increased by 23.9%
to $1,099,826 in fiscal 2007 when compared to $887,911 in 2006.  The
increase in depreciation and depletion expense was primarily attributable to
increases in Colombian production and an 82% increase in the depletable cost
pool.





Impairment
Expense.During 2007, we recorded a provision for impairments
of $348,019, all of which was attributable to our North American
properties.  Impairments related to the termination, during 2007, of
operations of seven wells in the U.S. and the fact that, as of December 31,
2007, well testing had not yet been conducted on, and no reserves had been
attributed to, the well drilled during 2007 on our Caddo Lake
Prospect.





General and Administrative
Expenses.  General and administrative expense (excluding stock
based compensation) increased by 31.0% to $1,233,020 during 2007 from $941,324
in 2006.  The increase in general and administrative expense was
primarily attributable to an increase in salary to our president in mid-2006,
payment of a full year’s salary to our chief financial officer hired during
2006, increases in base salary of our president and chief financial officer
during the third quarter of 2007 and payment of bonuses to our president and
chief financial officer during 2007.





Stock
based compensation expense included in general and administrative expenses
increased by 15.7% to $335,208 in 2007 as compared to 289,755 in
2006.  The increase in stock-based compensation expense was
attributable to the 2006 grant of stock options in connection with the hiring of
our chief financial officer and the grants of options to our directors during
2007.





Other Income,
Net.  Other income, net, consists of interest income, net of
financing costs in the nature of interest and deemed interest associated with
outstanding shareholder loans and convertible notes and warrants issued in May
2005 and outstanding during part of 2006.  Certain features of the
convertible notes and warrants resulted in the recording of a deemed derivative
liability on the balance sheet and periodic interest associated with the deemed
derivative liabilities and changes in the fair market value of those deemed
liabilities.





Other
income, net, totaled $649,792 in 2007 compared to $99,263 in
2006.  The improvement in other income, net, was attributable to
interest earned on funds received from the 2006 private placement and the
absence of interest expense, financing fees and derivative related expense
during 2007 attributable to the retirement or conversion during 2006 of all
outstanding shareholder loans and convertible notes.





Income Tax Expense
(Benefit).  Income tax expense decreased to $57,196 in 2007
from $510,637 in 2006.  The decrease in income tax expense during 2007
was attributable to the gain of $662,668 associated with the reallocation of the
Hupecol tax credits discussed above, partially offset by an increase in revenue
and an effective tax rate increase in Colombia.  Income tax expense
during 2007 and 2006 was entirely attributable to operations in Colombia. We
recorded no U.S. income tax liability in 2007 or 2006.  At December
31, 2007, we had net operating loss carry forward of approximately $832,821 and
foreign tax credits of approximately $224,750.





Financial
Condition





Liquidity and Capital
Resources.  At December 31, 2007, we had a cash balance of
$417,818 and working capital of $10,428,422 compared to a cash balance of
$409,008 and working capital of $14,202,160 at December 31, 2006.  The
changes in cash and working capital during the period were primarily
attributable to the payment of drilling costs.





Cash
Flows.  Operating cash flows for 2007 totaled $1,801,481 as
compared to $1,239,446 during 2006.  The increase in operating cash
flow was primarily attributable to increased revenues from oil and gas sales
partially offset by increased lease operating expenses and general and
administrative expenses and reductions in payables and accrued
expenses.


22
 Table of Contents


Investing
activities used $1,792,672 during 2007 as compared to $17,507,371 used during
2006.  The decrease in cash flows used by investing activities during
2007 was primarily attributable to the temporary net investment of $14,000,000
in marketable securities during 2006 as compared to the sale of $7,500,000 of
those marketable securities during 2007, offset by the purchase of $3,150,000 of
marketable securities in 2007 and investments in oil and gas acquisition and
drilling activities of $6,142,672 during 2007 as compared to $3,507,371 in
2006.





Financing
activities provided $0 during 2007 as compared to $14,952,833 during
2006.  Cash flows from financing activities during 2006 related to the
private placement of common stock resulting in the receipt of net proceeds of
$15,361,583 and the receipt of $491,250 from the exercise of warrants partially
offset by the repayment of shareholder loans of $900,000.





Long-Term
Liabilities.  At December 31, 2007, we had long-term
liabilities of $135,267 as compared to $38,816 at December 31,
2006.  Long-term liabilities at December 31, 2007 and December 31,
2006 consisted of a reserve for plugging costs and deferred rent
liability.





Capital and Exploration Expenditures
and Commitments.  Our principal capital and exploration
expenditures relate to our ongoing efforts to acquire, drill and complete
prospects.  With the receipt of additional financing in 2006 and prior
years, and the increase in our revenues and operating cash flows, we expect that
future capital and exploration expenditures will be funded principally through
funds on hand and funds generated from operations.





During
2007, we invested $6,142,672 for the acquisition and development of oil and gas
properties, primarily consisting of (1) drilling of 3 domestic wells
($1,799,792), (2) drilling 26 wells in Colombia ($4,247,009), and (3) lease
retention payments on domestic properties ($95,871).





At
December 31, 2007, our only material contractual obligation requiring
determinable future payments on our part was our lease relating to our executive
offices.





The
following table details our contractual obligations as of December 31,
2007:





Payments
      due by periodTotal
                
                
                2008
                
                
                
                2009
      – 2010
                
                
                
                2011
      – 2012
                
                
                ThereafterOperating
      leases
                
                
                369,050
                
                
                
                79,576
                
                
                
                166,260
                
                
                
                123,214
                
                
                
                0Total
                
                
                369,050
                
                
                
                79,576
                
                
                
                166,260
                
                
                
                123,214
                
                
                
                0





In
addition to the contractual obligations requiring that we make fixed payments,
in conjunction with our efforts to secure oil and gas prospects, financing and
services, we have, from time to time, granted overriding royalty interests
(ORRI) in various properties, and may grant ORRIs in the future, pursuant to
which we will be obligated to pay a portion of our interest in revenues from
various prospects to third parties.





2008 Planned Drilling, Leasehold and
Other Activities.  As of December 31, 2007, we planned to drill
a total of 15 wells during 2008, of which 1 well is planned to be drilled on our
domestic exploration projects and 14 wells are planned to be drilled on our
Colombian exploration projects.  The following table reflects planned
drilling activities during 2008:





Location
              
              Prospect
      Name
              
              #
      of Planned WellsCaddo
      Parish, LA
              
              Caddo
      Lake Prospect
              
              1Llanos
      Basin, Colombia
              
              Cara
      Cara Concession
              
              1Llanos
      Basin, Colombia
              
              Dorotea
      Concession
              
              7Llanos
      Basin, Colombia
              
              Cabiona
      Concession
              
              3Llanos
      Basin, Colombia
              
              Las
      Garzas Concession
              
              1Llanos
      Basin, Colombia
              
              Leona
      Concession
              
              1Llanos
      Basin, Colombia
              
              Camarita
      Concession
              
              1


23
 Table of Contents




Additional
wells are expected to be drilled at locations to be determined based on the
results of the planned drilling projects. Our planned drilling activity is
subject to change from time to time without notice.  In particular, we
cannot predict the impact on our planned drilling activities in Colombia of
ongoing efforts by Hupecol to monetize assets.





We also
plan to selectively evaluate and acquire interests in additional drilling
prospects.





At
December 31, 2007, our acquisition and drilling budget for 2008 totaled
approximately $6,270,000, consisting of (1) $4,090,000 for drilling of 14 wells
in Colombia, (2) $545,000 for drilling of 1 domestic well, (3) $385,000 for
seismic operations in Colombia, and (4) $1,250,000 for road construction and
facilities in Colombia.  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 will meet our anticipated
objectives and business operations, including our 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 the Company 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
December 31, 2007.





Inflation





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





Item7A.
            Quantitative
      and Qualitative Disclosures About Market
Risk





Commodity
Price Risk





The price
we receive for our oil and gas production heavily influences our revenue,
profitability, access to capital and future rate of growth. Crude oil and
natural gas are commodities and, therefore, their prices are subject to wide
fluctuations in response to relatively minor changes in supply and demand.
Historically, the markets for oil and gas have been volatile, and these markets
will likely continue to be volatile in the future. The prices we receive for
production depends on numerous factors beyond our control.


We have
not historically entered into any hedges or other transactions designed to
manage, or limit exposure to oil and gas price volatility.





Interest
Rate Risk





We invest
funds in excess of projected short-term needs in interest rate sensitive
securities, primarily fixed maturity securities. While it is generally our
intent to hold our fixed maturity securities to maturity, we have classified a
majority of our fixed maturity portfolio as available-for-sale. In accordance
with SFAS No. 115, "Accounting for Certain Investments in Debt and Equity
Securities," our available-for-sale fixed maturity securities are carried at
fair value on the balance sheet with unrealized gains or losses reported net of
tax in accumulated other comprehensive income.





Increases
and decreases in prevailing interest rates generally translate into decreases
and increases in fair values of fixed maturity
securities.  Additionally, fair values of interest rate sensitive
instruments may be affected by the creditworthiness of the issuer, prepayment
options, relative values of alternative investments, the liquidity of the
instrument and other general market conditions.  Because of the
short-term nature of the interest bearing investments, the quality of the
issuers and the intent to hold those investments to maturity, we do not believe
we face any material interest rate risk with respect to such
investments.





Item8.
            Financial
      Statements and Supplementary Data





Our
financial statements appear immediately after the signature page of this
report.  See “Index to Financial Statements” on page 30 of this
report.


24
 Table of Contents




Item9.
            Changes
      in and Disagreements With Accountants on Accounting and Financial
      Disclosure





Previously
disclosed.  See Form 8-K, filed April 19, 2007.





Item
      9A(T).
            Controls
      and Procedures





Corporate
Disclosure Controls





Evaluation
of Disclosure Controls and Procedures





Under the
supervision and the participation of our management, including our principal
executive officer and principal financial officer, we conducted an evaluation as
of December 31, 2007 of the effectiveness of the design and operation of our
disclosure controls and procedures, as such term is defined under Rule 13a-15(e)
promulgated under the Securities Exchange Act of 1934, as amended. Based on this
evaluation, our principal executive officer and our principal financial officer
concluded that our disclosure controls and procedures were effective as of
December 31, 2007.





Management’s
Report on Internal Control over Financial Reporting





As of
December 31, 2007, Houston American Energy Corporation does not meet the
definition of "accelerated filer," as described by Rule 12b-2 of the Exchange
Act. We are required by the Sarbanes-Oxley Act of 2002 to include an assessment
of our internal control over financial reporting for the year ended December 31,
2007. Our management is responsible for establishing and maintaining adequate
internal control over financial reporting as that term is defined in Exchange
Act Rule 13a-15(f). Our internal control over financial reporting is a process
designed to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of our financial statements for external reporting
purposes in accordance with generally accepted accounting principles (“GAAP”).
Our internal control over financial reporting includes those policies and
procedures that (i) pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect our transactions and dispositions of our
assets; (ii) provide reasonable assurance that transactions are recorded as
necessary to permit preparation of our financial statements in accordance with
GAAP, and that our receipts and expenditures are being made only in accordance
with authorizations of our management and directors; and (iii) provide
reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use or disposition of our assets that could have a material effect
on our financial statements.





Internal
control over financial reporting cannot provide absolute assurance of achieving
financial reporting objectives because of its inherent
limitations.  Internal control over financial reporting is a process
that involves human diligence and compliance and is subject to lapses in
judgment and breakdowns resulting from human failures. Internal control over
financial reporting also can be circumvented by collusion or improper management
override. Because of such limitations, there is a risk that material
misstatements may not be prevented or detected on a timely basis by internal
control over financial reporting. However, these inherent limitations are known
features of the financial reporting process. Therefore, it is possible to design
into the process safeguards to reduce, though not eliminate, this
risk.  In addition, projections of any evaluation of effectiveness to
future periods are subject to the risk that controls may become inadequate
because of changes in conditions or that the degree of compliance with the
policies or procedures may deteriorate.





In order
to evaluate the effectiveness of our internal control over financial reporting
as of December 31, 2007, as required by Section 404 of the Sarbanes-Oxley Act of
2002, our management conducted an assessment, including testing, based on the
criteria set forth in Internal Control—Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (the “COSO
Framework”).  A material weakness is a control deficiency, or a
combination of control deficiencies, that results in more than a remote
likelihood that a material misstatement of our annual or interim financial
statements will not be prevented or detected.  In assessing the
effectiveness of our internal control over financial reporting, management
identified the following two material weaknesses in internal control over
financial reporting as of December 31, 2007:





1.
            Deficiencies
      in Segregation of Duties.  The Company continues to lack
      adequate segregation of duties in our financial reporting process, as our
      CFO serves as our only internal accounting and financial reporting
      personnel, and as such, performs substantially all accounting and
      financial reporting functions with the assistance of a part-time
      consultant. Accordingly, the preparation of financial statements and the
      related monitoring controls surrounding this process were not segregated.
      There is a risk that a material misstatement of the financial statements
      could be caused, or at least not be detected in a timely manner, due to
      insufficient segregation of
duties.


25
 Table of Contents




The
Company has no current plans, however, to add accounting or financial reporting
personnel and, accordingly, expects to continue to lack segregation of
accounting, financial reporting and oversight functions. As operations increase
in scope, the company intends to evaluate hiring additional in-house accounting
personnel so as to provide for appropriate segregation of duties within the
accounting function.





2.
            Deficiencies
      in the Company's treasury process controls. We did not consistently review
      bank reconciliations prepared by the part-time consultant. The Company
      failed to perform certain control procedures designed to ensure that the
      bank reconciliations were accurate and timely. There is a risk that a
      material misstatement of the financial statements could be caused, or at
      least not be detected in a timely manner, by this failure to review the
      bank reconciliation. We plan to implement a formal process for timely
      review and approval of bank reconciliations. The Company will monitor the
      effectiveness of this action and will make any other changes and take such
      other actions as management determines to be
  appropriate.





Based on
the material weaknesses described above and the criteria set forth by the COSO
Framework, we have concluded that our internal control over financial reporting
at December 31, 2007, was not effective.





This
annual report does not include an attestation report of the company’s registered
public accounting firm regarding internal control over financial reporting.
 Management’s report was not subject to attestation by the company’s
registered public accounting firm pursuant to temporary rules of the Securities
and Exchange Commission that permit the company to provide only management’s
report in this annual report.





Changes
in Internal Control over Financial Reporting





No change
in our internal control over financial reporting (as defined in Rule 13a-15(f)
under the Securities Exchange Act of 1934) occurred during the fourth quarter of
fiscal 2007 that has materially affected, or is reasonably likely to materially
affect, our internal control over financial reporting.





Item
      9B.
            Other
      Information





Not
applicable


26
 Table of Contents




PART
III





Item10.
            Directors,
      Executive Officers and Corporate
Governance





The
information required by this Item will be included in a definitive proxy
statement, pursuant to Regulation 14A, to be filed not later than 120 days after
the close of our fiscal year.  Such information is incorporated herein
by reference.





Executive
Officers





Our
executive officers as of December 31, 2007, and their ages and positions as of
that date, are as follows:





Name
                    
                    Age
                    
                    PositionJohn
      Terwilliger
                    
                    60
                    
                    President,
      Chief Executive Officer and ChairmanJay
      Jacobs
                    
                    30
                    
                    Chief
      Financial
Officer





John F. Terwilliger has
served as our President, CEO and Chairman since our inception in April
2001.





Jay Jacobs has served as our
Chief Financial Officer since July 2006.  From April 2003 until
joining the Company, Mr. Jacobs served as an Associate and as Vice President –
Energy Investment Banking at Sanders Morris Harris, Inc., an investment banking
firm, where he specialized in energy sector financing and
transactions.  Previously, Mr. Jacobs was an Energy Finance Analyst at
Duke Capital Partners, LLC from June 2001 to April 2003 and a Tax Consultant at
Deloitte & Touché, LLP.  Mr. Jacobs holds a Masters of
Professional Accounting from the University of Texas and is a Certified Public
Accountant.





There are
no family relationships among the executive officers and
directors.  Except as otherwise provided in employment agreements,
each of the executive officers serves at the discretion of the
Board.





Item11.
            Executive
      Compensation





The
information required by this Item will be included in a definitive proxy
statement, pursuant to Regulation 14A, to be filed not later than 120 days after
the close of our fiscal year.  Such information is incorporated herein
by reference.





Item12.
            Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters





The
information required by this Item will be included in a definitive proxy
statement, pursuant to Regulation 14A, to be filed not later than 120 days after
the close of our fiscal year.  Such information is incorporated herein
by reference.





Equity
compensation plan information is set forth in Part II, Item 5 of this Form
10-KSB.





Item13.
            Certain
      Relationships and Related Transactions, and Director
      Independence





The
information required by this Item will be included in a definitive proxy
statement, pursuant to Regulation 14A, to be filed not later than 120 days after
the close of our fiscal year.  Such information is incorporated herein
by reference.





Item14.
            Principal
      Accountant Fees and Services





The
information required by this Item will be included in a definitive proxy
statement, pursuant to Regulation 14A, to be filed not later than 120 days after
the close of our fiscal year.  Such information is incorporated herein
by reference.


27
 Table of Contents




PART
IV





Item15.
            Exhibits
      and Financial Statement Schedules





1.
            Financial
      statements.  See “Index to Financial Statements” on page 30 of
      this report.





2.
            Exhibits





Incorporated by
      ReferenceExhibitNumber
                                          
                                          Exhibit
      Description
                                          
                                          Form
                                          
                                          Date
                                          
                                          Number
                                          
                                          Filed
      Herewith3.1
                                          
                                          Certificate
      of Incorporation of Houston American Energy Corp. filed April 2,
      2001
                                          
                                          SB-2
                                          
                                          8/3/01
                                          
                                          3.13.2
                                          
                                          Amended and RestatedBylaws
      of Houston American Energy Corp. adopted November 26,
    2007
                                          
                                          8-K
                                          
                                          11/29/07
                                          
                                          3.13.3
                                          
                                          Certificate
      of Amendment to the Certificate of Incorporation of Houston American
      Energy Corp. filed September 25, 2001
                                          
                                          SB-2
                                          
                                          10/01/01
                                          
                                          3.44.1
                                          
                                          Text
      of Common Stock Certificate of Houston American Energy
      Corp.
                                          
                                          SB-2
                                          
                                          8/3/01
                                          
                                          4.110.1
                                          
                                          Form
      of Registration Rights Agreement, dated May 4, 2005
                                          
                                          8-K
                                          
                                          5/10/05
                                          
                                          4.310.2
                                          
                                          Houston
      American Energy Corp. 2005 Stock Option Plan*
                                          
                                          8-K
                                          
                                          8/16/05
                                          
                                          10.110.3
                                          
                                          Form
      of Director Stock Option Agreement*
                                          
                                          8-K
                                          
                                          8/16/05
                                          
                                          10.210.4
                                          
                                          Form
      of Placement Agent Warrant, dated April 28, 2006
                                          
                                          8-K
                                          
                                          4/28/06
                                          
                                          4.110.5
                                          
                                          Form
      of Registration Rights Agreement, dated April 28, 2006
                                          
                                          8-K
                                          
                                          4/28/06
                                          
                                          4.210.6
                                          
                                          Form
      of Subscription Agreement, dated April 2006 relating to the sale of shares
      of common stock
                                          
                                          8-K
                                          
                                          4/28/06
                                          
                                          10.110.7
                                          
                                          Form
      of Lock-Up Agreement, dated April 2006
                                          
                                          8-K
                                          
                                          4/28/06
                                          
                                          10.214.1
                                          
                                          Code
      of Ethics for CEO and Senior Financial Officers
                                          
                                          10-KSB
                                          
                                          3/26/04
                                          
                                          14.123.1
                                          
                                          Consent
      of Thomas Leger & Co. L.L.P.
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          X23.2
                                          
                                          Consent
      of Malone & Bailey, P.C.
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          X31.1
                                          
                                          Section
      302 Certification of CEO
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          X31.2
                                          
                                          Section
      302 Certification of CFO
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          X32.1
                                          
                                          Section
      906 Certification of CEO
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          X32.2
                                          
                                          Section
      906 Certification of CFO
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          X99.1
                                          
                                          Code
      of Business Ethics
                                          
                                          8-K
                                          
                                          7/7/06
                                          
                                          99.1





*
            Compensatory
      plan or arrangement.




28
 Table of Contents




SIGNATURES





Pursuant
to the requirements of Section 13 or 15(d) 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.





HOUSTON
      AMERICAN ENERGY CORP.Dated:    December
      09, 2008By:
              /s/
      John F. TerwilligerJohn
      F. TerwilligerPresident




29
 Table of Contents




HOUSTON
AMERICAN ENERGY CORP.





INDEX TO
FINANCIAL STATEMENTS








Report
      of Independent Registered Public Accounting Firm
              F-1Report
      of Independent Registered Public Accounting Firm
              F-2Balance
      Sheets as of December 31, 2007 and December 31, 2006
              F-3Statements
      of Operations For the Years ended December 31, 2007 and
    2006
              F-4Statements
      of Shareholders’ Equity for the Years ended December 31, 2007 and
      2006
              F-5Statements
      of Cash Flows For the Years Ended December 31, 2007 and
    2006
              F-6Notes
      to Financial Statements
              F-7


Table of Contents




REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM








The Board
of Directors and Stockholders


Houston
American Energy Corp.


Houston,
Texas








We have
audited the accompanying balance sheet of Houston American Energy Corp. as of
December 31, 2007 and the related statements of operations, shareholders'
equity, and cash flows for the year ended December 31, 2007.  These
financial statements are the responsibility of the Company's
management.  Our responsibility is to express an opinion on these
financial statements based on our audit.





We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States).  Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement.  The
Company is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting.  Our audit included
consideration of internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the circumstances, but not
for purposes of expressing an opinion on the effectiveness of the Company’s
internal control over financial reporting.  Accordingly, we express no
such opinion.  An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial
statements.  An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation.  We believe
that our audit provides a reasonable basis for our opinion.





In our
opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of Houston American Energy Corp. as of
December 31, 2007, and the results of its operations and its cash flows for the
year ended December 31, 2007, in conformity with accounting principles generally
accepted in the United States of America.








/s/
Malone & Bailey, PC





www.malone-bailey.com


Houston,
Texas





March 26,
2008


F-1
 Table of Contents


REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM








The Board
of Directors and Stockholders


Houston
American Energy Corp.


Houston,
Texas








We have
audited the accompanying balance sheet of Houston American Energy Corp. as of
December 31, 2006 and the related statements of operations, shareholders'
equity, and cash flows for the year ended December 31, 2006.  These
financial statements are the responsibility of the Company's
management.  Our responsibility is to express an opinion on these
financial statements based on our audit.





We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States).  Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement.  An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements.  An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the over-all financial statement
presentation.  We believe that our audit provides a reasonable basis
for our opinion.





In our
opinion, the financial statements referred to above present fairly, in all
material respects the financial position of Houston American Energy Corp. as of
December 31, 2006, and the results of its operations and its cash flows for the
year ended December 31, 2006 in conformity with accounting principles generally
accepted in the United States of America.








/s/
      Thomas Leger & Co., L.L.P.Thomas
      Leger & Co., L.L.P.





March 26,
2007


Houston,
Texas


F-2
 Table of Contents


HOUSTON
AMERICAN ENERGY CORP.


BALANCE
SHEETS





ASSETS




December
      31,CURRENT
      ASSETS
                  
                  2007
                  
                  
                  2006Cash
                  
                  $
                  417,818
                  
                  
                  $
                  409,008Marketable
      securities
                  
                  
                  9,650,000
                  
                  
                  
                  14,000,000Accounts
      receivable – Oil and gas sales
                  
                  
                  577,512
                  
                  
                  
                  325,436Prepaid
      expenses and other current assets
                  
                  
                  49,255
                  
                  
                  
                  -TOTAL
      CURRENT ASSETS
                  
                  
                  10,694,585
                  
                  
                  
                  14,734,444PROPERTY,
      PLANT AND EQUIPMENTOil
      and gas properties, full cost methodCosts
      subject to amortization
                  
                  
                  12,714,669
                  
                  
                  
                  6,796,308Costs
      not being amortized
                  
                  
                  998,806
                  
                  
                  
                  700,549Office
      equipment
                  
                  
                  11,878
                  
                  
                  
                  11,878Total
                  
                  
                  13,725,353
                  
                  
                  
                  7,508,735Accumulated
      depreciation and amortization oil and gas properties
                  
                  
                  (3,708,308
                  )
                  
                  
                  (2,260,463
                  )PROPERTY,
      PLANT AND EQUIPMENT, NET
                  
                  
                  10,017,045
                  
                  
                  
                  5,248,272OTHER
      ASSETS
                  
                  
                  3,167
                  
                  
                  
                  3,167TOTAL
      ASSETS
                  
                  $
                  20,714,797
                  
                  
                  $
                  19,985,883LIABILITIES
      AND SHAREHOLDERS' EQUITYCURRENT
      LIABILITIESAccounts
      payable
                  
                  $
                  260,222
                  
                  
                  $
                  399,159Accrued
      expenses
                  
                  
                  1,720
                  
                  
                  
                  11,909Foreign
      income taxes payable
                  
                  
                  4,221
                  
                  
                  
                  121,216TOTAL
      CURRENT LIABILITIES
                  
                  
                  266,163
                  
                  
                  
                  532,284LONG-TERM
      DEBTReserve
      for plugging and abandonment costs
                  
                  
                  115,061
                  
                  
                  
                  38,816Deferred
      rent obligation
                  
                  
                  20,206
                  
                  
                  
                  -TOTAL
      LONG-TERM DEBT
                  
                  
                  135,267
                  
                  
                  
                  38,816SHAREHOLDERS'
      EQUITYCommon
      stock, par value $.001;100,000,000 shares authorized, 27,920,172 shares
      issued and outstanding
                  
                  
                  27,920
                  
                  
                  
                  27,920Additional
      paid-in capital
                  
                  
                  22,377,832
                  
                  
                  
                  22,042,624Treasury
      stock, at cost; 100,000 shares
                  
                  
                  (85,834
                  )
                  
                  
                  (85,834
                  )Accumulated
      deficit
                  
                  
                  (2,006,551
                  )
                  
                  
                  (2,569,927
                  )TOTAL
      SHAREHOLDERS' EQUITY
                  
                  
                  20,313,367
                  
                  
                  
                  19,414,783TOTAL
      LIABILITIES AND SHAREHOLDERS' EQUITY
                  
                  $
                  20,714,797
                  
                  
                  $
                  19,985,883









F-3
 Table of Contents




HOUSTON
AMERICAN ENERGY CORP.


STATEMENT
OF OPERATIONS


FOR
THE YEARS ENDED DECEMBER 31, 2007 AND 2006





2007
                  
                  
                  2006Oil
      and gas revenue
                  
                  $
                  4,977,172
                  
                  
                  $
                  3,202,731EXPENSES
      OF OPERATIONSLease
      operating expense and severance tax
                  
                  
                  1,841,119
                  
                  
                  
                  1,017,440Joint
      venture expense
                  
                  
                  149,200
                  
                  
                  
                  167,023Depreciation
      and depletion
                  
                  
                  1,099,826
                  
                  
                  
                  887,911Impairment
      of oil and gas properties
                  
                  
                  348,019
                  
                  
                  
                  -General
      and administrative expense
                  
                  
                  1,568,228
                  
                  
                  
                  1,231,079Total
      expenses
                  
                  
                  5,006,392
                  
                  
                  
                  3,303,453Income
      (Loss) from operations
                  
                  
                  (29,220
                  )
                  
                  
                  (100,722
                  )OTHER
      (INCOME) EXPENSEInterest
      income
                  
                  
                  (649,792
                  )
                  
                  
                  (496,490
                  )Interest
      expense-derivative
                  
                  
                  -
                  
                  
                  
                  37,773Loss
      on change in fair value of derivative liabilities
                  
                  
                  -
                  
                  
                  
                  170,949Interest
      expense
                  
                  
                  -
                  
                  
                  
                  57,278Interest
      expense – related party
                  
                  
                  -
                  
                  
                  
                  20,440Financing
      costs
                  
                  
                  -
                  
                  
                  
                  110,787Total
      other (income) expense
                  
                  
                  (649,792
                  )
                  
                  
                  (99,263
                  )Net
      Income (loss) before taxes
                  
                  
                  620,572
                  
                  
                  
                  (1,459
                  )Income
      tax expense
                  
                  
                  57,196
                  
                  
                  
                  510,637Net
      income (loss)
                  
                  $
                  563,376
                  
                  
                  $
                  (512,096
                  )Basic
      net income (loss) per share
                  
                  $
                  0.02
                  
                  
                  $
                  (0.02
                  )Diluted
      net income (loss) per share
                  
                  $
                  0.02
                  
                  
                  $
                  (0.02
                  )Basic
      weighted average shares
                  
                  
                  27,920,172
                  
                  
                  
                  25,087,847Diluted
      weighted average shares
                  
                  
                  28,132,375
                  
                  
                  
                  25,087,847








F-4
 Table of Contents





HOUSTON
      AMERICAN ENERGY CORP.STATEMENT
      OF SHAREHOLDERS' EQUITYFor
      the Years Ended December 31, 2007 and
2006





Common Stock
                      
                      
                      Treasury Stock
                      
                      
                      AccumulatedShares
                      
                      
                      Amount
                      
                      
                      Paid
      - inCapital
                      
                      
                      Shares
                      
                      
                      Amount
                      
                      
                      Equity(Deficit)
                      
                      
                      TotalBalance
      at December 31, 2005
                      
                      
                      19,970,589
                      
                      
                      $
                      19,971
                      
                      
                      $
                      2,851,921
                      
                      
                      
                      (100,000
                      )
                      
                      $
                      (85,834
                      )
                      
                      $
                      (2,057,831
                      )
                      
                      $
                      728,227Stock
      issued for -Cash
                      
                      
                      5,533,333
                      
                      
                      
                      5,533
                      
                      
                      
                      15,356,050
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      15,361,583Convertible
      notes
                      
                      
                      2,125,000
                      
                      
                      
                      2,125
                      
                      
                      
                      2,122,875
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      2,125,000Warrant
      exercise
                      
                      
                      291,250
                      
                      
                      
                      291
                      
                      
                      
                      490,959
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      491,250Options
      issued to director
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      70,200
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      70,200Options
      issued to employee
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      219,555
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      219,555Reclassification
      of derivative liabilitiesand discount on
      convertible note
                      
                      
                      -
                      
                      
                      
                      
                      
                      
                      
                      931,064
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      931,064Net
      loss
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      (512,096
                      )
                      
                      
                      (512,096
                      )Balance
      at December 31, 2006
                      
                      
                      27,920,172
                      
                      
                      
                      27,920
                      
                      
                      
                      22,042,624
                      
                      
                      
                      (100,000
                      )
                      
                      
                      (85,834
                      )
                      
                      
                      (2,569,927
                      )
                      
                      
                      19,414,783Stock
      issued for -Options
      issued to director
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      143,100
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      143,100Options
      issued to employee
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      192,108
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      192,108Net
      Income
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      563,376
                      
                      
                      
                      (512,096
                      )Balance
      at December 31, 2007
                      
                      
                      27,920,172
                      
                      
                      
                      27,920
                      
                      
                      
                      22,377,832
                      
                      
                      
                      (100,000
                      )
                      
                      
                      85,834
                      
                      
                      
                      (2,006,551
                      )
                      
                      
                      20,313,367







F-5
 Table of Contents


HOUSTON
      AMERICAN ENERGY CORP.STATEMENT
      OF CASH FLOWSFOR
      THE YEARS ENDED DECEMBER 31, 2007 AND
2006





2007
                  
                  
                  2006CASH
      FLOW FROM OPERATING ACTIVITIESNet
      income (loss)
                  
                  $
                  563,376
                  
                  
                  $
                  (512,096
                  )Adjustments to reconcile net
      income (loss)to net cash from
      operationsDepreciation
      and depletion
                  
                  
                  1,099,826
                  
                  
                  
                  887,911Non-cash
      expensesStock
      based compensation
                  
                  
                  335,208
                  
                  
                  
                  289,755Impairment
      of oil and gas properties
                  
                  
                  348,019
                  
                  
                  
                  -Amortization
      of debt discount and deferred financing costs
                  
                  
                  -
                  
                  
                  
                  148,557Change
      in fair value of derivatives
                  
                  
                  -
                  
                  
                  
                  170,949Amortization
      of asset retirement obligation
                  
                  
                  2,299
                  
                  
                  
                  -Amortization
      of deferred rent
                  
                  
                  20,206
                  
                  
                  
                  -Decrease
      (increase) in accounts receivable
                  
                  
                  (281,401
                  )
                  
                  
                  247,786Decrease
      in prepaid expense
                  
                  
                  (19,931
                  )
                  
                  
                  9,965(Decrease)
      increase in accounts payable and accrued liability
                  
                  
                  (266,121
                  )
                  
                  
                  (3,381
                  )Net
      cash provided by operations
                  
                  
                  1,801,481
                  
                  
                  
                  1,239,446CASH
      FLOW FROM INVESTING ACTIVITIESPurchases
      of marketable securities
                  
                  
                  (3,150,000
                  )
                  
                  
                  (17,000,000
                  )Sales
      of marketable securities
                  
                  
                  7,500,000
                  
                  
                  
                  3,000,000Acquisition
      of oil and gas properties and assets
                  
                  
                  (6,142,672
                  )
                  
                  
                  (3,507,371
                  )Funds
      in excess of prospect costsNet
      cash used in investing activities
                  
                  
                  (1,792,672
                  )
                  
                  
                  (17,507,371
                  )CASH
      FLOW FROM FINANCING ACTIVITIESSale
      of common stock - net of costs
                  
                  
                  -
                  
                  
                  
                  15,361,583Exercise
      of warrants
                  
                  
                  -
                  
                  
                  
                  491,250Repayment
      of debt
                  
                  
                  -
                  
                  
                  
                  (900,000
                  )Net
      cash provided by financing
                  
                  
                  -
                  
                  
                  
                  14,952,833INCREASE
      (DECREASE) IN CASH
                  
                  
                  8,809
                  
                  
                  
                  (1,315,092
                  )Cash,
      beginning of period
                  
                  
                  409,008
                  
                  
                  
                  1,724,100Cash,
      end of period
                  
                  $
                  417,817
                  
                  
                  $
                  409,008SUPPLEMENTAL
      CASH FLOW INFORMATION:Interest
      paid
                  
                  
                  -
                  
                  
                  $
                  77,718Taxes
      paid
                  
                  
                  849,586
                  
                  
                  $
                  261,891SUPPLEMENTAL
      SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIESConversion
      of convertible notes to common stock
                  
                  
                  -
                  
                  
                  $
                  2,125,000Exercise
      of warrants
                  
                  
                  -
                  
                  
                  
                  491,250







F-6
 Table of Contents


NOTE 1 – NATURE OF COMPANY AND SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES





General





Houston
American Energy Corp. (a Delaware Corporation) (“the Company” or “HUSA”) was
incorporated on April 2, 2001.  The Company is engaged, as a
non-operating joint owner, in the exploration, development, and production of
natural gas, crude oil, and condensate from properties located principally in
the Gulf Coast area of the United States and international locations with proven
production, which to date has focused on Colombia, South America.





General
Principles and Use Of Estimates





The
financial statements have been prepared in conformity with accounting principles
generally accepted in the United States of America. In preparing financial
statements, Management makes informed judgments and estimates that affect the
reported amounts of assets and liabilities as of the date of the financial
statements and affect the reported amounts of revenues and expenses during the
reporting period. On an ongoing basis, Management reviews its estimates,
including those related to such potential matters as litigation, environmental
liabilities, income taxes, determination of proved reserves of oil and gas and
asset retirement obligations.  Changes in facts and circumstances may
result in revised estimates and actual results may differ from these
estimates.





Reclassification





Certain
amounts for prior periods have been reclassified to conform to the current
presentation.





Oil and Gas
Revenues





The
Company recognizes sales revenues, net of royalties and net profits interests,
based on the amount of gas, oil and condensate sold to purchasers when delivery
to the purchaser has occurred and title has transferred. This occurs when
production has been delivered to a pipeline. These sales may result in more or
less than the Company’s share of pro−rata production from certain
wells.  When natural gas sales volumes exceed the Company’s entitled
share and the accumulated overproduced balance exceeds the Company’s share of
the remaining estimated proved natural gas reserves for a given property, the
Company will record a liability.  Historically, sales volumes have not
materially differed from the Company’s entitled share of natural gas
production.





Oil and
Gas Properties





The
Company uses the full cost method of accounting for exploration and development
activities as defined by the SEC. Under this method of accounting, the costs for
unsuccessful, as well as successful, exploration and development activities are
capitalized as oil and gas properties. Capitalized costs include lease
acquisition, geological and geophysical work, delay rentals, costs of drilling,
completing and equipping the wells and any internal costs that are directly
related to acquisition, exploration and development activities but does not
include any costs related to production, general corporate overhead or similar
activities. Gain or loss on the sale or other disposition of oil and gas
properties is not recognized, unless the gain or loss would significantly alter
the relationship between capitalized costs and proved reserves of oil and
natural gas attributable to a country.





The
Company categorizes its full costs pools as costs subject to amortization and
costs not being amortized. The sum of net capitalized costs subject to
amortization, including estimated future development and abandonment costs, are
amortized using the unit-of-production method.





Depletion
and amortization for oil and gas properties was $1,097,882 and $885,611 at
December 31, 2007 and 2006, respectively and accumulated amortization was
$3,348,411 at December 31, 2007.


F-7
 Table of Contents


Furniture and
Equipment





Office
equipment is stated at original cost and is depreciated on the straight-line
basis over the useful life of the assets, which ranges from three to five
years.





Depreciation
expense for office equipment was $1,944 and $2,300 at December 31, 2007 and
2006, respectively and accumulated depreciation was $11,878 at December 31,
2007.





Costs
Excluded





Oil and
gas properties include costs that are excluded from capitalized costs being
amortized. These amounts represent costs of investments in unproved properties.
The Company excludes these costs on a country-by-country basis until proved
reserves are found or until it is determined that the costs are impaired. All
costs excluded are reviewed quarterly to determine if impairment has occurred.
The amount of any impairment is transferred to the costs subject to
amortization.





Ceiling
Test





Under the
full cost method of accounting, a ceiling test is performed each quarter. The
full cost ceiling test is an impairment test prescribed by SEC Regulation S-X.
The ceiling test determines a limit, on a country-by-country basis, on the book
value of oil and gas properties. The capitalized costs of proved oil and gas
properties, net of accumulated depreciation, depletion and amortization (“DD&A”) and the
related deferred income taxes, may not exceed the estimated future net cash
flows from proved oil and gas reserves, using prices in effect at the end of the
period with consideration of price change only to the extent provided by
contractual arrangement, discounted at 10%, net of related tax effects. If
capitalized costs exceed this limit, the excess is charged to expense and
reflected as additional accumulated DD&A.





Unevaluated
oil and gas properties not subject to amortization at December 31, 2007 include
the following:





North
      America
              
              
              South
      America
              
              
              TotalLeasehold
      acquisition costs
              
              
              191,477
              
              
              
              1,366
              
              
              $
              192,843Geological,
      geophysical, screening and evaluation costs
              
              
              707,138
              
              
              
              11,964
              
              
              
              719,102Leasehold
      retention costs
              
              
              86,861
              
              
              
              -
              
              
              
              86,861Total
              
              
              985,476
              
              
              
              13,330
              
              
              $
              998,806





Asset
Retirement Obligations





The
Company has adopted Statement of Financial Accounting Standards (“SFAS”) No.
143, “Accounting for Asset Retirement Obligations,” which addresses accounting
and reporting for obligations associated with the retirement of tangible
long-lived assets and the associated asset retirement costs. For the Company,
asset retirement obligations (“ARO”) represent the systematic, monthly accretion
and depreciation of future abandonment costs of tangible assets such as
platforms, wells, service assets, pipelines, and other facilities. SFAS 143
requires that the fair value of a liability for an asset’s retirement obligation
be recorded in the period in which it is incurred if a reasonable estimate of
fair value can be made, and that the corresponding cost is capitalized as part
of the carrying amount of the related long-lived asset. The liability is
accreted to its then present value each period, and the capitalized cost is
depreciated over the useful life of the related asset. If the liability is
settled for an amount other than the recorded amount, an adjustment is made to
the full cost pool, with no gain or loss recognized, unless the adjustment would
significantly alter the relationship between capitalized costs and proved
reserves. Although the Company’s domestic policy with respect to ARO is to
assign depleted wells to a salvager for the assumption of abandonment
obligations before the wells have reached their economic limits, as required
under SFAS No. 143, the Company has estimated its future ARO obligation with
respect to its domestic operations. Under the Company’s previous accounting
method, the Company included estimated future costs of abandonment and
dismantlement in the full cost amortization base and amortized these costs as a
component of depletion expense. Subsequent to adoption of SFAS 143, the ARO
assets, which are carried on the balance sheet as part of the full cost pool,
have been included in our amortization base for the purposes of calculating
depreciation, depletion and amortization expense. For the purposes of
calculating the ceiling test, the future cash outflows associated with settling
the ARO liability have been included in the computation of the discounted
present value of estimated future net revenues.


F-8
 Table of Contents




The
following table describes changes in our asset retirement liability during each
of the years ended December 31, 2007 and 2006. The ARO liability in the
table below includes amounts classified as both current and long-term at
December 31, 2007 and 2006.





North
      America
                
                
                South
      AmericaYears
      Ended December 31
                
                
                Years
      Ended December 312007
                
                
                2006
                
                
                2007
                
                
                2006ARO
      liability at January 1
                
                $
                0
                
                
                $
                -
                
                
                $
                38,816
                
                
                $
                41,249Accretion
      expense
                
                
                -
                
                
                
                -
                
                
                
                2,299
                
                
                
                3,300Liabilities
      incurred from drilling
                
                
                7,360
                
                
                
                -
                
                
                
                32,006
                
                
                
                11,077Liabilities
      incurred – assets acquired
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -Liabilities
      settled – assets abandoned
                
                
                -
                
                
                
                -
                
                
                
                (4,641
                )
                
                
                -Changes
      in estimates
                
                
                16,678
                
                
                
                -
                
                
                
                22,543
                
                
                
                (16,810
                )ARO
      liability at December 31,
                
                $
                24,038
                
                
                $
                -
                
                
                $
                91,023
                
                
                $
                38,816





Joint Venture
Expense





Joint
venture expense reflects the indirect field operating and regional
administrative expenses billed by the operator of the Colombian
concessions.





Income
Taxes





Deferred
income taxes are provided on a liability method whereby deferred tax assets and
liabilities are established for the difference between the financial reporting
and income tax basis of assets and liabilities as well as operating loss and tax
credit carry forwards.  Deferred tax assets are reduced by a valuation
allowance when, in the opinion of management, it is more likely than not that
some portion or all of the deferred tax assets will not be
realized.  Deferred tax assets and liabilities are adjusted for the
effects of changes in tax laws and rates on the date of enactment.





Preferred
Stock





The
Company has authorized 10,000,000 shares of preferred stock with a par value of
$.001.  The Board of Directors shall determine the designations,
rights, preferences, privileges and voting rights of the preferred stock as well
as any restrictions and qualifications thereon.  No shares of
preferred stock have been issued.





Cash and
Cash Equivalents





Cash and
cash equivalents consist of demand deposits and cash investments with initial
maturity dates of less than three months.





Marketable
Securities





Holdings
of marketable securities qualify as available-for-sale or trading securities and
are recorded at fair value.  The Company’s marketable securities
consist of asset-backed securities and municipal bonds with original maturities
beyond 90 days.  As the Company views all securities as representing
the investment of funds available for current operations, the short-term
investments are classified as current assets.  The Company's policy is
to protect the value of its investment portfolio and minimize principal risk by
earning returns based on current interest rates.  All of the Company's
marketable securities are classified as available-for-sale securities in
accordance with the provisions of SFAS No. 115, "Accounting For Certain
Investments in Debt and Equity Securities" and are carried at fair market value
with unrealized gains and losses, net of taxes, reported as a separate component
of stockholders' equity.  Realized gains and losses and declines in
value of securities judged to be other then temporary are included in interest
income, net, based on the specific identification method.


F-9
 Table of Contents




At
December 31, 2007, the Company’s available for sale securities of $9,650,000
consisted of (1) $900,000 in AAA rated asset-backed auction rate notes maturing
December 2032, and (2) $8,750,000 in AAA rated municipal bonds maturing December
2032.  Each of these investments paid interest monthly and had regular
roll-over or auction dates at which time the interest rates were reset or the
securities were redeemed for cash.  There were no unrealized gains or
losses associated with these marketable securities at December 31,
2007.





Net
Income (Loss) Per Share





Pursuant
to SFAS No. 128, "Earnings Per Share," basic net income per share is computed by
dividing the net income attributable to common shareholders by the
weighted-average number of common shares outstanding during the
period.  Diluted net income per share is computed by dividing the net
income attributable to common shareholders by the weighted-average number of
common and common equivalent shares outstanding during the
period.  Common share equivalents included in the diluted computation
represent shares issuable upon assumed exercise of stock options, warrants, and
convertible notes using the treasury stock and "if converted"
method.  The Company’s securities do not have a contractual obligation
to share in the losses in any given period.  As a result these
securities were not allocated any losses in the periods of net
losses.





For the
year ended December 31, 2007, 339,000 options and 315,000 warrants to purchase
common stock resulted in weighted average diluted shares outstanding of
28,132,375 based upon the treasury stock method, which resulted in $0.02 diluted
earnings per share.  For the year ended December 31, 2006, 309,000
options and 315,000 warrants to purchase common stock were excluded from the
calculation of diluted net loss per share because they were
anti-dilutive.





Concentration of
Risk





The
Company is dependent upon the industry skills and contacts of John F.
Terwilliger, the chief executive officer, to identify potential acquisition
targets in the onshore coastal Gulf of Mexico region of Texas and
Louisiana.  Further, as a non-operator oil and gas exploration and
production company and through its interest in a limited liability company
(“Hupecol”) and its concessions in the South American country of Colombia, the
Company is dependent on the personnel, management and resources of Hupecol to
operate efficiently and effectively.





As a
non-operating joint interest owner, the Company has a right of investment
refusal on specific projects and the right to examine and contest its division
of costs and revenues determined by the operator.





The
Company currently has interests in concessions in Colombia and expects to be
active in Colombia for the foreseeable future.  The political climate
in Colombia is unstable and could be subject to radical change over a very short
period of time.  In the event of a significant negative change in
political and economic stability in the vicinity of the Company’s Colombian
operations, the Company may be forced to abandon or suspend their
efforts.  Either of such events could be harmful to the Company
expected business prospects.





During
2007, the Company was advised that Hupecol had retained an investment bank for
purposes of evaluating a possible transaction involving the monetization of
Hupecol assets.  Pursuant to that engagement, in March 2008, Hupecol
Caracara LLC, as owner/operator under the Caracara Association Contract, entered
into a Purchase and Sale Agreement to sell all of its interest in the Caracara
Association Contract and related assets for a sale price of $920 million,
subject to certain closing adjustments based on oil price fluctuations and
operations between the effective date of the sale, January 1, 2008, and the
closing date.  Pursuant to our investment in Hupecol Caracara LLC, we
hold a 1.594674% interest in the Caracara assets being sold and will receive our
proportionate interest in the net sale proceeds after deduction of commissions
and transaction expenses.  The Company’s Caracara assets subject to
the proposed sale had a net book value of $2,087,777 at December 31,
2007.


F-10
 Table of Contents


Completion
of the sale of the Caracara assets is subject to satisfaction of various
conditions set out in the Purchase and Sale Agreement, including the granting of
all consents and approvals of the Colombian governmental authorities required
for the transfer of the assets to the purchaser.





At
December 31, 2007, 67.9% of the Company’s net oil and gas property investment
and 91% of its revenue was with or derived from Hupecol.





The
majority of the oil production for 2007 from the Company’s mineral interests was
sold to an international integrated oil company (97%). The gas production is
sold to U.S. natural gas marketing companies based on the highest
bid.  There were no other product sales of more than 10% to a single
buyer.





The
Company reviews accounts receivable balances when circumstances indicate a
balance may not be collectible.  Historically, the Company has not
experienced any uncollectible accounts receivable. Based upon the Company’s
review, no allowance for uncollectible accounts was deemed necessary at December
31, 2007 and 2006, respectively.





Concentration of Credit
Risk





Financial
instruments that potentially subject the Company to a concentration of credit
risk include cash, cash equivalent and marketable securities.  The
Company had cash deposits of approximately $175,793 in excess of FDIC insured
limits at the period end.  The Company has not experienced any losses
on its deposits of cash and cash equivalents, and its short-term
investments.





Subordinated Convertible
Notes and Warrants- Derivative Financial Instruments





The
convertible subordinated notes (the “Convertible Notes”) and warrants (the
”Warrants”) issued in May 2005 were accounted for in accordance with Emerging
Issues Task Force (“EITF”) No. 00-19, "Accounting for Derivative Financial
Instruments Indexed to, and Potentially Settled in, a Company's Own Stock," EITF
05-02 “Meaning of ‘Conventional Convertible Debt Instrument’ in Issue No.
00-19”, and EIFT 05-04 “The Effect of a Liquidated Damages Clause on a
Freestanding Financial Instrument Subject to Issue No. 00-19”.




The
Company identified the conversion feature; the conversion price reset feature
and the Company’s optional early redemption right within the Convertible Notes
to represent embedded derivatives.  These embedded derivatives were
bifurcated from their respective host debt contracts and accounted for as
derivative liabilities because they were subject to a registration rights
agreement.  The conversion feature, the conversion price reset feature
and the Company’s optional early redemption right within the Convertible Notes
were bundled together as a single hybrid compound instrument in accordance with
SFAS No. 133 Derivatives Implementation Group Implementation Issue No. B-15,
“Embedded Derivatives:  Separate Accounting for Multiple Derivative
Features Embedded in a Single Hybrid Instrument.”





The
Company identified the common stock warrant as a detachable
derivative.  The warrant exercise price reset provision is an embedded
derivative within the common stock warrant.  The common stock warrant
and the embedded warrant exercise price reset provision were accounted for as a
separate single hybrid compound instrument.





The
Single Compound Embedded Derivatives within Convertible Notes and the Derivative
Liability for Warrants were recorded at fair value at the date of issuance (May
4, 2005) and marked-to-market each quarter with changes in fair value recorded
to the Company’s income statement as “Net change in fair value of derivative
liabilities.”  The Company utilized a third party valuation firm to
fair value both single compound embedded derivatives under the following
methods:  a layered discounted probability-weighted cash flow approach
for the Single Compound Embedded Derivatives within Convertible Notes; and the
Black-Scholes model for the Derivative Liability for Warrants based on a
probability weighted exercise price.


F-11
 Table of Contents


The fair
value of the derivative liabilities was subject to the changes in the trading
value of the Company’s common stock.  As a result, the Company’s
financial statements fluctuated from quarter-to-quarter based on factors, such
as the price of the Company’s stock at the balance sheet date, the amount of
shares converted by note holders and/or exercised by warrant
holders.  Consequently, our financial position and results of
operations varied from quarter-to-quarter based on conditions other than our
operating revenues and expenses.





In May
2006, the Convertible Notes were converted to common stock and the Warrants were
exercised resulting in the reclassification of all derivative liabilities
associated with the Convertible Notes and Warrants.  See “Note 2 –
Notes Payable – Subordinated Convertible Notes” and “– Warrants.”





Stock-Based
Compensation





Effective
January 1, 2006, the Company adopted the provisions of SFAS 123R “Share Based
Payment” for its stock based compensation plans. The Company previously
accounted for these plans under the recognition and measurement principles of
Accounting Principles Board (APB) Opinion No. 25, “Accounting for Stock Issued
to Employees,” (APB 25) and related interpretations and disclosure requirements
established by SFAS 123, “Accounting for Stock-Based Compensation.”





Under APB
25, the Company recognized stock based compensation using the intrinsic value
method and, thus, generally no compensation expense was recognized for stock
options as they were generally granted at the market value on the date of grant.
The pro forma effects on net income due to stock based compensation were
disclosed in the notes to the consolidated financial statements. SFAS 123R
eliminates the use of APB 25 and the intrinsic value method of accounting, and
requires companies to recognize the cost of employee services received in
exchange for awards of equity instruments, based on the grant date fair value of
those awards, in the financial statements over the requisite service
period.





Recent Accounting
Developments





In July
2006, the FASB issued FASB Interpretation No. 48 “Accounting for Uncertainty in
Income Taxes--an Interpretation of FASB Statement 109”, which clarifies the
accounting for uncertainty in tax positions taken or expected to be taken in a
tax return, including issues relating to financial statement recognition and
measurement. FIN 48 provides that the tax effects from an uncertain tax position
can be recognized in the financial statements only if the position is
“more-likely-than-not” of being sustained if the position were to be challenged
by a taxing authority. The assessment of the tax position is based solely on the
technical merits of the position, without regard to the likelihood that the tax
position may be challenged. If an uncertain tax position meets the
“more-likely-than-not” threshold, the largest amount of tax benefit that is
greater than 50 percent likely of being recognized upon ultimate settlement with
the taxing authority, is recorded. The provisions of FIN 48 are effective for
fiscal years beginning after December 15, 2006, with the cumulative effect of
the change in accounting principle recorded as an adjustment to opening retained
earnings. The Company has evaluated the impact of FIN 48 and concluded that no
adjustments to retained earnings were needed.





In
September 2006, the FASB issued Statement of Financial Accounting Standards No.
157 “Fair Value Measurements”, which provides expanded guidance for using fair
value to measure assets and liabilities. SFAS 157 establishes a hierarchy for
data used to value assets and liabilities, and requires additional disclosures
about the extent to which a company measures assets and liabilities at fair
value, the information used to measure fair value, and the effect of fair value
measurements on earnings. Implementation of SFAS 157 is required on January 1,
2008. The Company is currently evaluating the impact of adopting SFAS 157 on the
financial statements.





xxvi)In
February 2007, the FASB issued SFAS No. 159, “the Fair Value Option for
Financial Assets and Financial Liabilities—including an amendment of FASB
Statement No. 115”. SFAS No. 159 permits entities to choose to measure
many financial instruments and certain other items at fair value. Unrealized
gains and losses on items for which the fair value option has been elected will
be recognized in earnings at each subsequent reporting date. SFAS 159 is
effective for the Company January 1, 2008.  The adoption of SFAS
No. 159 will not have a material impact on the Company's consolidated
financial position or results of operations.


F-12
 Table of Contents


In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements”. SFAS 160 establishes accounting and
reporting standards for ownership interests in subsidiaries held by parties
other than the parent, the amount of consolidated net income attributable to the
parent and to the noncontrolling interest, changes in a parent's ownership
interest and the valuation of retained noncontrolling equity investments when a
subsidiary is deconsolidated. SFAS 160 also establishes reporting
requirements that provide sufficient disclosures that clearly identify and
distinguish between the interests of the parent and the interests of the
noncontrolling owners. This standard is effective for fiscal years beginning
after December 15, 2008. The Company is currently evaluating the effect, if
any, that SFAS No. 160 will have on the financial statements.








NOTE 2 – NOTES PAYABLE AND RELATED
DERIVATIVE LIABILITIES





Note Payable – Related
Party





Shareholder
loans, in the principal amount of $900,000, were repaid in full from the
proceeds of the April 2006 private placement.





Subordinated Convertible
Notes





On May 4,
2005, the Company entered into purchase agreements with multiple investors
pursuant to which the Company sold $2,125,000 of 8% subordinated convertible
notes due 2010.





The
Convertible Notes provided for interest at 8% with semi-annual interest payments
and had a maturity date of May 1, 2010.  The notes were convertible,
at the option of the holders, into common stock of the Company at a price of
$1.00 per share, subject to standard anti-dilution provisions relating to
splits, reverse splits and other transactions plus a reset provision whereby the
conversion price could be adjusted downward to a lower price per share if the
Company issued its common stock to others below the stated conversion
price.  The notes were subject to automatic conversion in the event
the Company conducted an underwritten public offering of its common stock from
which the Company received at least $5 million and the public offering price was
at least 150% of the then applicable conversion price.  The Company
had the right to cause the notes to be converted into common stock after May 1,
2006 if the price of the Company's common stock exceeded 200% of the then
applicable conversion price on the date of conversion and for at least 20
trading days over the preceding 30 trading days.  The Company had the
right to repurchase the Notes after May 1, 2007 at 103% of the face amount
during 2007, 102% of the face amount during 2008, 101% of the face amount during
2009 and 100% of the face amount thereafter.  The notes were unsecured
general obligations of the Company and were subordinated to all other
indebtedness of the Company unless the other indebtedness was expressly made
subordinate to the notes.  The conversion feature, the conversion
price, reset provision and the Company's optional early redemption right in the
Convertible Notes were bundled together as a single compound embedded derivative
liability, and using a layered discounted probability-weighted cash flow
approach, were initially fair valued at $2,368,485 at May 4, 2005.





At
inception the excess of the unamortized discount over the notional amount of the
Convertible Note in the amount of $285,547 was charged to expense in the
Company's statement of operations.  For the period from inception of
the Convertible Notes (May 4, 2005) through December 31, 2005, the amortization
of unamortized discount on the Convertible Notes was $34,167, which was
classified as interest expense in the accompanying statement of
operation.  The mark to market adjustment to increase the derivative
liability for the period from inception to December 31, 2005 was
$15,561.





On May 2,
2006, the Convertible Notes were satisfied in full upon the conversion of the
same to common stock.  As a result of conversion of the Convertible
Notes, the compound embedded derivative liability of $2,373,405 at that date was
reclassified as additional paid in capital, and the unamortized discount, in the
amount of $2,053,060, was credited as a reduction of additional paid in capital
for the year ended December 31, 2006. The mark to market adjustment to decrease
the derivative liability from December 31, 2005 to the conversion date was
$10,640.


F-13
 Table of Contents




Warrants





On May 4,
2005, in connection with the issuance of the Convertible Notes, the Company
entered into the Warrants, three year warrant agreements, with nine parties
whereby 191,250 warrants were issued at an exercise price of $1.00 per share,
subject to a reset provision whereby the exercise price would be adjusted
downward in the event the Company issued its common stock to others at a price
below the initial warrant exercise price.  This reset provision
represented an embedded derivative, which was not bifurcated from the host
warrant contract (as both were derivatives) and was a derivative liability at
its fair value at date of inception utilizing the Black-Scholes method with a
probability weighted exercise price.  This fair value model comprised
multiple probability-weighted scenarios under various assumptions reflecting the
economics of the warrants, such as risk free interest rate, expected Company
stock price and volatility, likelihood of exercise, and timely
registration.  The assumptions used at December 31, 2005 were a
risk-free interest rate of 3.08%, volatility of 40%, expected term of 2.3 years,
dividend yield of 0.00% and a probability weighted exercise price of
$.983.  The common stock warrants and the embedded warrant price reset
provision were initially fair valued at $42,063 at May 4, 2005 and charged to
expense in the Company's statement of operations.  The mark to market
adjustment for the period from inception to December 31, 2005 was
$387,067.





The
Warrants were exercised in full in May 2006.  As a result of exercise
of the warrants, the derivative liability associated with the warrants, in the
amount of $610,719, was reclassified as additional paid in capital for the year
ended December 31, 2006.  The mark to market adjustment to increase
the liability from December 31, 2005 to the date of exercise was
$181,589.





NOTE 3 – RELATED PARTIES





In
conjunction with the Company's efforts to secure oil and gas prospects,
financing and services, in lieu of salary or other forms of compensation, during
2005, the Company granted to John F. Terwilliger, Chief Executive Officer, and
Orrie L. Tawes, a principal shareholder and Director, overriding royalty
interests in select mineral properties of the Company.  During 2007
and 2006, Mr. Terwilliger received royalty payments relating to those properties
totaling $50,580 and $37,333, respectively, and Mr. Tawes received royalty
payments relating to those properties totaling $48,528 and $23,343,
respectively.





John
Terwilliger periodically loaned funds to support the Company's operations. At
December 31, 2005, loans from Mr. Terwilliger totaled $904,400, including
accrued interest.  Loans from Mr. Terwilliger accrued interest at 7.2%
and were due January 1, 2007.  The loans from Mr. Terwilliger were
repaid in full in May 2006.  Interest paid to Mr. Terwilliger totaled
$20,440 during 2006.





NOTE 4 – INCOME TAXES





The
following table sets forth a reconciliation of the statutory federal income tax
for the year ended December 31, 2007 and 2006.





2007
                
                
                2006Income/Loss
      before income taxes
                
                $
                620,572
                
                
                $
                (1,459
                )Income
      tax computed at statutory rates
                
                
                210,994
                
                
                $
                (496
                )Derivative
      expense
                
                
                -
                
                
                
                70,982Effect
      of foreign taxes
                
                
                525,086
                
                
                
                173,616Permanent
      differences, nondeductible expenses
                
                
                1,828
                
                
                
                40,330Increase
      (decrease) in valuation allowance
                
                
                96,292
                
                
                
                219,567Return
      to Accrual Items
                
                
                (115,029
                )State
                
                
                713Other
                
                
                
                
                
                
                6,638Tax
      provision
                
                $
                719,884
                
                
                $
                510,637Current
      provisionUnited
      States
                
                
                1,080
                
                
                $
                -Foreign
                
                
                137,601
                
                
                
                510,637Deferred
      provision- Foreign
                
                
                581,203
                
                
                
                -Total
      provision
                
                $
                719,884
                
                
                $
                510,637


F-14
 Table of Contents




The
Company has a net operating loss carry forward of approximately $832,821 which
will expire in 2023. In addition, the Company has approximately $224,750 of
foreign tax credit carry forwards which will expire in 2015, 2016, and
2017.





The tax
effects of the temporary differences between financial statement income and
taxable income are recognized as a deferred tax asset and liability. Significant
components of the deferred tax asset and liability as of December 31, 2007 are
set out below.





2007
                
                
                2006Non-Current
      Deferred tax assets:Net
      operating loss carryforwards
                
                $
                283,159
                
                
                $
                66,536Foreign
      tax credit carryforwards
                
                
                224,750
                
                
                
                841,642Asset
      retirement obligation
                
                
                13,197
                
                
                
                13,197Deferred
      State Tax
                
                
                61,369
                
                
                
                -Stock
      Compensation
                
                
                113,971
                
                
                
                -Other
                
                
                353,027
                
                
                
                -Colombia
      Future Tax Obligations
                
                
                173,616Total
      Non-Current Deferred tax assets
                
                
                1,223,089
                
                
                
                921,375Non-Current
      Deferred tax liabilities:Book
      over tax depreciation, depletionand
      capitalization methods on oiland
      gas properties
                
                
                (256,789
                )
                
                
                (189,524
                )Colombian
      deductions in excess of book
                
                
                (581,202
                )
                
                
                -Total
      Non-Current tax liabilities
                
                
                (837,991
                )
                
                
                (189,524
                )Valuation
      Allowance
                
                
                (966,300
                )
                
                
                (731,851
                )Net
      deferred tax liability
                
                $
                (581,202
                )
                
                $
                -





Foreign Income
Taxes





The
Company owns an interest in four limited liability companies that operate the
activities in Colombia, and various entities controlled by
Hupecol.  Colombia's tax rate is 34%.  Based on information
provided by the manager of Hupecol, the Company has determined its share of the
Colombia tax liability for 2007 will be $137,601.  This amount has
been accrued during the year and will be funded by withholdings from the 2007
revenue and from revenue received in 2008.





In 2007,
the Company was advised that Hupecol would be adjusting the division of
interests among the members of the various Hupecol entities to reflect revised
Colombian tax allocations among the various Hupecol
entities.  Specifically, Hupecol advised that Colombian tax attributes
were allocated among the Hupecol entities without taking into account the
specific contributions of each individual entity resulting in an improper
shifting of tax expenses and benefits among the Hupecol entities and, in turn,
the members of each of the Hupecol entities, including the Company.





As a
result of the adjustment by Hupecol, during 2007, the Company received a net
credit from Hupecol for excess Colombian taxes allocated to it in the amount of
$662,688.  This credit has been reflected in the financial statements
as a credit to income tax expense.





NOTE 5 – STOCK BASED
COMPENSATION





On August
12, 2005, the Company's Board of Directors adopted the Houston American Energy
Corp. 2005 Stock Option Plan (the "Plan").  The terms of the Plan
allow for the issuance of up to 500,000 options to purchase 500,000 shares of
the Company's common stock. Persons eligible to participate in the Plan are key
employees, consultants and directors of the Company. During 2007 the Company
granted 30,000 options to the members of the Board of Directors and 66,667
previously granted options vested to company employees.


F-15
 Table of Contents




The
options granted to the directors were valued on the date of the grant using the
Black-Scholes option-pricing model with the following weighted average
assumptions, risk-free interest rate 5.24%, expected life in years 10, expected
stock volatility 88%, expected dividends 0.0%.  Using this model
yielded a value of $143,100 which was charged to expense in 2007.





The
options granted to employees were valued on the date of the grant using the
Black-Scholes option-pricing model with the following weighted average
assumptions, risk-free interest rate 5.24%, expected life in years 10, expected
stock volatility 77%, expected dividends 0.0%. The total value of the options
was $494,000.  The options are being expensed over the vesting
period.  During 2007, $192,108 was expensed as employee
compensation.





Option
activity during 2007 is as follows:





Options
              
              
              Weighted
      Average Exercise Price
              
              
              Weighted
      Average Remaining Contractual Term (in Years)
              
              
              Aggregate
      Intrinsic ValueOutstanding
      at beginning of year
              
              
              309,000
              
              
              $
              2.89
              
              
              
              8.27
              
              
              $
              77,000Granted
              
              
              30,000
              
              
              
              5.45
              
              
              
              9.39
              
              
              
              0Exercised
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Forfeited
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Outstanding
      at end of year
              
              
              339,000
              
              
              $
              3.12
              
              
              
              8.37
              
              
              $
              77,000





No
options were exercised for the year ended December 31, 2007.  As of
December 31, 2007, total unrecognized stock-based compensation expense related
to non-vested stock options was $82,332.  As of December 31, 2007
there were 161,000 shares of common stock available for issuance pursuant to
future stock option grants.





NOTE 6 – COMMON STOCK





April 2006 Private
Placement





On April
28, 2006, the Company entered into Subscription Agreements (the "Purchase
Agreements") with multiple investors pursuant to which the Company sold
5,533,333 shares of common stock (the "Shares") for $16,599,999.





The
Shares were offered and sold in a private placement transaction pursuant to the
exemption from registration provided by Section 4(2) of the Securities Act of
1933 and Rule 506 promulgated thereunder.  Each investor was an
"accredited investor" as defined in Rule 501 promulgated under the Securities
Act.





Pursuant
to the terms of the Subscription Agreements, the Company and the investors
entered into Registration Rights Agreements under which the Company agreed to
file with the SEC, within 60 days, a registration statement covering the
Shares.  In conjunction with the placement of the Shares, John
Terwilliger, O. Lee Tawes III and Edwin Broun III each entered into lock-up
agreements pursuant to which each agreed not to offer or sell any shares of the
Company's common stock until the earlier of the effective date of the
registration statement relating to the Shares or one year from the sale of the
Shares.





The
Company paid commissions totaling $1,162,000 and issued a warrant (the
"Placement Agent Warrant") to the placement agent in the offering to purchase
415,000 shares of common stock at $3.00 per share.  The Registration
Rights Agreements provide that the shares of common stock underlying the
Placement Agent Warrant are to be included in the registration statement, which
was filed and declared effective on June 16, 2006.


F-16
 Table of Contents




Conversion of 8%
Subordinated Convertible Notes





During
2006, the Company notified the holders of its Convertible Notes of its election
to convert the Convertible Notes into shares of the Company's common
stock.  As a result of such election, the full principal amount of the
Convertible Notes of $2,125,000 was satisfied by conversion of the same into
2,125,000 shares of common stock.





The
shares of common stock issued on conversion of the Convertible Notes were
offered and issued pursuant to the exemption from registration provided by
Section 4(2) of the Securities Act of 1933.  Each of the investors is
an "accredited investor", as defined in Rule 501 promulgated under the
Securities Act.





Exercise of
Warrants





During
2006, the holders of the Warrants exercised all 191,250 warrants and were issued
an aggregate of 191,250 shares of common stock for aggregate consideration of
$191,250.





The
shares of common stock issued on exercise of the warrants were offered and
issued pursuant to the exemption from registration provided by Section 4(2) of
the Securities Act of 1933.  Each of the investors is an "accredited
investor", as defined in Rule 501 promulgated under the Securities
Act.





During
2006, the placement agent exercised 100,000 of the 415,000 Placement Agent
Warrants, and was issued 100,000 shares for an aggregate consideration of
$300,000.  At December 31, 2007, the Company had the remaining 315,000
warrants outstanding with a remaining contractual life of 3.33
years.





The
weighted average exercise price for all remaining outstanding warrants was
$3.00.  No warrants were exercised during the year ended December 31,
2007.





NOTE 7 – COMMITMENTS AND
CONTINGENCIES





Lease
Commitment





The
Company leases office facilities under an operating lease agreement that expires
May 31, 2012.  The lease agreement requires future payments as
follows:





Year
                
                Amount2008
                
                
                79,5762009
                
                
                81,9452010
                
                
                84,3152011
                
                
                86,6842012
                
                
                36,530Total
                
                
                369,050





Total
rental expense was $76,578 in 2007 and $43,704 in 2006. The Company does not
have any capital leases or other operating lease commitments.





Legal
Contingencies





The
Company is subject to legal proceedings, claims and liabilities that arise in
the ordinary course of its business. The Company accrues for losses associated
with legal claims when such losses are probable and can be reasonably estimated.
These accruals are adjusted as further information develops or circumstances
change.


F-17
 Table of Contents




Environmental
Contingencies





The
Company’s oil and natural gas operations are subject to stringent federal, state
and local laws and regulations relating to the release or disposal of materials
into the environment or otherwise relating to environmental protection. These
laws and regulations may require the acquisition of a permit before drilling
commences, restrict the types, quantities and concentration of substances that
can be released into the environment in connection with drilling and production
activities, limit or prohibit drilling activities on certain lands lying within
wilderness, wetlands and other protected areas, and impose substantial
liabilities for pollution resulting from our operations. Failure to comply with
these laws and regulations may result in the assessment of administrative, civil
and criminal penalties, incurrence of investigatory or remedial obligations or
the imposition of injunctive relief. Changes in environmental laws and
regulations occur frequently, and any changes that result in more stringent or
costly waste handling, storage, transport, disposal or cleanup requirements
could require the Company to make significant expenditures to maintain
compliance, and may otherwise have a material adverse effect on its results of
operations, competitive position or financial condition as well as the industry
in general. Under these environmental laws and regulations, the Company could be
held strictly liable for the removal or remediation of previously released
materials or property contamination regardless of whether the Company was
responsible for the release or if its operations were standard in the industry
at the time they were performed.  The Company maintains insurance
coverage, which it believes is customary in the industry, although the Company
is not fully insured against all environmental risks





Development
Commitments





During
the ordinary course of oil and gas prospect development, the Company commits to
a proportionate share for the cost of acquiring mineral interest, drilling
exploratory or development wells and acquiring seismic and geological
information.





Employment
Arrangements





In
October 2004, the Company began paying an annual salary of $180,000 to its Chief
Executive Officer.  Effective June 1, 2006, the salary of the Chief
Executive Officer was increased to $300,000 annually.





In July
2006, the Company appointed James "Jay" Jacobs as Chief Financial Officer and
fixed Mr. Jacobs' compensation as follows:  (1) base salary of
$125,000; and (2) a stock option to purchase 200,000 shares of common stock at
$2.98 per share, the closing price on first day of employment, vesting over a 2
year period and exercisable over a period of ten years.





During
2007, the Company’s compensation committee engaged a compensation consultant, as
called for by the terms of employment of the Company’s chief financial officer,
to review the compensation arrangements of the Company’s senior executives with
a view to adjusting such compensation to reflect industry compensation
practices. Following that review, the compensation committee approved increases
in base salary of the Company’s chief executive officer to $315,000 annually and
chief financial officer to $150,000 annually, the payment of one-time cash
bonuses of $50,000 to the Company’s chief executive officer and $30,000 to the
chief financial officer and the grant of 41,700 shares of restricted stock to
the Company’s chief executive officer and 13,900 shares to the chief financial
officer, which grants are subject to approval of the same by the Company’s
shareholders.


F-18
 Table of Contents


NOTE
8 – GEOGRAPHICAL INFORMATION





The
Company currently has operations in two geographical areas, the United States
and Colombia. Revenues for the twelve months ended December 31, 2007 and Long
Lived Assets as of December 31, 2007 attributable to each geographical area are
presented below:





Years Ended December 31,
      2007
                
                
                Years Ended December 31,
      2006Long
      Lived
                
                
                
                
                
                Long
      LivedRevenues
                
                
                Assets,
      Net
                
                
                Revenues
                
                
                Assets,
      NetNorth
      America
                
                $
                445,532
                
                
                $
                2,182,857
                
                
                $
                637,625
                
                
                $
                1,164,423South
      America
                
                
                4,531,640
                
                
                
                7,834,188
                
                
                
                2,565,106
                
                
                
                4,081,905Total
                
                $
                4,977,172
                
                
                $
                10,017,045
                
                
                $
                3,202,731
                
                
                $
                5,246,328





NOTE
9 – SUPPLEMENTAL INFORMATION ON OIL AND GAS EXPLORATION, DEVELOPMENT AND
PRODUCTION ACTIVITIES (UNAUDITED)





This
footnote provides unaudited information required by Statement of Financial
Accounting Standards No. 69, “Disclosures about Oil and gas Producing
Activities”.




Geographical
Data




The
following table shows the Company’s oil and gas revenues and lease operating
expenses, which includes the joint venture expenses incurred in South America,
by geographic area:




2007
                  
                  
                  2006RevenuesNorth
      America
                  
                  $
                  445,532
                  
                  
                  $
                  637,625South
      America
                  
                  
                  4,531,640
                  
                  
                  
                  2,565,106$
                  4,977,172
                  
                  
                  $
                  3,202,731Production
      CostNorth
      America
                  
                  $
                  130,430
                  
                  
                  $
                  198,167South
      America
                  
                  
                  1,710,689
                  
                  
                  
                  819,273$
                  1,841,119
                  
                  
                  $
                  1,017,,440





Capital
Costs





Capitalized
costs and accumulated depletion relating to the Company’s oil and gas producing
activities as of December 31, 2007, all of which are onshore properties located
in the United States and Colombia, South America are summarized
below:





North
      America
              
              
              South
      America
              
              
              TotalUnproved
      properties not being amortized
              
              
              85,476
              
              
              
              13,330
              
              
              
              998,806Properties
      being amortized
              
              
              3,424,994
              
              
              
              9,289,675
              
              
              
              12,714,669Accumulated
      depreciation, depletion and amortization
              
              
              (2,227,613
              )
              
              
              (1,468,817
              )
              
              
              (3,696,430
              )Total
      capitalized costs
              
              $
              2,182,857
              
              
              $
              7,834,188
              
              
              $
              10,017,045





During
2007, the Company recorded a provision for impairments of $348,019, all of which
was attributable to North American properties.  Impairments related to
the termination, during 2007, of operations of seven wells in the U.S. and the
fact that, as of December 31, 2007, well testing had not yet been conducted on,
and no reserves had been attributed to, the well drilled on the Company’s Caddo
Lake Prospect.


F-19
 Table of Contents




Amortization
Rate





The
amortization rate per unit based on barrel equivalents was $57.15 for North
America and $8.07 for South America.





Acquisition, Exploration and
Development Costs Incurred





Costs
incurred in oil and gas property acquisition, exploration and development
activities for December 31, 2007 and 2006 is summarized below:





2007North
      America
                
                
                South
      AmericaProperty
      acquisition costs:Proved
                
                $
                880,779
                
                
                $
                355,000Unproved
                
                
                191,477
                
                
                
                -Exploration
      costs
                
                
                2,249,679
                
                
                
                -Development
                
                
                1,088,535
                
                
                
                8,948,005Total
      costs incurred
                
                $
                4,410,470
                
                
                $
                9,303,0052006North
      America
                
                
                South
      AmericaProperty
      acquisition costs:Proved
                
                $
                888,057
                
                
                $
                355,000Unproved
                
                
                182,197
                
                
                
                -Exploration
      costs
                
                
                1,292,226
                
                
                
                3,914,171Development
      costs
                
                
                141,277
                
                
                
                723,929Total
      costs incurred
                
                $
                2,503,757
                
                
                $
                4,933,100


F-20
 Table of Contents




Reserve
Information and Related Standardized Measure of Discounted Future Net Cash
Flows





The
supplemental unaudited presentation of proved reserve quantities and related
standardized measure of discounted future net cash flows provides estimates only
and does not purport to reflect realizable values or fair market values of the
Company’s reserves.  Volumes reported for proved reserves are based on
reasonable estimates.  These estimates are consistent with current
knowledge of the characteristics and production history of the
reserves.  The Company emphasizes that reserve estimates are
inherently imprecise and that estimates of new discoveries are more imprecise
than those of producing oil and gas properties.  Accordingly,
significant changes to these estimates can be expected as future information
becomes available.





Proved
reserves are those estimated reserves of crude oil (including condensate and
natural gas liquids) and natural gas that geological and engineering data
demonstrate with reasonable certainty to be recoverable in future years from
known reservoirs under existing economic and operating
conditions.  Proved developed reserves are those expected to be
recovered through existing wells, equipment, and operating methods.





These
estimates are made by an independent reservoir engineers.  Reserve
definitions and pricing requirements prescribed by the SEC were
used.  Total estimated proved developed and undeveloped reserves by
product type and the changes therein are set forth below for the years
indicated.





North
      America
                
                
                South
      America
                
                
                TotalGas
      (mcf)
                
                
                Oil
      (bbls)
                
                
                Gas(mcf)
                
                
                Oil
      (bbls)
                
                
                Gas
      (mcf)
                
                
                Oil
      (bbls)Total
      proved reservesBalance
      December 31, 2005
                
                
                850,650
                
                
                
                2,800
                
                
                
                -
                
                
                
                270,621
                
                
                
                850,650
                
                
                
                273,421Extensions
      and discoveries
                
                
                3
                
                
                
                141
                
                
                
                -
                
                
                
                277,155
                
                
                
                3
                
                
                
                277,296Revisions
      of prior estimates
                
                
                (346,807
                )
                
                
                1,656
                
                
                
                -
                
                
                
                (110,273
                )
                
                
                (346,807
                )
                
                
                (108,617
                )Production
                
                
                (78,096
                )
                
                
                (1,687
                )
                
                
                -
                
                
                
                (48,057
                )
                
                
                (78,096
                )
                
                
                (49,744
                )Balance
      December 31, 2006
                
                
                425,750
                
                
                
                2,910
                
                
                
                -
                
                
                
                389,446
                
                
                
                425,750
                
                
                
                392,356Extensions
      and discoveries
                
                
                1
                
                
                
                13
                
                
                
                -
                
                
                
                1,121,765
                
                
                
                1
                
                
                
                1,121,778Revisions
      of prior estimates
                
                
                (245,853
                )
                
                
                3,158
                
                
                
                -
                
                
                
                (160,857
                )
                
                
                (245,853
                )
                
                
                (157,699
                )Production
                
                
                (44,249
                )
                
                
                (2,079
                )
                
                
                -
                
                
                
                (69,127
                )
                
                
                (44,249
                )
                
                
                (71,206
                )Balance
      December 31, 2007
                
                
                135,649
                
                
                
                4,012
                
                
                
                -
                
                
                
                1,281,227
                
                
                
                135,649
                
                
                
                1,285,239Proved
      developed reservesat
      December 31, 2006
                
                
                85,890
                
                
                
                2,240
                
                
                
                -
                
                
                
                283,500
                
                
                
                85,890
                
                
                
                285,740at
      December 31, 2007
                
                
                135,649
                
                
                
                4,012
                
                
                
                -
                
                
                
                761,959
                
                
                
                135,649
                
                
                
                765,971




During
2006 and 2007, the Company recorded significant extensions and discoveries
resulting principally from its ongoing drilling operations in
Colombia.
 
 The
Company experienced downward revisions in estimated proved natural gas and oil
reserves in both 2006 and 2007.  The revisions to natural gas reserves
during 2006 were primarily attributable to a decrease in natural gas prices and
downward revisions in volumes of natural gas reserves based on updated well
performance from the Company’s North American properties.  The
revisions to natural gas reserves during 2007 were primarily attributable to a
downward revision in volumes of natural gas reserves based on updated well
performance from the Company’s North American properties.  The
revisions to oil reserves during 2006 and 2007 were primarily attributable to
downward revisions in the volumes of oil reserves based on updated well
performance from the Company’s South American properties.


F-21
 Table of Contents




The
standardized measure of discounted future net cash flows relating to proved oil
and gas reserves is computed by applying year-end prices of oil and gas (with
consideration of price changes only to the extent provided by contractual
arrangements) to the estimated future production of proved oil and gas reserves,
less estimated future expenditures (based on year-end costs) to be incurred in
developing and producing the proved reserves, less estimated related future
income tax expenses (based on year-end statutory tax rates, with consideration
of future tax rates already legislated), and assuming continuation of existing
economic conditions.  Future income tax expenses give effect to
permanent differences and tax credits but do not reflect the impact of
continuing operations including property acquisitions and
exploration.  The estimated future cash flows are then discounted
using a rate of ten percent a year to reflect the estimated timing of the future
cash flows.





Standard
measure of discounted future net cash flows at December 31, 2007





North America
                  
                  
                  South America
                  
                  
                  TotalFuture
      net cash flow
                  
                  $
                  1,312,392
                  
                  
                  $
                  111,909,478
                  
                  
                  $
                  113,221,870Future
      production cost
                  
                  
                  (530,096
                  )
                  
                  
                  (18,540,428
                  )
                  
                  
                  (19,070,524
                  )Future
      development costs
                  
                  
                  -
                  
                  
                  
                  (2,537,694
                  )
                  
                  
                  (2,537,694
                  )Future
      income tax
                  
                  
                  -
                  
                  
                  
                  (21,039,554
                  )
                  
                  
                  (21,039,554
                  )Future
      net cash flow
                  
                  
                  782,296
                  
                  
                  
                  69,791,802
                  
                  
                  
                  70,574,09810%
      annual discount for timing of cash flow
                  
                  
                  (172,260
                  )
                  
                  
                  (14,450,335
                  )
                  
                  
                  (14,622,595
                  )Standard
      measure of discounted future net cash flow relating to proved oil and gas
      reserves
                  
                  $
                  610,036
                  
                  
                  $
                  55,341,467
                  
                  
                  $
                  55,951,503Changes
      in standardized measure:Change
      due to current year operationsSales,
      net of production costs
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  (3,136,053
                  )Change
      due to revisions in standardized variables:Income
      taxes
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  (13,727,868
                  )Accretion
      of discount
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  1,045,246Net
      change in sales and transfer price, net of production
      costs
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  14,313,855Revision
      and others
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  9,549,895Discoveries
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  59,728,838Changes
      in production rates and other
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  (804,957
                  )Net
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  47,869,166Beginning
      of year
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  8,082,337End
      of year
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  $
                  55,951,503


F-22
 Table of Contents




Standard
measure of discounted future net cash flows at December 31, 2006





North America
                    
                    
                    South America
                    
                    
                    TotalFuture
      net cash flow
                    
                    
                    2,927,620
                    
                    
                    
                    18,479,216
                    
                    
                    
                    21,406,836Future
      production cost
                    
                    
                    (1,303,900
                    )
                    
                    
                    (6,993,899
                    )
                    
                    
                    (8,297,799
                    )Future
      income tax
                    
                    
                    -
                    
                    
                    
                    (2,862,863
                    )
                    
                    
                    (2,862,863
                    )Future
      net cash flow
                    
                    
                    1,623,720
                    
                    
                    
                    8,622,454
                    
                    
                    
                    10,246,17410%
      annual discount for timing of cash flow
                    
                    
                    567,170
                    
                    
                    
                    1,596,667
                    
                    
                    
                    2,163,837Standard
      measure of discounted future netcash flow relating to proved oil
      and gas reserves
                    
                    $
                    1,056,550
                    
                    
                    $
                    7,025,787
                    
                    
                    $
                    8,082,337Changes
      in standardized measure:Change
      due to current year operationsSales,
      net of production costs
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    $
                    (2,185,290
                    )Change
      due to revisions in standardized variables:Income
      taxes
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    727,245Accretion
      of discount
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    637,560Net
      change in sales and transfer price, net of production
costs
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    2,426,491Revision
      and others
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    (3,672,014
                    )Discoveries
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    4,590,226Changes
      in production rates and other
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    (817,481
                    )Net
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    1,706,737Beginning
      of year
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    6,375,600End
      of year
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    $
                    8,082,337






F-23