NOTE 6-STOCK-BASED COMPENSATION

On August 12, 2005, the Company's Board of Directors adopted the Houston American Energy Corp. 2005 Stock Option Plan (the “2005 Plan”). The terms of the 2005 Plan allow for the issuance of up to 500,000 options to purchase 500,000 shares of the Company's common stock.

In 2008, the Company's Board of Directors adopted the Houston American Energy Corp. 2008 Equity Incentive Plan (the “2008 Plan” and, together with the 2005 Plan, the “Plans”). The terms of the 2008 Plan allow for the issuance of up to 2,200,000 shares of the Company's common stock pursuant to the grant of stock options and restricted stock. Persons eligible to participate in the Plans are key employees, consultants and directors of the Company.

Stock Option Activity

During 2008, the Company granted 1,050,000 options to employees. The options granted to employees during 2008 had a ten year life and 150,000 of the options vest ratably over three years and 900,000 of the options vest ratably over six years. The options 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 3.875%, expected life in years of 6 and 6.75, respectively, expected stock volatility 73.81754%, and expected dividend yield of 0.0%. The Company determined the options qualify as ‘plain vanilla' under the provisions of SAB 107 and the simplified method was used to estimate the expected option life. The total value of the options was $5,299,214. The options are being expensed over the vesting period. During 2011, 2010 and 2009, $861,662, $994,983, and $1,007,558, respectively, were amortized to expense as employee compensation for the options granted to employees during 2008.

During 2009, the Company granted 26,665 options to members of the Board of Directors and 120,000 options to employees.

The options granted to the directors during 2009 vested immediately, had a ten-year life and 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 3.19%, expected life of 5 years, expected stock volatility 87.625%, expected future dividend yield of 0.0%. The Company determined the options qualify as ‘plain vanilla' under the provisions of Staff Accounting Bulletin (SAB) 107 and the simplified method was used to estimate the expected option life. Using this model yielded a value of $38,174 which was charged to expense in 2009 for the options granted to directors during 2009.

The options granted to employees during 2009 vest ratably over three years, had a ten-year life and 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 3.19%, expected life of 6 years, expected stock volatility 87.625%, and expected future dividend yield of 0.0%. The Company determined the options qualify as ‘plain vanilla' under the provisions of SAB 107 and the simplified method was used to estimate the expected option life. The total value of the options was $182,831. The options are being expensed over the vesting period. During 2011, 2010 and 2009, $60,849, $60,943 and $34,396 were amortized to expense as employee compensation for the options granted to employees during 2009.

During 2010, the company granted 125,000 options to members of the Board of Directors and 150,000 options to employees.

The options granted to the directors during 2010 vested immediately, had a ten-year life and 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 2.23%, expected life of 5.7 years, expected stock volatility 87.97%, and expected future dividend yield of 0.44%. The Company determined the options qualify as ‘plain vanilla' under the provisions of SAB 107 and the simplified method was used to estimate the expected option life. Using this model yielded a value of $1,177,781 which was charged to expense in 2010 for the options granted to directors during 2010. These options had a weighted average grant date fair value of $4.28 per share.

The options granted to employees during 2010 vest ratably over three years, had a ten-year life and 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 1.70%, expected life of 5.8 years, expected stock volatility 87.35%, and expected future dividend yield of 0.0%. The Company determined the options qualify as ‘plain vanilla' under the provisions of SAB 107 and the simplified method was used to estimate the expected option life. The total value of the options was $958,477. The options are being expensed over the vesting period. During 2011 and 2010, $319,155 and $123,421 was amortized to expense as employee compensation for the options granted to employees during 2010. These options had a weighted average grant date fair value of $3.49 per share.

During 2011, the company granted 106,250 options to members of the Board of Directors, including 25,000 options granted to a newly appointed director and 81,250 options granted pursuant to annual grants to independent directors. 86,666 options were exercised on a cashless basis by former directors, resulting in the issuance of 39,458 shares of common stock.

The 25,000 options granted to the newly appointed director vested immediately, had a ten-year life, an exercise price of $14.06 per share and 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 2.095%, expected life of 5.685 years, (3) expected stock volatility 87.549%, and expected future dividend yield of 0.142%. The Company determined the options qualify as ‘plain vanilla' under the provisions of SAB 107 and the simplified method was used to estimate the expected option life. Using this model yielded a value of $250,915 which was charged to expense in 2011. These options had a grant date fair value of $10.04 per share.

The 81,250 options granted under the annual director grants vest 20% on the grant date and 80% on March 13, 2012. These options had a ten-year life, an exercise price of $16.07 per share and were valued on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions: risk-free interest rate 1.689%, expected life of 5.30 years, expected stock volatility 87.25%, and expected dividend yield of 0.124%. The Company determined the options qualify as ‘plain vanilla” under the provisions of SAB 107 and the simplified method was used to estimate the expected option life. Using this model yielded a value of $905,125, of which $714,636 was expensed during 2011. These options had a grant date fair value of $11.14 per share.

Option activity during 2011, 2010 and 2009 is as follows:

	Options			Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (in Years)		Aggregate Intrinsic Value
Outstanding at December 31, 2008		1,392,333		$	6.21
Granted		146,665		$	2.05
Exercised		-
Forfeited		-

Outstanding at December 31, 2009		1,538,998		$	5.81
Granted		275,000		$	10.85
Exercised		-
Forfeited		-

Outstanding at December 31, 2010		1,813,998		$	6.57
Granted		106,250		$	15.60
Exercised		(39,458	)	$	4.60
Forfeited		(47,208	)	$	10.97

Outstanding at December 31, 2011		1,833,582		$	7.02	6.63	$	9,977,732

As of December 31, 2011, 1,178,582 of the outstanding options were exercisable. The exercisable options had a weighted average exercise price of $6.47 and an intrinsic value of $6,994,632 as of December 31, 2011.

Unvested options at December 31, 2011 totaled 655,000, with a weighted average grant date fair value and exercise price per share of $5.66 and $8.02, respectively, an amortization period of 1.95 years and a weighted average remaining life of 7.2 years.

As of December 31, 2011, total unrecognized stock-based compensation expense related to non-vested stock options was $2,574,620. As of December 31, 2011, there were 734,752 shares of common stock available for issuance pursuant to future stock or option grants under the Plans.

Restricted Stock Activity

During 2011, the Company granted to officers an aggregate of 45,000 shares of restricted stock, which shares vest over a period of three years. The fair value of $743,400 was determined based on the fair market value of the shares on the date of grant. This value is being amortized over the vesting period and, during 2011, $135,675 was amortized to expense. As of December 31, 2011, there was $607,725 of unrecognized compensation cost related to unvested restricted stock. The cost is expected to be recognized over a weighted average period of approximately 2.45 years.

Share-Based Compensation Expense

The following table reflects share-based compensation recorded by the Company for 2011, 2010 and 2009:

	2011			2010			2009
Share-based compensation expense included in general and administrative expense	$	2,342,892		$	2,357,230		$	1,080,128
Earnings per share effect of share-based compensation expense	$	(0.08	)	$	(0.08	)	$	(0.04	)