UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549





FORM
10-Q





x
            QUARTERLY
      REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934For
      the quarterly period ended June 30, 2008o
            TRANSITION
      REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACTFor
      the transition period from _________________ to
      _________________






cotes logo
            Commission file number
      000-33155
              
              COATES
      INTERNATIONAL, LTD.
              (Exact Name of Registrant as Specified in its
      Charter)






Delaware
            
            22-2925432(State
      or other Jurisdiction of
            
            (I.R.S.
      EmployerIncorporation
      or Organization)
            
            Identification
      No.)




Highway
34 & Ridgewood Road, Wall Township, New Jersey 07719


(Address
of Principal Executive Office) (Zip Code)





(732)
449-7717


(Registrant's
telephone number including area code)





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 o




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




Yes o No 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
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.




Large
accelerated filer ‚                                                                                                           Accelerated
filer Non-accelerated filer ‚




Non-accelerated
filer ‚ (Do not check
if a smaller reporting company)Smaller reporting company x





As of August
12, 2008, 273,426,636 shares of the Registrant’s common stock were issued and
outstanding.










COATES
INTERNATIONAL, LTD.


QUARTERLY
REPORT ON FORM 10-Q





CONTENTS





JUNE
30, 2008





PagePART
      1 – FINANCIAL INFORMATIONItem
      1.   Financial Statements (Unaudited):Condensed
      Balance Sheets
            2Condensed
      Statements of Operations
            3Condensed
      Statements of Cash Flows
            4Notes
      to the Condensed Financial Statements
            5-11Item
      2.    Management's Discussion and Analysis of
      Financial Condition and Results of Operations
            12-18Item
      3.    Quantitative and Qualitative Disclosures About
      Market Risk
            18Item
      4T.  Controls and Procedures
            18PART
      II  -  OTHER INFORMATION
            19Item
      1.    Legal Proceedings
            19Item
      1A. Risk Factors
            20Item
      2.    Unregistered Sales of Equity Securities and Use
      of Proceeds
            20Item
      3.    Defaults Upon Senior Securities
            20Item
      4.    Submission of Matters to a Vote of Security
      Holders
            20Item
      5.    Other Information
            20Item
      6.    Exhibits and Reports on Form 8-K
            20SIGNATURES
            21














Coates
International, Ltd.


Condensed
Balance Sheets




June
      30, 2008
            
            
            December
      31, 2007Assets
            
            (Unaudited)Current
      AssetsCash
            
            $
            616,097
            
            
            $
            959,181Inventory, net
            
            
            424,220
            
            
            
            402,191Other
      assets
            
            
            2,223
            
            
            
            2,223Total Current
    Assets
            
            
            1,042,540
            
            
            
            1,363,595Property,
      plant and equipment, net
            
            
            1,457,331
            
            
            
            1,474,023Deferred
      licensing costs, net
            
            
            74,574
            
            
            
            76,716Security
      deposits
            
            
            197,500
            
            
            
            197,500Total Assets
            
            $
            2,771,945
            
            
            $
            3,111,834Liabilities
      and Stockholders’ DeficiencyCurrent
      LiabilitiesAccounts payable and accrued
      liabilities
            
            $
            973,754
            
            
            $
            947,901Total Current
      Liabilities
            
            
            973,754
            
            
            
            947,901License
      deposits
            
            
            375,000
            
            
            
            375,00010%
      Convertible note, due March 2010
            
            
            20,000
            
            
            
            20,000Finance
      obligation
            
            
            3,876,607
            
            
            
            3,876,607Total Liabilities
            
            
            5,245,361
            
            
            
            5,219,508Commitments
      and Contingencies
            
            
            -
            
            
            
            -Stockholders'
      DeficiencyPreferred
      stock, $0.001 par value, 100,000,000 shares authorized, no
      shares
              issued
      or outstanding
            
            
            -
            
            
            
            -Common
      stock, $.0001 par value, 1,000,000,000 shares authorized,
              273,426,636
      and 273,411,636 shares issued and outstanding at June 30,
      2008    and December 31, 2007,
      respectively
            
            
            27,343
            
            
            
            27,341Additional
      paid-in capital
            
            
            20,722,353
            
            
            
            20,587,403Accumulated
      deficit
            
            
            (23,223,112
            )
            
            
            (22,722,418
            )Total
      Stockholders' Deficiency
            
            
            (2,473,416
            )
            
            
            (2,107,674
            )Total Liabilities and Stockholders' Deficiency
            
            $
            2,771,945
            
            
            $
            3,111,834








The
accompanying notes are an integral part of these condensed financial
statements.




2





Coates
International, Ltd.


Condensed
Statements of Operations


(Unaudited)





Three
      Months Ended
              June
      30,
            
            
            Six
      Months Ended
              June
      30,2008
            
            
            2007
            
            
            2008
            
            
            2007Revenue
      from Research and Development
            
            $
            700,000
            
            
            $
            -
            
            
            $
            700,000
            
            
            $
            -Operating
      Expenses:Research
      and development costs
            
            
            158,882
            
            
            
            290,652
            
            
            
            295,475
            
            
            
            371,160General
      and administrative expenses
            
            
            353,833
            
            
            
            365,721
            
            
            
            693,962
            
            
            
            791,532Depreciation
      and amortization expense
            
            
            9,417
            
            
            
            12,453
            
            
            
            18,833
            
            
            
            26,622Total
      Operating Expenses
            
            
            522,132
            
            
            
            668,826
            
            
            
            1,008,270
            
            
            
            1,189,314Income
      (Loss) From Operations
            
            
            177,868
            
            
            
            (668,826
            )
            
            
            (308,270
            )
            
            
            (1,189,314
            )Interest
      expense, net
            
            
            (97,368
            )
            
            
            (99,500
            )
            
            
            (192,424
            )
            
            
            (195,400
            )Income
      (Loss) Before Income Taxes
            
            
            80,500
            
            
            
            (768,326
            )
            
            
            (500,694
            )
            
            
            (1,384,714
            )Provision
      for income taxes
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Net
      Income (Loss)
            
            $
            80,500
            
            
            $
            (768,326
            )
            
            $
            (500,694
            )
            
            $
            (1,384,714
            )Basic
      net income (loss) per share
            
            $
            0.00
            
            
            $
            0.00
            
            
            $
            0.00
            
            
            $
            (0.01
            )Basic
      weighted average number of shares
            
            
            273,426,636
            
            
            
            268,028,151
            
            
            
            273,425,812
            
            
            
            267,463,352Diluted
      net income (loss) per share
            
            $
            0.00
            
            
            $
            0.00
            
            
            $
            0.00
            
            
            $
            (0.01
            )Diluted
      weighted average number of shares
            
            
            273,471,081
            
            
            
            268,028,151
            
            
            
            273,425,812
            
            
            
            267,463,352








The
accompanying notes are an integral part of these condensed financial
statements.




3





Coates
International, Ltd.


Condensed
Statements of Cash Flows


(Unaudited)







Six
      Months Ended
              June
      30,2008
            
            
            2007Net
      Cash Used in Operating Activities
            
            $
            (351,036
            )
            
            $
            (1,150,998
            )Cash
      Flows Used in Investing Activities:Acquisition of
      property, plant and equipment
            
            
            -
            
            
            
            (4,281
            )Net
      Cash Used in Investing Activities
            
            
            -
            
            
            
            (4,281
            )Cash
      Flows From Financing Activities:Proceeds
      from issuance of common stock
            
            
            7,952
            
            
            
            1,670,000Proceeds
      from issuance of 10% convertible note
            
            
            -
            
            
            
            120,000Proceeds of
      promissory note from related party
            
            
            -
            
            
            
            100,000Repayment of
      promissory note from related party
            
            
            -
            
            
            
            (100,000
            )Repayment of demand
      loans from related party
            
            
            -
            
            
            
            (92,337
            )Deferred offering
      costs paid
            
            
            -
            
            
            
            (67,955
            )Net
      Cash  Provided by Financing Activities
            
            
            7,952
            
            
            
            1,629,708Net
      (Decrease) Increase in Cash
            
            
            (343,084
            )
            
            
            474,429Cash
      - Beginning of Period
            
            
            959,181
            
            
            
            254,242Cash
      - End of Period
            
            $
            616,097
            
            
            $
            728,671Schedule
      of Supplemental Cash Flow Data:Cash
      paid for Interest
            
            $
            195,268
            
            
            $
            196,507




The
accompanying notes are an integral part of these condensed financial
statements.


4




Coates
International, Ltd.
 Notes
to the Condensed Financial Statements
 
 1.
BASIS OF PRESENTATION
 
 The
accompanying unaudited condensed financial statements of Coates International,
Ltd. (the “Company”) have been prepared in accordance with generally accepted
accounting principles for interim financial information. Accordingly, they do
not include all of the information and notes required by accounting principles
generally accepted in the United States (“GAAP”) for complete financial
statements. In the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have been
included. The results of operations for the three and six month periods ended
June 30, 2008 and 2007 are not necessarily indicative of the results that may be
expected for any other interim period or for the full year.  The
unaudited condensed financial statements should be read in conjunction with the
financial statements and footnotes thereto included in the Company’s annual
report on Form 10-K for the year ended December 31, 2007 and the quarterly
report for the quarter ended March 31, 2008 on Form 10-Q.
 
 2.
ACCOUNTING POLICIES
 
 Revenue
Recognition
 
 Revenue
from research and development activities is recognized when earned and
realization is reasonably assured, provided that financial risk has been
transferred from the Company to its customer. For the three and six months ended
June 30, 2008, the Company recognized $700,000 of revenues received from its
research and development agreement with Well to Wire Energy, Inc.
(“WWE”).
 
 Net
Income (Loss) per Share
 
 Basic net
income (loss) per share is based on the weighted average number of common shares
outstanding without consideration of potentially dilutive shares of common
stock. There were no shares of preferred stock outstanding during the six months
ended June 30, 2008 and 2007. Diluted net income per share is based on the
weighted average number of common and potentially dilutive common shares
outstanding, when applicable. Dilutive net loss per share does not include any
dilutive common shares outstanding since their inclusion would be
antidilutive.
 
 Use
of Estimates
 
 The
preparation of financial statements in conformity with GAAP requires management
to make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reported period.  Actual results could differ from those
estimates.
 
 3.
WELL TO WIRE ENERGY, INC.ESCROW AGREEMENT AND
FINANCING COMMITMENT
 
 In April
2008, the Company entered into a conditional second license agreement with
WWE for the territory of the United States (the “US License”). The US
License provides for a license fee of $50 million and annual minimum purchases
of Coates CSRV Systems as a condition of exclusivity.  The US license
has been deposited into an escrow account and the grant under the license is not
effective until the conditions for release from escrow are
satisfied.
 
 The
escrow agreement was established to provide a more secure mechanism for the
Company to collect payments due under both the prior Canadian licensing and
research and development agreements and the new $50 million US License (the
“Escrow Agreement”).  The Escrow Agreement provides that the US
License shall be held until WWE remits a release payment (the “Release
Payment”). The Release Payment consists of (i) an initial down payment
required under the US License of $1 million and (ii) $8.5 million in payment of
the balance of the monies due to the Company in connection with the
license for the territory of Canada, including the Canadian license agreement
and the research and development agreement (the “Canadian Agreements”). While
the US License is held in escrow there shall not be any grant of license to
WWE. WWE is expected to make non-refundable periodic payments to the
Company in unspecified amounts as partial payments of the Release Payment until
the Release Payment has been paid in full. The first
$3.8 million of the Release Payment, which has been designated as payment of the
fees due under the Research and Development Agreement, is being recognized as
revenue at the time the cash payments are received. WWE has made nonrefundable
payments to the Company totaling $1.5 million in prior years. For the six months
ended June 30, 2008, the Company received $700,000 of non-refundable payments
from WWE which have been recognized as research and development
revenue.Upon full satisfaction of the Release Payment, WWE would be
granted a license for the territory of the United States under the US License
agreement.
  5
  WWE is a
privately held company and its ability to make the license payments due to us
and to honor the minimum purchase requirements under the licenses is dependent
on the success of its continued efforts to raise new equity capital. At
June 30, 2008, the remaining balance of the Release Payment was
$8,800,000.  In August 2008, the Company received additional
installments toward the release payment aggregating $200,000, bringing the
balance of the Release Payment down to $8,600,000. To the extent that WWE is not
successful or experiences delays in raising such additional new equity capital,
the Company’s cash flow, results of operations and financial position could be
adversely affected.
 
 Under the
Escrow Agreement, WWE was required to remit the full amount of the Release
Payment by June 30, 2008 (the “Payment Period”). As WWE was unable to remit the
full amount of the Release Payment within the Payment Period, the Canadian
license agreement automatically became non-exclusive. As provided for in the
Escrow Agreement, since WWE has paid more than $500,000 on account of the
Release Payment through June 30, 2008, the Payment Period was automatically
extended until September 30, 2008 (the “Extended Payment Period”). As an
inducement to WWE to continue remitting installments of the Release Payment as
soon as possible, the Company has offered to reinstate the Exclusivity Provision
of the licenses earlier, provided that WWE remits a minimum additional Release
Payment of $600,000, which would bring the total amount of non-refundable
payments to $3,000,000. Under the Escrow Agreement, should WWE be able to remit
the entire balance of the Release Payment within the Extended Payment
Period, the exclusivity of the Canadian license agreement shall be
reinstated.
 
 In May
2008, the Company was advised that WWE had secured a $1.1 Billion equipment
lease finance commitment from Canada West Corporate Finance, Inc., which is to
be utilized for its Coates CSRV engine generator purchases over the next five
years pursuant to its licensing agreement with the Company. The five-year WWE
business plan on which this commitment was based provides for the purchase of
approximately 7,400 Engine Generators at a price per unit of
$162,000.  WWE is only permitted to draw down on the $1.1 Billion
financing commitment for the acquisition of Coates CSRV Electric Power Natural
Gas Generators. The parties are in the process of finalizing a definitive
financing agreement.
 
 4.
COMMON STOCK
 
 On
February 26, 2007, the Company’s common stock commenced trading on the Over the
Counter Bulletin Board market system under the ticker symbol COTE.
 
 The
Company commenced a private placement offering in December 2006 (the “Offering”)
of “Units” consisting of (i) one share of the Company’s 6% Series A Convertible
Preferred Stock (the “Preferred Stock”) and (ii) a Warrant to purchase five
thousand shares of the Company’s Common Stock at an initial exercise price of
$1.10 per share (the “Warrants”), and terminated the Offering in March 2007.
Aggregate net proceeds from this Offering, which amounted to $420,000 has been
used for working capital purposes. There were no expenses incurred related to
this offering. All of the investors have accepted ten shares of our common stock
in lieu of each share of Preferred Stock purchased through the private offering.
No shares of Preferred Stock were issued. In June 2007, the Company issued in
the aggregate 420,000 shares of its common stock and 42 Warrants in connection
with the Units sold.
 
 5.
ISSUANCE OF 10% CONVERTIBLE NOTES
 
 In March
2007, the Company issued a 10% Convertible Subordinated Note, due March 2010
(“Convertible Note”) in the principal amount of $100,000 to one of its outside
directors and received cash proceeds of $100,000. In April 2007, the Company
issued an additional 10% Convertible Note in the principal amount of $20,000 to
another outside director and received cash proceeds of $20,000. The proceeds
from the Convertible Notes were used for working capital purposes. The
Convertible Notes are convertible at the option of the holder into shares of the
Company’s common stock at an initial conversion rate that is determined by
dividing the principal amount of notes being converted by $0.45. As the closing
price of the Company’s common stock on the date of the transaction was $0.35 per
share, there was no beneficial conversion feature. Interest accrues at the rate
of 10% per annum and is payable in cash only at maturity. All interest shall be
forfeited upon conversion, in which case the holder would be entitled to
dividends declared, if any, on the Company’s common stock during the time the
convertible note was outstanding. On May 16, 2007, $100,000 principal amount of
these convertible notes was converted into 222,222 shares of our common stock.
The Company has reserved 44,444 shares of its common stock for conversion of the
balance of these notes.
  6
  6.
INVESTMENT AGREEMENT WITH DUTCHESS PRIVATE EQUITIES FUND, LTD. AND REGISTRATION
OF SECURITIES
 
 On April
26, 2007, the Company entered into an Investment Agreement with Dutchess Private
Equities Fund, Ltd. (the “Investor”). Pursuant to this Agreement, the Investor
has committed to purchase up to $10,000,000 of our common stock over the course
of thirty-six (36) months. The amount that the Company shall be entitled to
request from each purchase (“Puts”) shall be equal to, at the Company’s
election, either (i) up to $500,000 or (ii) 200% of the average daily volume
(U.S. market only) of the common stock for the ten (10) trading days prior to
the applicable put notice date, multiplied by the average of the three (3) daily
closing bid prices immediately preceding the put date. The put date shall be the
date that the Investor receives a put notice of a draw down from the Company.
The purchase price shall be set at ninety-three percent (93%) of the lowest
closing Best Bid price of the common stock during the pricing period. The
pricing period shall be the five (5) consecutive trading days immediately after
the put notice date. There are put restrictions applied on days between the put
date and the closing date with respect to that particular Put. During this time,
the Company shall not be entitled to deliver another put notice. Further, the
Company shall reserve the right to withdraw that portion of the Put that is
priced below seventy-five percent (75%) of the lowest closing bid prices for the
10-trading day period immediately preceding each put notice.
 
 In
connection with this transaction, the Company filed a registration statement on
Form SB-2 with the Securities and Exchange Commission (“SEC”) covering
15,000,000 shares of the common stock underlying the Investment Agreement. This
registration statement was declared effective by the SEC on June 22, 2007. The
Company shall have an ongoing obligation to register additional shares of our
common stock as necessary underlying the draw downs. The Company also included
in the registration statement the registration of approximately 4,230,000 shares
of common stock representing the 266,667 shares reserved for conversion of the
10% convertible notes (222,222 of which were converted in May 2007), 630,000
shares of common stock related to the stock and warrants issued in connection
with a completed private placement of securities and 3,333,333 shares of common
stock sold in April and May 2007.
 
 During
the six months ended June 30, 2008, the Company sold 15,000 shares of its common
stock under this equity line of credit and received proceeds of approximately
$8,000. During the year ended December 31, 2007, the Company sold 2,341,803
shares of its common stock under this equity line of credit and received
proceeds of $1,215,855. The amount recorded to additional paid in capital in
2007 was reduced by offering costs approximating $73,000.
 
 7.
EARNINGS (LOSS) PER SHARE
 
 At June
30, 2008, the Company had 2,029,445 shares of common stock potentially issuable
upon assumed conversion of (i) $20,000 principal amount of 10% convertible notes
into 44,445 shares of common stock, (ii) 42 outstanding warrants to purchase
210,000 shares of common stock a price per share of $1.10; and, (iii) 628,333
vested stock options and 1,146,667 non-vested stock options to purchase shares
of common stock at a price per share of $0.44.   For the quarter
ended June 30, 2008, fully diluted earnings per share was determined by assuming
that the 10% convertible notes were converted in to 44,445 shares of common
stock and that the interest on such notes during the period of $500 was not
incurred. The potentially issuable shares related to the warrants and stock
options were not included in fully diluted earnings per share because the effect
of including them in the calculation would have been anti-dilutive. For the
three months ended June 30, 2007 and the six month periods ended June 30, 2008
and 2007, none of the potentially issuable shares of common stock were assumed
to be converted because the Company incurred a net loss for the period and the
effect of including them in the calculation would have been anti-dilutive. There
was no effect on net loss per share as a result of potential
dilution.
  7
  8.
STOCK OPTIONS
 
 The
Company’s 2006 Stock Option and Incentive Plan (the “Stock Plan”) was adopted by
the Company’s Board of Directors in October 2006. In September 2007, the Stock
Plan, by consent of George J. Coates, majority shareholder, was adopted by our
shareholders. The Stock Plan provides for the grant of stock-based awards to
employees, officers and directors of, and consultants or advisors to, the
Company and its subsidiaries, if any.  Under the Stock Plan, the
Company may grant options that are intended to qualify as incentive stock
options (“incentive stock options”) within the meaning of Section 422 of
the Internal Revenue Code of 1986, as amended (the “Code”), options not intended
to qualify as incentive stock options (“non-statutory options”), restricted
stock and other stock-based awards.  Incentive stock options may be
granted only to employees of the Company.  A total of 12,500,000
shares of common stock may be issued upon the exercise of options or other
awards granted under the Stock Plan.  The maximum number of shares
with respect to which awards may be granted to any employee under the Stock Plan
shall not exceed 25% of the 12,500,000 shares of common stock covered by the
Stock Plan.
 
 The Board
of Directors or Compensation Committee may, in its sole discretion, amend,
modify or terminate any award granted or made under the Stock Plan, so long as
such amendment, modification or termination would not materially and adversely
affect the participant.
 
 There
were no stock options outstanding at the beginning of 2007. The Company granted
options to purchase 1,775,000 shares of common stock (1,750,000 shares to
officers and directors) on April 18, 2007 at an exercise price of $0.44 per
share. The options vest equitably over a 3-4 year vesting period. The fair value
of shares vested during both the three and six month periods ended June 30,
2008 was approximately $12,000 and during both the three and six month
periods ended June 30, 2007 was approximately $220,000.
  The
Company also granted 25,000 five-year non-employee stock options to its
corporate general counsel on April 18, 2007 at an exercise price of $0.44 per
share, which is being accounted for in accordance with the guidance in Emerging
Issues Task Force Issue No. 96-18, "Accounting for Equity Instruments that are
Issued to Other than Employees for Equity or in Conjunction with Selling Goods
or Services". The options vest equitably over a 4-year vesting period. In
accordance therewith, the fair value of each option is estimated on the balance
sheet date for non-vested options and on the vesting date for vested options.
The fair value of shares vested during the three months ended June 30, 2008 and
2007 was approximately $1,650.
 
 During
both of the three month periods ended June 30, 2008 and 2007, 35,000 stock
options became vested.  During both of the six month periods ended
June 30, 2008 and 2007, 35,000 stock options became vested. The weighted-average
fair value of 1,146,667 nonvested employee stock options at June 30, 2008 was
approximately $453,000. Total compensation cost related to nonvested employee
stock options at June 30, 2008 that has not been recognized was approximately
$172,000. This non-cash compensation expense will be recognized in the future
over a remaining weighted average period of approximately 2.8
years.
 
 At June
30, 2008, the fair value of the unvested portion of non-employee stock options
granted to the Company’s general corporate counsel was approximately
$6,000.
  For the
three months ended June 30, 2008 and 2007, the Company recorded non-cash stock
based compensation expense amounting to approximately $58,000 and $289,000,
respectively, relating to stock option grants.  For the three months
ended June 30, 2008 and 2007, approximately $47,000 and $204,000, respectively,
of this amount was included in research and development expenses and
approximately $11,000 and $85,000, respectively, of this amount is included in
general and administrative expenses in the accompanying statements of
operations. For the six months ended June 30, 2008 and 2007, the Company
recorded non-cash stock based compensation expense amounting to approximately
$127,000 and $289,000, respectively, relating to stock option grants. For the
six months ended June 30, 2008 and 2007, approximately $88,000 and $204,000,
respectively, of this amount was included in research and development expenses
and approximately $39,000 and $85,000, respectively, of this amount is included
in general and administrative expenses in the accompanying statements of
operations.
  8
 
 A summary
of the activity in the Company’s Stock Option Plan for employees and directors
is as follows:
 
 
 Exercise
      Price Per Share
              
              
              Number
      Outstanding
              
              
              Weighted
      Average Remaining Contractual Life
              
              
              Number
      Exercisable
              
              
              Weighted
      Average Exercise Price
              
              
              Weighted
      Average Fair Value at Date of GrantBalance,
      1/1/07
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Granted,
      April 18, 2007
              
              $
              0.44
              
              
              
              1,775,000
              
              
              
              14
              
              
              
              628,333
              
              
              $
              0.44
              
              
              $
              0.40Balance,
      6/30/08
              
              $
              0.44
              
              
              
              1,775,000
              
              
              
              14
              
              
              
              628,333
              
              
              $
              0.44
 
 No stock
options were exercised, forfeited or expired during the three and six month
periods ended June 30, 2008 and 2007. The weighted average fair value of the
Company's stock-based compensation expense of $0.40 per share was estimated
using the Black-Scholes option pricing model which requires highly subjective
assumptions including the expected stock price volatility. These assumptions
were as follows:
  ●
              Historical
      stock price volatility
              
              
              180●
              Risk-free
      interest rate
              
              
              4.56%-4.64%●
              Expected
      life (in years)
              
              
              4●
              Dividend
      yield
              
              
              0.00
 
 The
valuation assumptions were determined as follows:
  ●
              Historical
      stock price volatility: The Company obtained the volatility factor of
      other publicly traded engine manufacturers.●
              Risk-free
      interest rate: The Company bases the risk-free interest rate on the
      interest rate payable on U.S. Treasury securities in effect at the time of
      the grant for a period that is commensurate with the assumed expected
      option life.●
              Expected
      life: The expected life of the options represents the period of time
      options are expected to be outstanding. The Company has no historical data
      on which to base this estimate. Accordingly, the Company estimated the
      expected life based on its expectation that the executives will be subject
      to frequent black out periods during the time that the stock
      options will be exercisable and based on the Company’s expectation
      that it will complete its research and development phase and commence its
      initial production phase. The vesting period of these options was also
      considered in the determination of the expected life of each stock option
      grant.●
              No
      expected dividends.
  The same
methodology and assumptions were utilized in estimating the fair value of
non-employee stock options granted to the Company’s general corporate counsel,
which approximated $9,000 and $13,000 at June 30, 2008 and 2007,
respectively.
  9.
INCOME TAXES
 
 Deferred taxesare
determined using the liability method for the temporary differences between the
financial reporting basis and income tax basis of the Company’s assets and
liabilities. Deferred income taxes are measured based on the tax rates expected
to be in effect when the temporary differences are included in the Company’s tax
return. Deferred tax assets and liabilities are recognized based on anticipated
future tax consequences attributable to differences between financial statement
carrying amounts of assets and liabilities and their respective tax bases.
 
 Deferred income tax
assets decreased by approximately $417,000 and increased by approximately
$252,000 for the three months ended June 30, 2008 and 2007, respectively.
Deferred income tax assetsdecreased by approximately $150,000 and increased by approximately
$389,000 for the six months ended June 30, 2008 and 2007, respectively. These
amounts were fully offset by a corresponding increase in the tax valuation
allowance.
  9
  10.
RELATED PARTY TRANSACTIONS
 
 The
Company owns approximately 30% of the outstanding shares of common stock of
Coates Motorcycle Company, Ltd. (“Coates Motorcycle”), a company that was
researching and developing a heavy cruiser motorcycle equipped with the Coates
SRV engine.
 
 The
Company’s investment in Coates Motorcycle is being accounted for under the
equity method of accounting for investments. As such, the investment is being
carried at cost, adjusted for the Company’s proportionate share of the
undistributed earnings and losses of Coates Motorcycle. The Company stopped
recording its proportionate share of additional losses of Coates Motorcycle at
the point at which its investment equaled $-0- from the recording of such prior
proportionate losses. Had the Company continued to record its proportionate
share of undistributed earning and losses after its investment was written down
to $ -0- in 2005, it would have recorded an additional share of undistributed
losses aggregating approximately $506,000 through June 30, 2008.
 
 Summarized
unaudited information for Coates Motorcycle is as follows:
 
 For
      the Three Months
                Ended June 30:
              
              
              For
      the Six Months
                Ended June 30:2008
              
              
              2007
              
              
              2008
              
              
              2007Revenue
              
              $
              -
              
              
              $
              -
              
              
              $
              -
              
              
              $
              -Operating
      expenses
              
              
              100
              
              
              
              118,770
              
              
              
              620
              
              
              
              290,412Net
      loss
              
              
              (22,495
              )
              
              
              (141,152
              )
              
              
              (45,400
              )
              
              
              (331,409
              )
 
 June
      30, 2008
              
              
              December
      31,2007Current
      assets
              
              $
              55
              
              
              $
              175Total
      assets
              
              
              55
              
              
              
              175Current
      liabilities
              
              
              (623,800
              )
              
              
              (579,020
              )Total
      liabilities
              
              
              (1,515,800
              )
              
              
              (1,470,520
              )Stockholders’
      deficiency
              
              
              1515,745
              
              
              
              1,470,345
 
 
 The
Coates Trust has made loans to the Company at various times to provide working
capital. George J. Coates, Bernadette Coates, wife of George J. Coates and
Gregory Coates are beneficiaries of the Coates Trust. In April 2007, the Coates
Trust advanced an additional $100,000 in the form of a 6% promissory note. At
the same time, the outstanding balance of the prior loans of $92,337 was
converted to and included in this promissory note. No interest was imputed on
these loans for the period prior to the time they were converted to the 6%
promissory note. In May 2007, the entire $192,337 principal amount of the 6%
promissory note was repaid, along with accrued interest of approximately
$1,500.
 
 The
approximate amount of compensation and benefits paid to George J. Coates,
Gregory Coates and Bernadette Coates, exclusive of non-cash stock based
compensation for employee stock options recognized for George J. Coates and
Gregory Coates, for the three and six month periods ended June 30, 2008 and
2007, is summarized as follows:
 
 For the Three Months
                Ended June 30:
              
              
              For the Six Months
                Ended June 30:2008
              
              
              2007
              
              
              2008
              
              
              2007George
      J. Coates (a)
              
              $
              61,000
              
              
              $
              68,000
              
              
              $
              121,000
              
              
              $
              122,000Gregory
      Coates (a)
              
              
              35,000
              
              
              
              31,000
              
              
              
              64,000
              
              
              
              55,000Bernadette
      Coates (b)
              
              
              20,000
              
              
              
              10,000
              
              
              
              31,000
              
              
              
              21,000
 
 (a)
              Includes
      compensation paid for vacation earned but not taken in 2008 and
      2007.
 (b)
              Includes
      compensation paid for vacation earned but not taken in
    2008.
  10
  Effective
in April 2008, the annual base salaries for George J. Coates, Gregory Coates and
Bernadette Coates increased to approximately $250,000, $150,000 and $67,000,
respectively.
 
 Barry C.
Kaye, Treasurer and Chief Financial Officer was paid consulting fees
of  approximately $20,100 and $34,500 during the three months ended
June 30, 2008 and 2007, respectively, and approximately $38,400 and $42,000
during the six months ended June 30, 2008 and 2007, respectively.
 
 The
Company paid Coates Precision Engineering, Ltd, a company owned solely by George
J. Coates, approximately $5,000 for services rendered in connection with
engineering certain materials for use in production during the three months and
six month periods ended June 30, 2007.
 
 11.
LITIGATION AND CONTINGENCIES
 
 The
Company, certain of its officers and directors and other related and unrelated
parties were named as defendants in a lawsuit brought in the Superior Court of
New Jersey captioned H. Alton Neff v. George Coates, Coates International, Ltd.
et al. Plaintiff contends that he is the assignee of 1107 North West Central
Avenue Inc. ("1107"). Preliminary agreements and an amendment thereto relating
to purchase of a certain license by 1107 from the Company provided, inter alia,
that a $500,000 deposit made by 1107 to the Company would convert to stock of
the Company if certain conditions were not met by 1107. The Company maintains
that 1107 did not fulfill such conditions, and failed to make a certain payment,
and therefore, the deposit converted into shares of the Company's restricted
Common Stock. On February 13, 2007, the Superior Court of New Jersey dismissed
the complaint “with prejudice.” The plaintiffs and a third party defendant filed
notices of appeal.  Oral argument before the appellate court was held
on April 8, 2008 and its decision was released on May 8, 2008. The trial court’s
dismissal of H. Alton Neff’s (“Neff”) claims against the Company and George J.
Coates was affirmed.  The claims of 1107 were reinstated and the
defenses of two of the other named defendants to the counterclaim and third
party complaint of the Company and George J. Coates were reinstituted. The
appellate court also suggested that the trial court might consider imposing
monetary sanctions against Neff, 1107 and the other two defendants. The Company
is pursuing a claim for attorney’s fees by filing a motion for
sanctions.  This motion is scheduled to be argued on September 12,
2008. The Company will also pursue counterclaims and third party claims and
vigorously defend against the claims of 1107. On June 23, 2008, Neff filed a
notice of petition for certification with the New Jersey Supreme Court. The
Company has filed a brief in opposition to that petition, which is still
pending.
 
 In April
2007, the Company received a demand letter from a law firm requesting payment of
approximately $77,000 in connection with a promissory note issued to the law
firm as security for the payment of future services to the Company. The Company
has notified the holder of this note that it does not intend to honor the
promissory note because the law firm did not provide the services contemplated
to be performed as consideration for the promissory note. No further action to
pursue collection of this promissory note has been taken to date by the holder.
At this time, it is not possible to reasonably estimate the outcome of this
matter, and, accordingly, no amount has been accrued.
 
 On
January 25, 2008, a complaint was filed with the Superior Court of New Jersey
Law Division (the “Court”) on behalf of Mark Goldsmith a former executive of the
Company, as the plaintiff, which named the Company, Coates Motorcycle Company,
Ltd. and George J. Coates as Defendants. The complaint alleges breach of
contract with respect to Mr. Goldsmith’s employment agreements with the Company
and Coates Motorcycle and seeks compensatory damages consisting of compensation,
severance, stock options and other employee benefits, punitive damages, interest
and attorney’s fees. On March 20, 2008, an answer to Mr. Goldsmith’s complaint
was filed with the Court, along with separate defenses and separate
counterclaims against Mr. Goldsmith filed by each of the Defendants. The
counterclaims assert that Mr. Goldsmith misrepresented his background and
capabilities in order to induce the Company to hire him and that certain of his
business decisions were made to further his self interest rather than the
interests of the Company. The counterclaims allege breach of contract, fraud and
breach of covenant by Mr. Goldsmith and seek compensatory damages, punitive
damages, interest, attorney’s fees, costs of suit and other just and equitable
relief. The court has assigned this matter to mandatory mediation. An
unsuccessful mediation session was held on June 23, 2008.
 
 In the
opinion of management, Mr. Goldsmith’s complaint is without merit and the
Company intends to vigorously defend against this complaint asserted by Mr.
Goldsmith and will diligently pursue its counterclaims. The Company has without
prejudice to its position, accrued compensation under his employment agreement
for accounting purposes only, of approximately $96,000 of his salary during
2007. Although the Company does not intend to make any payments to Mr. Goldsmith
in connection with this employment agreement, this amount has been included in
accounts payable and accrued liabilities in the accompanying balance
sheets.
 11
  Item
2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
  Forward Looking
Statements
  This
quarterly report on Form 10-Q contains forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995 and Federal
securities laws, and is subject to the safe-harbor created by such Act and laws.
Forward-looking statements may include our statements regarding our goals,
beliefs, strategies, objectives, plans, including product and service
developments, current dependence on our contract with Well to Wire Energy, Inc.,
future financial conditions, results or projections or current expectations. In
some cases, you can identify forward-looking statements by terminology such as
"may," "will," "should," "expect," "plan," "anticipate," "believe," "estimate,"
"predict," "potential" or "continue," the negative of such terms, or other
comparable terminology. These statements are subject to known and unknown risks,
uncertainties, assumptions and other factors that may cause actual results to be
materially different from those contemplated by the forward-looking statements.
The business and operations of Coates International, Ltd. are subject to
substantial risks, which increase the uncertainty inherent in the
forward-looking statements contained in this report. Except as required by law,
we undertake no obligation to release publicly the result of any revision to
these forward-looking statements that may be made to reflect events or
circumstances after the date hereof or to reflect the occurrence of
unanticipated events. Further information on potential factors that could affect
our business is described in our various periodic reports filed with the SEC.
Readers are also urged to carefully review and consider the various disclosures
we have made in this and such previously filed reports.
  Background
  We have
completed the development of the Coates spherical rotary valve engine
(“CSRV”).  We have successfully integrated the CSRV into commercial
electric power generators and 35 KW synchronous home generators.  The
CSRV engine can be powered by various alternate fuels including natural gas,
landfill gas, ethanol and bio-diesel among many others.  Results of
independent testing of the CSRV engine indicated more than a 30% improvement in
fuel efficiency and a significant reduction in harmful emissions. We are also
currently developing a prototype diesel truck engine incorporating our CSRV
technology that would be suitable for the heavy trucking industry. We continue
to make meaningful progress in developing this prototype. We have completed
incorporating the CSRV technology into this prototype and have built a custom
gear box to accommodate the prototype engine's
high pressure fuel injection sysytem. Additional work is required to
develop a computer controlled fuel injection system expected to
increase engine efficiency. Upon completion of all aspects of development
of this prototype engine, it will be mounted in a long haul tractor and
load tested. We intend to penetrate the heavy trucking industry by retrofitting
existing trucks with our diesel engine design.  The diesel truck
engine is expected to achieve substantial improvements in fuel efficiency and
reduce harmful emissions.
 
 We are
currently due remaining payments aggregating approximately $8.6 million from
Well to Wire Energy, Inc. (“WWE”) in connection with the Canadian licensing and
research and development agreements and the United States licensing agreement
covering our commercial electric power generators discussed
hereinafter.  The first $3.8 million of Release Payment, which
has been designated as payment of the fees due under the Research and
Development Agreement, is being recognized as revenue at the time the cash
payments are received. WWE is in the process of undertaking to raise new equity
capital through a private placement of its equity securities in order to fund
the payments due to us. We intend to commence production of engines in
connection with the two licensing agreements upon receiving a sufficient portion
of the original $9.5 million Release Payment due us.
 
 We are
also currently engaged in new research and development activities in connection
with applying our technology to other commercially feasible internal combustion
engine applications and intend to manufacture engines and/or license the
technology to third party original equipment manufacturers for multiple other
applications and uses.
 
 Significant
Estimates
 
 The
Company utilizes significant estimates in the preparation of its financial
statements. These significant estimates include assigning useful lives to our
property, plant and equipment, determining an appropriate amount to reserve for
obsolete and slow moving inventory, assigning expected lives to our stock
options granted and selecting a volatility factor for our stock options in order
to estimate the fair value of our stock options on the date of
grant.
  12
 Agreements with Well to Wire
Energy, Inc.
 
 On
September 29, 1999, the Company signed a Licensing Agreement with Well to Wire
Energy, Inc. ("WWE"), an oil and gas company in Canada, relating to the
distribution in Canada of 6-cylinder engines modified with the Coates Rotary
Valve System fueled by natural gas to generate electrical power in consideration
for future payments. A separate Research and Development Agreement between the
Company and WWE provided for development and delivery of certain prototype
engines.  The Company received initial deposits on these agreements
aggregating $1,500,000 during 1999, 2000 and 2001 and received additional
non-refundable payments in 2008 as discussed hereinafter.
 
 On July
7, 2006, we signed a confirmation letter agreement with WWE that provided as
follows:
 ●
              The
      Company is to ship to WWE the third power unit of the Company’s CSRV Power
      Generator with output depending on the fuel used. The generator is powered
      by an 855 cubic inch, 6 cylinder industrial electric power engine modified
      with the CSRV system (the “Generator”).  Payment of the balance
      of fees due under these agreements is provided for in the Escrow Agreement
      discussed hereinafter.
  ●
              WWE
      will have the exclusive right to use, lease, and sell the generators that
      are based on the CSRV System technology within
  Canada.
  ●
              WWE
      will have a right of first refusal to market the CSRV Power Generators,
      incorporating the CSRV System technology,
  worldwide.
  ●
              The
      Company and WWE have agreed that the minimum annual number of CSRV Power
      Generators to be purchased by WWE in order to maintain exclusivity is
      120.  Until otherwise agreed between the parties, the price per
      Generator shall be US $150,000.  The minimum purchase
      requirement shall become effective upon payment by WWE of a sufficient
      portion of the Release Payment provided for by the Escrow
      Agreement.
  ●
              WWE
      shall not be required to pay any royalties to us as part of these
      agreements.
  ●
              Patent
      Rights.  All patent and other intellectual property rights
      related to the engine remain with the
Company.
  In April
2008, we entered into a conditional second license agreement with Well to
Wire Energy, Inc. (“WWE”) for the territory of the United States (the
“US License”). The US License provides for a license fee of $50 million and
annual minimum purchases of Coates CSRV Electric Power Generators as a condition
of exclusivity.  The US license has been deposited in to an escrow
account and the grant under the license is not effective until the conditions
for release from escrow are satisfied.
 
 The
escrow agreement was established to provide a more secure mechanism for us to
collect payments due under both the prior Canadian licensing and research and
development agreements and the new $50 million US License (the “Escrow
Agreement”).  The Escrow Agreement provides that the US License shall
be held until WWE remits a release payment (the “Release
Payment”). The Release Payment consists of (i) of an initial down payment
required under the US License of $1 million and (ii) $8.5 million in payment of
the balance of the monies due us in connection with the license for the
territory of Canada, including the Canadian license agreement and the research
and development agreement (the “Canadian Agreements”). While the US License is
held in escrow, there shall not be any grant of license to WWE. WWE is
expected to make non-refundable periodic payments to the Company in unspecified
amounts as partial payments of the Release Payment until the Release Payment has
been paid in full. Upon full satisfaction of the Release Payment, WWE would be
granted a license for the territory of the United States under the US License
agreement.
 
 WWE is a
privately held company and its ability to make the license payments due to us
and to honor the minimum purchase requirements under the licenses is dependent
on the success of its continued efforts to raise new equity
capital.  Through August 13, 2008, WWE has made nonrefundable payments
to us totaling $1.5 million in prior years and $900,000 in 2008, leaving a
remaining balance of the Release Payment of $8,600,000.  The initial
payments will be recognized as research and development revenue as the cash
is received. To the extent that WWE is not successful or experiences delays in
raising such additional new equity capital, the Company’s cash flow, results of
operations and financial position could be adversely affected.
  13
  Under the
Escrow Agreement, WWE was required to remit the full amount of the Release
Payment by June 30, 2008 (the “Payment Period”). As WWE was unable to remit the
full amount of the Release Payment within the Payment Period, the Canadian
license agreement automatically became non-exclusive. As provided for in the
Escrow Agreement, since WWE has paid more than $500,000 on account of the
Release Payment through June 30, 2008, the Payment Period was automatically
extended until September 30, 2008 (the “Extended Payment Period”). As an
inducement to WWE to continue remitting installments of the Release Payment as
soon as possible, the Company has offered to reinstate the Exclusivity Provision
of the licenses earlier, provided that WWE remits a minimum additional Release
Payment of $600,000, which would bring the total amount of non-refundable
payments to $3,000,000. Under the Escrow Agreement, should WWE be able to remit
the entire balance of the Release Payment within the Extended Payment
Period, the exclusivity of the Canadian license agreement shall be
reinstated.
 
 The
failure of WWE to make the entire Release Payment within the Payment Period
or within the Extended Payment Period shall constitute a breach of the
Escrow Agreement, the Canadian license agreement and the US License. In such
event, the Company would be entitled to (i) retain any and all monies received
from WWE and (ii) immediately, without notice to WWE, cancel the Escrow
Agreement, the Canadian license agreement and the US License without providing
WWE any right of redemption or reinstatement.
 
 The US
License would, if WWE is able to satisfy the Escrow Agreement release
provisions, grant to WWE the right to use, sell and lease Licensed Products,
manufactured by the Company as the power source for the generation of electrical
energy for the oil and gas industry and from landfills.  Licensed
Products consist of CSRV Valve Systems, CSRV Valve Seals, CSRV Rotary Valve
Spheres, CSRV Valve Components and CSRV Engines for the Oil and Gas Industry and
Landfills.
 
 The
manufacture of any Licensed Products by WWE is prohibited.  WWE is
required to procure all internal combustion engines incorporating the CSRV Valve
System from the Company or its designee. The license granted to WWE is exclusive
within the Territory, provided that WWE satisfies the minimum annual purchase
commitment of 120 internal combustion engines incorporating the CSRV System, the
Coates Engines and all component parts. The agreement also grants WWE a right of
first refusal in the event that the Company negotiates an offer with another
third party for a worldwide license to use the Licensed Product.
 
 After
payment of the Release Payment required under the Escrow Agreement, the
remaining unpaid balance of the US License fee of $49 million is payable in
quarterly installments commencing October 27, 2008. The amount of the quarterly
installment payments shall be equal to 5% of WWE’s net profits over the next
five years; however, in any event, the entire balance of the licensing fee must
be paid in full on or before February 12, 2012.
 
 Acceleration
of the balance of the licensing fee payments shall be required in the event that
WWE completes a stock offering or private placement offering.  The
entire unpaid balance of the licensing fee shall become due and payable if WWE
raises $100 million or more from such offering.  If WWE raises $25
million or less from any such offering, then WWE must pay us 20% of the amount
raised towards the licensing fee.
 
 In August
2008, WWE entered into a $1.2 Billion equipment lease finance funding commitment
from Canada West Corporate Finance, Inc., which is to be utilized for its Coates
CSRV engine generator purchases over the next five years pursuant to its
licensing agreement with the Company. The five-year WWE business plan on which
this commitment was based provides for the purchase of approximately 7,400
Engine Generators at a price per unit of $162,000.  WWE is only
permitted to draw down on the $1.2 Billion financing commitment for the
acquisition of Coates CSRV Electric Power Natural Gas Generators.
 
 We do not
currently have the production capacity to fulfill orders for this number of
engine generators over the next five years.  Management believes that
it could be successful in entering into a procurement contract with one or more
major engine suppliers in the United States to deliver engine blocks
incorporating our proprietary pistons and heads.  Under this approach,
we would complete the production of the engines by incorporating the Coates
Spherical Rotary Valve system into these engine blocks.
  14
  There are
a number of inherent risks associated with achieving this level of revenues over
the next five years, including:
  ·
              Although
      we intend to pursue numerous other opportunities to generate revenues from
      production of internal combustion engines incorporating the CSRV
      technology and/or licensing of this technology to original equipment
      manufacturers, until we are able to enter into definitive agreements with
      new customers, our revenues will be concentrated with a single customer,
      WWE.  WWE will be required to remit a sufficient portion of the
      Release Payment due to us under the Escrow Agreement prior to the
      commencement of production of the Coates CSRV Electric Power Natural Gas
      Generators.
  ·
              There
      can be no assurances that we will have adequate capital resources to
      procure a sufficient number of engine blocks, inventory and parts on a
      timely basis, as well as cover the payroll costs for an increased labor
      force and overhead that would be required in order to fulfill orders for
      this volume of engine generators over the next five years. In the event
      that we are unable to fulfill this volume of orders, our revenues and
      profitability would be negatively impacted to the extent of any such
      shortfall.
  Results of Operations –
Three Months Ended June 30, 2008 Compared to Three Months Ended June 30,
2007
  Revenues
for the three months ended June 30, 2008, which amounted to $700,000, were
derived from non-refundable payments of a portion of the Release Payment
provided for by our Escrow Agreement with WWE received in connection with our
licensing and research and development agreements. There were no revenues
generated for the three months ended June 30, 2007.
  Research
and development expenses in connection with developing other commercially viable
applications of the CSRV technology to internal combustion engines were
approximately $159,000 and $291,000 for the three months ended June 30, 2008 and
2007, respectively. The net decrease in research and development costs of
approximately ($132,000) was primarily attributable to a decrease in stock based
compensation expense allocated to research and development of approximately
($157,000), offset by an increase in payroll and related expenses related to
increased research and development activities of approximately $20,000 and an
increase in parts and materials of approximately $5,000. Research and
development activities in 2008 primarily consisted of applying the CSRV
technology to additional internal combustion engine applications including the
development of a prototype diesel truck engine suitable for the heavy trucking
industry, a residential home use generator and additional activities on
developing an engine for the automobile racing industry.
  General
and administrative expenses decreased to approximately $354,000 for the three
months ended June 30, 2008 from approximately $366,000 in the corresponding
period in 2007. This net decrease of ($12,000) primarily resulted from a
decrease in stock based compensation expense of approximately ($74,000) and a
reduction in patent maintenance expenses of approximately ($11,000), offset by
an increase in legal  and professional fees of approximately $37,000,
an increase in marketing and show expenses of approximately $35,000 and an
increase of payroll and related expenses for general and administrative
activities of approximately $4,000.
  Depreciation
and amortization expense decreased to approximately $9,000 in the three months
ended June 30, 2008 from approximately $12,000 in the comparable period in
2007.  This decrease was primarily due to discontinuance of
depreciation of assets which became fully depreciated.
  Interest
expense decreased slightly from approximately $99,000 during the three months
ended June 30, 2008 to $98,000 during the comparable period in
2007.
  The
change in deferred taxes for the three months ended June 30, 2008 and 2007 was
fully offset by a valuation allowance, resulting in a $-0- net income tax
provision. The Company earned net income for the three month period ended June
30, 2008 of approximately $81,000.  No income taxes have been
provided, however, as there are available offsetting net operating losses from
prior periods to offset the income for this quarter.  For the three
months ended June 30, 2007, the Company experienced a net loss of approximately
$768,000.
  15
  Results of Operations – Six
Months Ended June 30, 2008 Compared to Six Months Ended June 30,
2007
  Revenues
for the six months ended June 30, 2008, which amounted to $700,000, were derived
from non-refundable payments of a portion of the Release Payment provided for by
our Escrow Agreement with WWE received in connection with our licensing and
research and development agreements. There were no revenues generated for the
six months ended June 30, 2007.
  Research
and development expenses in connection with developing other commercially viable
applications of the CSRV technology to internal combustion engines were
approximately $295,000 and $371,000 for the six months ended June 30, 2008 and
2007, respectively. The net decrease in research and development costs of
approximately ($76,000) was primarily attributable to a decrease in stock based
compensation expense allocated to research and development of approximately
($116,000), offset by an increase in payroll and related expenses related to
increased research and development activities of approximately $30,000 and an
increase in parts and materials of approximately $10,000. Research and
development activities in 2008 primarily consisted of applying the CSRV
technology to additional internal combustion engines applications including the
development of a prototype diesel truck engine suitable for the heavy trucking
industry, a residential home use generator and additional activities on
developing an engine for the automobile racing industry.
  General
and administrative expenses decreased to approximately $694,000 for the six
months ended June 30, 2008 from approximately $792,000 in the corresponding
period in 2007. This net decrease of approximately ($98,000) primarily resulted
from a reduction in legal fees of approximately ($66,000), a decrease in stock
based compensation expense of approximately ($46,000), reduction of payroll and
related expenses for general and administrative activities of approximately
($28,000), a decrease in offering costs charged to expense of approximately
($15,000) and a decrease in testing expenses of approximately ($10,000), offset
by an increase in marketing and show expenses of approximately $55,000, an
increase in patent maintenance expenses of approximately $7,000 and a net
increase in other general and administrative expenses of approximately
$5,000.
  Depreciation
and amortization expense decreased to approximately $19,000 in the six months
ended June 30, 2008 from approximately $27,000 in the comparable period in
2007.  This decrease was primarily due to discontinuance of
depreciation of assets which became fully depreciated.
  Interest
expense decreased slightly to approximately $195,000 during the six months ended
June 30, 2008 from approximately $192,000 for the comparable period in
2007.
  The
change in deferred taxes for the six months ended June 30, 2008 and 2007 was
fully offset by a valuation allowance, resulting in a $-0- net income tax
provision. The Company experienced a net loss for the six month periods ended
June 30, 2008 and 2007, of approximately $501,000 and $1,385,000,
respectively.
  Liquidity and Capital
Resources
  Our cash
position at June 30, 2008 was approximately $616,000, a decrease of
approximately $343,000 from the cash position of approximately $959,000 at
December 31, 2007. We had positive working capital of approximately $69,000 at
June 30, 2008 which represents an approximately ($343,000) decrease from the
approximately $416,000 of positive working capital at December 31, 2007. Our
current liabilities of approximately $974,000 at June 30, 2008 increased by
approximately $26,000 from approximately $948,000 at December 31,
2007.
 
 Operating
activities utilized cash of approximately ($351,000) in the six months ended
June 30, 2008, a decrease of approximately $800,000 from the cash utilized for
operating activities of approximately ($1,151,000) for the six months ended June
30, 2007. Cash utilized by operating activities in the six months ended June 30,
2008 results primarily from a cash basis net loss of approximately ($355,000)
(after adding back non-cash expenses for stock based compensation expense of
approximately $127,000 and depreciation and amortization of approximately
$18,000 and an increase in accounts payable and accrued liabilities of
approximately $26,000, offset by an increase in inventory of approximately
($22,000).
  16
  No cash
was utilized for investing or financing activities during the six months ended
June 30, 2008 as compared to approximately $4,000 utilized during the six months
ended June 30, 2007 for the purchase of property, plant and
equipment.
 
 In the
opinion of management, we will be required to continue to raise additional
working capital to fully achieve our objectives as we continue to work towards
being able to commence the production phase of our operations and continue
research and development activities in connection with developing other
commercially viable applications of our CSRV technology to internal combustion
engines. The sources of such additional working capital is anticipated to come
from the cash flows under the Escrow Agreement with WWE, the equity line of
credit established with Dutchess Private Equities Fund, Ltd. (“Dutchess”) and
the private placement offering of our equity securities to prospective
institutional investors introduced by Stonegate Securities. We do not intend to
commence the private placement offering of securities with Stonegate Securities
prior to commencing initial production. We are actively pursuing additional
working capital from these sources. The Company is carefully managing the pace
at which it draws working capital from the equity line with Dutchess. There can
be no assurance that we will be able to obtain the necessary working capital for
our production phase on a time frame that will enable us to optimize our
production capacity.  We continue to actively seek out additional
sources of new working capital. In August 2008, we received $200,000 in
additional payments from WWE under the Escrow Agreement.
 
 Contractual Obligations and
Commitments
 
 The
following table summarizes our contractual obligations and commitments at June
30, 2008:
 
 Amount Due WithinTotal
              
              
              2008
              
              
              2009
              
              
              2010
              
              
              2011Sale/Leaseback
      Arrangement(1)
              
              $
              1,332,500
              
              
              $
              195,000
              
              
              $
              390,000
              
              
              $
              390,000
              
              
              $
              357,500Employment
      Agreements(2)
              
              
              871,500
              
              
              
              131,500
              
              
              
              263,000
              
              
              
              263,000
              
              
              
              214,000Total
              
              $
              2,204,000
              
              
              $
              326,500
              
              
              $
              653,000
              
              
              $
              653,000
              
              
              $
              571,500
 
 (1)
              Although
      the total finance obligation reflected in the Company’s balance sheet at
      June 30, 2008 amounts to approximately $3,877,000, only the amounts
      reflected in the above table constitute a contractual commitment. This is
      a result of the required finance method of accounting treatment for the
      underlying sale/leaseback transaction. This accounting treatment is being
      applied because the Company’s option to repurchase this property through
      November 2008, represents a continuing interest in the property. Under
      this method, the property and the finance obligation continue to be
      reported on the Company’s balance sheet until the exercise or expiration
      of the repurchase option. The above payments, which will be charged to
      interest expense under this finance method of accounting equate to an
      annual interest rate of 10.06%. In the event that the option to repurchase
      the property expires unexercised, the Company would recognize a gain on
      the sale of the property for reporting purposes of approximately
      $2,412,000 at that
      time.
  (2)
              Our
      obligation under employment agreements would increase to $675,000 per year
      through October 17, 2009 and to $550,000 per year from October 18, 2009
      through October 23, 2011, upon the Company achieving an adequate level of
      working capital, as defined.
 
 Plan of
Operation
 
 We plan
to enter the production phase of our operations when we have received a
sufficient portion of the total original $9.5 million of payments due to us from
WWE under the Escrow Agreement.  The working capital from these
payments will be utilized to fund the “ramp up” of our production activities in
fulfillment of orders from WWE for our CSRV Electric Power Generators. Upon
commencement of production, our revenues, profits and operating cash flows will
initially be dependent on a single customer, WWE. The Company intends to take
advantage of the fact that essentially all the components of the CSRV generator
engine may be readily sourced and acquired from subcontractors, and,
accordingly, intends to manufacture the generator engine in the two following
ways:
 
 ·
              Assembly
      - to develop assembly lines within the Company’s premises. The Company is
      evaluating various opportunities to expand or acquire additional
      manufacturing capacity. We are also evaluating the desirability of
      outsourcing various aspects of the engine manufacturing to major engine
      suppliers in the U.S. As demand for our products justifies it, the Company
      will endeavor to increase its work force, accordingly. It is our intention
      to increase our production capacity in an orderly manner to ensure that
      proper training is conducted and effective operating procedures are
      implemented. We expect to add a significant number of new employees to our
      work force within the next 12 to 24 months as we commence
      production.
  ·
              Licensing
      the technology to Original Equipment Manufacturers (“OEM”) to take
      advantage of third party manufacturers’ production capacity and
      know-how.
  17
  We intend
to increase our expenditures for marketing and branding activities over the next
year in order to increase market awareness and acceptance of the CSRV
technology.  We believe that we can be successful in our efforts to
attract new customers and parties interested in licensing our
technology.
 
 The
extent to which we can carry out this plan of operations will be highly
dependent on our success in raising new sources of capital and generating cash
flows from operations in the production phase.
 
 Going
Concern
 
 As shown
in the accompanying financial statements, the Company has incurred recurring
losses from operations, and as of June 30, 2008, had a Stockholders’ Deficiency
of approximately $2,473,000. These factors raise substantial doubt about the
Company’s ability to continue as a going concern. Our independent registered
public accounting firm has stated in their Auditor’s Report as of December 31,
2007 and for the year then ended that this raises substantial doubt about our
ability to continue as a going concern.
 
 Management
is continuing to carefully monitor its costs and is restricting variable costs
to only those expenses that are necessary to carry out our business plans. The
Company continues to actively seek out new sources of working capital; however,
there can be no assurance that it will be successful in these
efforts.
 
 The
accompanying financial statements do not include any adjustments that might be
necessary if the Company is unable to continue as a going concern.
  Item
3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
 N/A.
 
 Item
4T. CONTROLS AND PROCEDURES
  Pursuant
to Rule 13a-15(b) under the Securities Exchange Act of 1934 (“Exchange Act”),
the Company carried out an evaluation, with the participation of the Company’s
management, including the Company’s Chief Executive Officer (“CEO”) and Chief
Accounting Officer (“CAO”) (the Company’s principal financial and accounting
officer), of the effectiveness of the Company’s disclosure controls and
procedures (as defined under Rule 13a-15(e) under the Exchange Act) as of the
end of the period covered by this report. Based upon that evaluation, the
Company’s CEO and CAO concluded that the Company’s disclosure controls and
procedures are effective to ensure that information required to be disclosed by
the Company in the reports that the Company files or submits under the Exchange
Act, is recorded, processed, summarized and reported, within the time periods
specified in the SEC’s rules and forms, and that such information is accumulated
and communicated to the Company’s management, including the Company’s CEO and
CAO, as appropriate, to allow timely decisions regarding required
disclosure.
 
 Management’s Report on
Internal Controls over Financial Reporting
 
 Internal
control over financial reporting is a process to provide reasonable assurance
regarding the reliability of consolidated financial reporting and the
preparation of financial statements for external purposes in accordance with
U.S. generally accepted accounting principles.  There has been no change in
the Company’s internal control over financial reporting during the six months
ended June 30, 2008 that has materially affected, or is reasonably likely to
materially affect, the Company’s internal control over financial
reporting.
  The
Company’s management, including the Company’s CEO and CAO, does not expect that
the Company’s disclosure controls and procedures or the Company’s internal
controls will prevent all errors and all fraud. A control system, no matter how
well conceived and operated, can provide only reasonable, not absolute,
assurance that the objectives of the control system are met. Further, the design
of a control system must reflect the fact that there are resource constraints,
and the benefits of controls must be considered relative to their costs. Because
of the inherent limitations in all control systems, no evaluation of the
controls can provide absolute assurance that all control issues and instances of
fraud, if any, within the Company have been detected.
 
 Management
conducted an evaluation of the effectiveness of our internal control over
financial reporting based on the framework inInternal Control – Integrated
Frameworkissued by the Committee of
Sponsoring Organizations of the Treadway Commission. Based on this evaluation,
management concluded that the company’s internal control over financial
reporting was effective as of June 30, 2008.
 
 This
quarterly 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 quarterly report.
 18
  PART
II - OTHER INFORMATION
  Item 1. LEGAL PROCEEDINGS
  The
Company, certain of its officers and directors and other related and unrelated
parties were named as defendants in a lawsuit brought in the Superior Court of
New Jersey captioned H. Alton Neff v. George Coates, Coates International, Ltd.
et al. Plaintiff contends that he is the assignee of 1107 North West Central
Avenue Inc. ("1107"). Preliminary agreements and an amendment thereto relating
to purchase of a certain license by 1107 from the Company provided, inter alia,
that a $500,000 deposit made by 1107 to the Company would convert to stock of
the Company if certain conditions were not met by 1107. The Company maintains
that 1107 did not fulfill such conditions, and failed to make a certain payment,
and therefore, the deposit converted into shares of the Company's restricted
Common Stock. On February 13, 2007, the Superior Court of New Jersey dismissed
the complaint “with prejudice.” The plaintiffs and a third party defendant filed
notices of appeal.  Oral argument before the appellate court was held
on April 8, 2008 and its decision was released on May 8, 2008. The trial court’s
dismissal of H. Alton Neff’s (“Neff”) claims against the Company and George J.
Coates was affirmed.  The claims of 1107 were reinstated and the
defenses of two of the other named defendants to the counterclaim and third
party complaint of the Company and George J. Coates were reinstituted. The
appellate court also suggested that the trial court might consider imposing
monetary sanctions against Neff, 1107 and the other two defendants. The Company
is pursuing a claim for attorney’s fees by filing a motion for
sanctions.  This motion is scheduled to be argued on September 12,
2008. The Company will also pursue counterclaims and third party claims and
vigorously defend against the claims of the 1107. On June 23, 2008, Neff filed a
notice of petition for certification with the New Jersey Supreme Court. The
Company has filed a brief in opposition to that petition, which is still
pending.
 
 In April
2007, the Company received a demand letter from a law firm requesting payment of
approximately $77,000 in connection with a promissory note issued to the law
firm as security for the payment of future services to the Company. The Company
has notified the holder of this note that it does not intend to honor the
promissory note because the law firm did not provide the services contemplated
to be performed as consideration for the promissory note. No further action to
pursue collection of this promissory note has been taken to date by the holder.
At this time, it is not possible to reasonably estimate the outcome of this
matter, and, accordingly, no amount has been accrued.
 
 On
January 25, 2008, a complaint was filed with the Superior Court of New Jersey
Law Division (the “Court”) on behalf of Mark Goldsmith a former executive of the
Company, as the plaintiff, which named the Company, Coates Motorcycle Company,
Ltd. and George J. Coates as Defendants. The complaint alleges breach of
contract with respect to Mr. Goldsmith’s employment agreements with the Company
and Coates Motorcycle and seeks compensatory damages consisting of compensation,
severance, stock options and other employee benefits, punitive damages, interest
and attorney’s fees. On March 20, 2008, an answer to Mr. Goldsmith’s complaint
was filed with the Court, along with separate defenses and separate
counterclaims against Mr. Goldsmith filed by each of the Defendants. The
counterclaims assert that Mr. Goldsmith misrepresented his background and
capabilities in order to induce the Company to hire him and that certain of his
business decisions were made to further his self interest rather than the
interests of the Company. The counterclaims allege breach of contract, fraud and
breach of covenant by Mr. Goldsmith and seek compensatory damages, punitive
damages, interest, attorney’s fees, costs of suit and other just and equitable
relief. The court has assigned this matter to mandatory mediation. An
unsuccessful mediation session was held on June 23, 2008.
 
 In the
opinion of management, Mr. Goldsmith’s complaint is without merit and the
Company intends to vigorously defend against this complaint asserted by Mr.
Goldsmith and will diligently pursue its counterclaims against Mr. Goldsmith.
The Company has without prejudice to its position, accrued compensation under
his employment agreement for accounting purposes only, of approximately $96,000
of his salary. Although the Company does not intend to make any payments to Mr.
Goldsmith in connection with this employment agreement, this amount has been
included in accounts payable and accrued liabilities in the accompanying balance
sheets.
  19
  Item
1A. RISK FACTORS
  There
were no material changes from the Risk Factors disclosed in the Company’s Form
10-K for the year ended December 31, 2007.
 
 Item
2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
 
 None
 
 Item 3. DEFAULTS UPON SENIOR SECURITIES
 
 None
 
 Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS
 
 No matter
was submitted during the quarter ending June 30, 2008 covered by this report to
a vote of the Company’s shareholders, through the solicitation of proxies or
otherwise.
 
 Item 5. OTHER INFORMATION
  None
 
 Item 6. EXHIBITS AND REPORTS ON FORM 8-K.
 
 (a) Reports
on Form 8-K and Form 8K-A
 
 On April
11, 2008, the Company filed Form 8-K with the SEC in connection with the
execution of a second licensing agreement with Well to Wire Energy, Inc. for the
territory of the United States.
 
 On May 5,
2008, the Company filed Form 8-K with the SEC based on a press release
announcing that Well to Wire Energy, Inc. has secured a $1.1 billion equipment
lease finance commitment from Canada West Corporate Finance which may only be
used to purchase electric power generators from the Company.
 
 (b)
Exhibits
  Exhibit
                Number
              Description31.1
      *
              Section
      302 Certification of Chief Executive Officer pursuant to Rule
      13a-14(a)/15d-14(a) under the Securities Exchange Act of 1934 as adopted
      pursuant to Section 302 of the Sarbanes-Oxley Act of
  2002.31.2
      *
              Section
      302 Certification of Principal Financial Officer pursuant to Rule
      13a-14(a)/15d-14(a) under the Securities Exchange Act of 1934 as adopted
      pursuant to Section 302 of the Sarbanes-Oxley Act of
  2002.32.1
      *
              Certification
      of Chief Executive Officer pursuant to 18 U.S.C. 1350, as adopted pursuant
      to Section 906 of the Sarbanes-Oxley Act of 2002.32.2
      *
              Certification
      of Principal Financial Officer pursuant to 18 U.S.C. 1350, as adopted
      pursuant to Section 906 of the Sarbanes-Oxley Act of
  2002.
 
 * Filed
herewith.
  20
  SIGNATURES
  Pursuant
to the requirements 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.
 
  COATES
      INTERNATIONAL, LTD.August
      13, 2008
              By:
              /s/ George
      J. CoatesGeorge
      J. CoatesPresident,
      Chief Executive Officer and
      Principal Executive Officer


August
      13, 2008
              By:
              /s/ Barry
      C. KayeBarry
      C. KayeTreasurer,
      Chief Financial Officer and
      Principal Financial Officer






21