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 March 31, 2009o
              TRANSITION
      REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACTFor
      the transition period from _________________ to
      _________________








coates 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 has submitted electronically and posted on
its corporate Web site, if any, every


Interactive
Data File required to be submitted and posted pursuant to Rule 405 of Regulation
S-T (§232.405 of this chapter) during the preceding 12 months (or for such
shorter period that the registrant was required to submit and post such
files).




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




As of May
11, 2009, 273,939,732 shares of the Registrant’s common stock were issued and
outstanding.














COATES
INTERNATIONAL, LTD.


QUARTERLY
REPORT ON FORM 10-Q





CONTENTS





MARCH
31, 2009

















PagePART
      1 – FINANCIAL INFORMATIONItem
      1.
                      Financial
      Statements (Unaudited):Condensed
      Balance Sheet
                      3Condensed
      Statements of Operations
                      4Condensed
      Statements of Cash Flows
                      5Notes
      to the Condensed Financial Statements
                      6-14Item
      2.
                      Management's
      Discussion and Analysis of Financial Condition and Results of
      Operations
                      15-21Item
      3.
                      Quantitative
      and Qualitative Disclosures About Market Risk
                      21Item
      4T.
                      Controls
      and Procedures
                      21PART
      II  -  OTHER INFORMATION
                      22Item
      1.
                      Legal
      Proceedings
                      22Item
      1A.
                      Risk
      Factors
                      22Item
      2.
                      Unregistered
      Sales of Equity Securities and Use of Proceeds
                      22Item
      3.
                      Defaults
      Upon Senior Securities
                      22Item
      4.
                      Submission
      of Matters to a Vote of Security Holders
                      22Item
      5.
                      Other
      Information
                      22Item
      6.
                      Exhibits
                      22SIGNATURES
                      23























2





Coates
      International, Ltd.Condensed
      Balance Sheets
  March
      31, 2009
                                      
                                      
                                      December
      31, 2008(Unaudited)AssetsCurrent
      AssetsCash
                                      
                                      $
                                      283,575
                                      
                                      
                                      $
                                      721,952Inventory,
      net
                                      
                                      
                                      498,439
                                      
                                      
                                      
                                      487,549Prepaid
      and other assets
                                      
                                      
                                      -
                                      
                                      
                                      
                                      4,679Total
      Current Assets
                                      
                                      
                                      782,014
                                      
                                      
                                      
                                      1,214,180Investment
      in related party
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -Deposit
      on land and building
                                      
                                      
                                      226,829
                                      
                                      
                                      
                                      -Property,
      plant and equipment, net
                                      
                                      
                                      36,290
                                      
                                      
                                      
                                      39,376Deferred
      licensing costs, net
                                      
                                      
                                      71,362
                                      
                                      
                                      
                                      72,433Security
      deposits
                                      
                                      
                                      197,500
                                      
                                      
                                      
                                      197,500Total
      Assets
                                      
                                      $
                                      1,313,995
                                      
                                      
                                      $
                                      1,523,489Liabilities
      and Stockholders' DeficiencyCurrent
      LiabilitiesAccounts
      payable and accrued liabilities
                                      
                                      $
                                      1,215,170
                                      
                                      
                                      $
                                      1,248,17310%
      Convertible note, due January 2010
                                      
                                      
                                      20,000
                                      
                                      
                                      
                                      -Total
      Current Liabilities
                                      
                                      
                                      1,235,170
                                      
                                      
                                      
                                      1,248,17310%
      Convertible note, due January 2010
                                      
                                      
                                      -
                                      
                                      
                                      
                                      20,000Deferred
      of gain on sale of land and building
                                      
                                      
                                      894,618
                                      
                                      
                                      
                                      978,479License
      deposits
                                      
                                      
                                      375,000
                                      
                                      
                                      
                                      375,000Total
      Liabilities
                                      
                                      
                                      2,504,788
                                      
                                      
                                      
                                      2,621,652Commitments
      and ContingenciesStockholders'
      DeficiencyPreferred
      Stock, $0.001 par value, 100,000,000 shares authorized, no shares issued
      or outstanding
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -Common
      Stock, $0.0001 par value, 1,000,000,000 shares authorized, 273,939,732 and
      273,126,636 shares issued and outstanding at March 31, 2009 and December
      31, 2008, respectively
                                      
                                      
                                      27,394
                                      
                                      
                                      
                                      27,313Additional
      paid-in capital
                                      
                                      
                                      21,104,818
                                      
                                      
                                      
                                      20,722,899Accumulated
      deficit
                                      
                                      
                                      (22,323,005
                                      )
                                      
                                      
                                      (21,848,375
                                      )Total
      Stockholders' Deficiency
                                      
                                      
                                      (1,190,793
                                      )
                                      
                                      
                                      (1,098,163
                                      )Total
      Liabilities and Stockholders' Deficiency
                                      
                                      $
                                      1,313,995
                                      
                                      
                                      $
                                      1,523,489.











3





Coates
      International, Ltd.Condensed
      Statement of Operations(Unaudited)
  Three
      Months Ended March 31,2009
                                            
                                            
                                            2008Revenue
      from research and development
                                            
                                            $
                                            215,000
                                            
                                            
                                            $
                                            -Gain
      on sale of land and building
                                            
                                            
                                            83,862
                                            
                                            
                                            
                                            -Total
                                            
                                            
                                            298,862
                                            
                                            
                                            
                                            -ExpensesResearch
      and development costs
                                            
                                            
                                            158,868
                                            
                                            
                                            
                                            136,592General
      and administrative expenses
                                            
                                            
                                            610,108
                                            
                                            
                                            
                                            340,129Depreciation
      and amortization
                                            
                                            
                                            4,157
                                            
                                            
                                            
                                            9,417Total
      Operating Expenses
                                            
                                            
                                            773,133
                                            
                                            
                                            
                                            486,138Loss
      from Operations
                                            
                                            
                                            (474,271
                                            )
                                            
                                            
                                            (486,138
                                            )Interest  expense,
      net
                                            
                                            
                                            (359
                                            )
                                            
                                            
                                            (95,056
                                            )Loss
      Before Income Taxes
                                            
                                            
                                            (474,630
                                            )
                                            
                                            
                                            (581,194
                                            )Provision
      for income taxes
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -Net
      Loss
                                            
                                            $
                                            (474,630
                                            )
                                            
                                            $
                                            (581,194
                                            )Basic
      and diluted loss per share
                                            
                                            $
                                            (0.00
                                            )
                                            
                                            $
                                            (0.00
                                            )Basic
      and diluted weighted average shares outstanding
                                            
                                            
                                            273,346,411
                                            
                                            
                                            
                                            273,424,988















4
   Coates
      International Ltd.Condensed
      Statements of Cash Flows(Unaudited)
  Three
      Months Ended March 31,2009
                                      
                                      
                                      2008Net
      Cash Used in Operating Activities
                                      
                                      $
                                      (479,681
                                      )
                                      
                                      $
                                      (472,787
                                      )Cash
      Flows from Investing Activities:Deposit
      on land and building
                                      
                                      
                                      (218,697
                                      )
                                      
                                      
                                      -(218,697
                                      )
                                      
                                      
                                      -Cash
      Flows from Financing ActivitiesIssuance
      of common stock and warrants
                                      
                                      
                                      260,000
                                      
                                      
                                      
                                      7,952260,000
                                      
                                      
                                      
                                      7,952Net
      Decrease in Cash
                                      
                                      
                                      (438,378
                                      )
                                      
                                      
                                      (464,835
                                      )Cash,
      beginning of period
                                      
                                      
                                      721,952
                                      
                                      
                                      
                                      959,181Cash,
      end of period
                                      
                                      $
                                      283,574
                                      
                                      
                                      $
                                      494,3462009
                                      
                                      
                                      2008Cash
      Paid for interest
                                      
                                      $
                                      -
                                      
                                      
                                      $
                                      97,669


5





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 accounting principles
generally accepted 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 month periods ended March 31,
2009 and 2008 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, 2008.





As shown
in the accompanying financial statements, the Company has incurred recurring
losses from operations, and as of March 31, 2009, had a Stockholders’ Deficiency
of approximately $1,191,000. In addition, the current economic environment,
which is characterized by tight credit markets, investor uncertainty about how
to safely invest their funds and low investor confidence, has introduced
additional risk and difficulty in our challenge to secure needed additional
working capital. These factors raise substantial doubt about the Company’s
ability to continue as a going concern. Management has instituted a cost control
program intended to cut variable costs to only those expenses that are necessary
to complete its activities related to entering the production phase of our
operations, develop additional commercially feasible applications of the CSRV
technology and seek additional sources of working capital and cover the general
and administrative expenses in support of such activities. The Company has been
actively undertaking efforts to secure new sources of working capital. At March
31, 2009, we had negative working capital of approximately ($453,000), compared
with negative working capital of approximately ($34,000) at the end of
2008.  During the three months ended March 31, 2009, the Company
received $215,000 from research and development fees and received proceeds of
$260,000 from the sale of common stock and warrants. 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.





2.
RECENT ACCOUNTING PRONOUCEMENT




In June
2008, the Financial Accounting Standards Board ratified the consensus reached on
Emerging Issues Task Force (“EITF”) issue No. 07-05, “Determining Whether an Instrument
(or Embedded Feature) Is Indexed to an Entity’s Own Stock”(“EITF No.
07-05”). EITF No. 07-05 clarifies the determination of whether an instrument (or
an embedded feature) is indexed to an entity’s own stock, which will qualify as
a scope exception under Statement of Financial Accounting Standards No. 133,
“Accounting for Derivative
Instruments and Hedging Activities”.EITF No. 07-05 is effective for
financial statements issued for fiscal years beginning after December 15, 2008.
Early adoption for an existing instrument is not
permitted.  Management does not belive that adoption
of  EITF No. 07-05 will have a material effect on the
Company's financial statements.




3.
ACCOUNTING POLICIES





Net
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 three
months ended March 31, 2009 and 2008. Diluted net income per share is based on
the weighted average number of common and potentially dilutive common shares
outstanding, when applicable.





Use
of Estimates





The
preparation of the Company’s financial statements in conformity with GAAP
requires management to make estimates and assumptions that affect the reported
amount of assets and liabilities and disclosures of contingent assets and
liabilities at the date of the financial statements and reported amounts of
revenues and expenses during the reporting period. These significant estimates
include assigning useful lives to the Company’s property, plant and equipment,
determining an appropriate amount to reserve for obsolete and slow moving
inventory, assigning expected lives to, and estimating the rate of forfeitures
of, stock options granted and selecting a volatility factor for the Company’s
stock options in order to estimate the fair value of the Company’s stock options
on the date of grant.Actual results could differ from those estimates.






6


4.
AGREEMENTS WITH WELL TO WIRE ENERGY, INC.





On
September 29, 1999, the Company signed a sublicense agreement with Well to Wire
Energy, Inc. ("WWE"), a company based in Canada in the oil and gas
industry.  This agreement exclusively licenses within Canada the use
of the CSRV system technology for industrial engines to be fueled by natural gas
to generate electrical power for the oil and gas industry (the “Canadian
License”). The agreement provided for a license fee of $5,000,000. A
deposit payment in the amount of $300,000 was received at that time. A separate
research and development agreement provided for WWE to pay a $5,000,000 fee to
the Company in consideration for the development and delivery of certain
prototype engines. The Company completed development of the prototypes in
accordance with this agreement at the end of 2007. The research and development
agreement has not been reduced to the form of a signed written agreement. As of
March 31, 2009, the Company had been paid a total of approximately $3,528,000 by
WWE under these agreements.





Additional
provisions of the Canadian License agreement are as follows:





●
            WWE
      shall have the exclusive right to use, lease and sell electric power
      generators that are based on the CSRV System technology within Canada for
      use in the oil and gas industry.●
            WWE
      shall have a specified right of first refusal to market the electric power
      generators worldwide in the oil and gas industry and landfill
      operations.●
            Upon
      commencement of the production and distribution of the electric power
      generators, the minimum annual number of 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 $150,000. The
      Company received a firm order from WWE for approximately 7,400 CSRV system
      technology engine generators at a mutually agreed upon increased price per
      unit of $159,000.  In the event WWE fails to purchase the minimum 120
      Coates generator engines during any year, WWE will automatically lose its
      exclusivity. In such a case, WWE would retain non-exclusive rights to
      continue to use the Coates generator engine in the territory of
      Canada.●
            WWE
      shall not be required to pay any royalties as part of the agreements
      between the parties.●
            All
      licensed rights under the Canadian License related to the CSRV system
      technology will remain with the
Company.





In 2008,
the Company entered into a conditional second sublicense 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 the Company’s 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 Canadian licensing and research
and development agreements and the $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, at the date of the
Escrow Agreement, 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. The Company received an additional $215,000
non-refundable payment from WWE during the three months ended March 31, 2009,
which has been recognized as research and development revenue in the
accompanying statement of operations. No payments were received from WWE
for the three months ended March 31, 2008. 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.





7


WWE is a
privately held company and its ability to make the license payments due to the
Company 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 March 31, 2009, the remaining balance of the Release Payment
was approximately $7,472,000.  Subsequent to March 31, 2009, the
Company received an additional installment of the Release Payment of $475,000,
reducing the balance of the Release Payment to approximately $6,997,000, not
including interest on the unpaid balance at 5% per annum of approximately
$303,000. 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 condition could be adversely affected.





WWE was
unable to remit the full amount of the Release Payment required to be made under
the Amended Escrow Agreement by April 30, 2009 (the “Extended Payment Period”).
In consideration of the severe world-wide economic climate and WWE’s continued
good faith efforts to make substantial periodic, non-refundable installments of
the Release Payment, the Company agreed to extend the due date for paying the
entire remaining balance of the Release Payment due under the Escrow
Agreement to July 31, 2009. Under the extension agreement, WWE is required to
make periodic installment payments throughout the extension period. As further
incentive to WWE and in view of the diminished level of risk that would result
upon WWE having made a substantial 45% non-refundable investment in the
licenses, the extension agreement provides that upon making an aggregate total
of at least $4,950,000, or 45% of the total $11 million originally due under the
Escrow Agreement, WWE would no longer be subject to the license cancellation
provisions. However, exclusivity would be forfeited if WWE failed to pay the
Company the entire remaining balance of the Release Payment. Interest continues
to be payable to the Company at the compounded rate of 5% per annum on the
unpaid balance of the Release Payment.  Such interest shall be
recognized as income upon receipt from WWE.





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
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
system technology 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 in
the oil and gas industry or landfill operations.





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 which were to commence October 27, 2008 in an amount
equal to WWE’s prior quarter net profits. As WWE has not generated a net profit
to date, no quarterly installment payments have been required. 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 an offering.





In 2008,
WWE secured an equipment lease finance commitment from Canada West Corporate
Finance, Inc. (“Canada West”), which is to be utilized for its CSRV engine
generator purchases and related equipment and parts over a five-year periodic
pursuant to its licensing agreement with the Company. The five-year WWE business
plan on which this agreement was based provides for the purchase of
approximately 7,400 Engine Generators.   Although the initial price
per unit under the firm order received from WWE was $159,000, the maximum price
per unit provided for under this finance commitment is $222,000. Should WWE
fulfill its five year business plan at the $159,000 unit price, the Company
would earn revenues of almost $1.2 billion. The current economic
environment, which is characterized by tight credit markets, investor
uncertainty about how to safely invest their funds and low investor confidence,
has introduced additional risk and difficulty for borrowers. Accordingly, there
can be no assurance that tight credit markets will not affect the availability
of funds under the financing commitment obtained from Canada West by
WWE.





8




5.
INVENTORY
 
 Inventory
at March 31, consisted of the following:
 
 2009
                  
                  
                  2008Raw
      materials
                  
                  $
                  377,522
                  
                  
                  $
                  294,385Work-in-process
                  
                  
                  32,099
                  
                  
                  
                  41,016Finished
      goods
                  
                  
                  240,000
                  
                  
                  
                  240,000Reserve
      for obsolescence
                  
                  
                  (151,182
                  )
                  
                  
                  (151,182
                  )Total
                  
                  $
                  498,439
                  
                  
                  $
                  424,219


6.
COMMON STOCK





In March
2009, the Company sold 838,096 shares of its common stock, 333,333 warrants
to purchase one share of its common stock at an exercise price of $0.30 per
share and 85,714 warrants to purchase one share of its common stock at an
exercise price of $0.35 per share in private sales of unregistered,
restricted securities to the son of a director pursuant to stock purchase
agreements and received net proceeds of $260,000. In connection with the
settlement of litigation in March 2009, a certificate representing the ownership
of 25,000 shares of common stock was surrendered by one of the parties. These
shares were retired and returned to authorized, but unissued
status.





In
January 2008, the Company sold 15,000 shares of its common stock under the
equity line of credit with Dutchess Private Equities Fund, Ltd. and received
proceeds of approximately $8,000 (See Note 7.)





7.
10% CONVERTIBLE NOTES DUE JANUARY 2010





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. Interest shall
accrue at the rate of 10% per annum and shall be 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. The Company has
reserved 44,444 shares of its common stock for conversion of the balance of
these notes.





8.
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 the Company’s 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
with the Securities and Exchange Commission (“SEC”) covering 15,000,000 shares
of the common stock underlying the Investment Agreement which became effective
in 2007. The Company shall have an ongoing obligation to register additional
shares of its common stock as necessary underlying the draw downs.





No shares
of common stock were sold under this equity line of credit during the three
months ended March 31, 2009. During the three months ended March 31, 2008, the
Company sold 15,000 shares of its common stock under this equity line of credit
and received proceeds of approximately $8,000.





9


9.
SALE/LEASEBACK OF LAND AND BUILDING





In 2005,
the Company entered into a sale/leaseback arrangement of the property which
houses its headquarters and research and development facility.  In
accordance with GAAP, this transaction was required to be accounted for under
the finance method until November 2008, because the Company had a continuing
interest in the property represented by an option to repurchase the property at
any time during the first three years of the agreement. This option lapsed
unexercised in November 2008.  The monthly rental payments provided
for by the lease agreement were being accounted for as interest expense, which
amounted to $-0- and $97,500 in the accompanying statement of operations for the
three months ended March 31, 2009 and 2008, respectively.




The
lapsing of this option in November 2008 required the recognition of the sale of
the property and recognition of the gain on this sale of approximately
$2,474,000, of which approximately $1,467,000 was recognized in November 2008.
The remaining portion of the gain is being recognized over the remaining life of
the lease agreement. For the three months ended March 31, 2009, approximately
$84,000 of this deferred gain was recognized and is included in gain from sale
of land and building in the accompanying statement of operations for the three
months ended March 31, 2009. The remaining unrecognized balance of the deferred
gain on sale at March 31, 2009 of approximately $978,000 is presented as
deferred gain on sale of land and building in the accompanying balance
sheet at March 31, 2009.




The
remaining payments due under the operating lease agreement subsequent to the
recognition of the sale are being charged to rent expense in accordance with the
required accounting treatment for an operating lease. Rent expense for the three
months ended March 31, 2009 amounted to $97,500. There was no rent expense for
the three months ended March 31, 2008.




Minimum
payments under the operating lease agreement are as follows:




Year
      Ending December 31,
                    
                    Amount2009
                    
                    $
                    292,5002010
                    
                    
                    390,0002011
                    
                    
                    357,500Total
                    
                    $
                    1,040,000





The
Company is responsible for all operating expenses and real estate taxes under
the sale/leaseback agreement. As described more fully in Note 14, the Company
was the successful bidder in an auction of this property. Closing of this
re-purchase transaction is expected to close in the second quarter of 2009,
whereupon the operating lease for this property would automatically terminate
and the Company would be relieved of the minimum payment obligations in the
chart above.





10.
LOSS PER SHARE





At March
31, 2009, the Company had 4,198,491shares of common stock potentially issuable
upon assumed conversion of (i) $20,000 principal amount of 10% convertible notes
into 44,444 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) warrants
to purchase 333,333 shares of common stock at a price per share of $0.30 and
warrants to purchase 85,714 shares of common stock at a price per share of
$0.35, (iv) 1,161,665 vested stock options, and; (v) 613,335
non-vested stock options to purchase shares of common stock at a price per share
of $0.44 and 1,750,000 non-vested stock options to purchase shares of common
stock at a price per share of $0.29. For the three months ended March 31, 2009
and 2008, no potentially issuable shares of common stock were assumed to be
converted because the Company incurred a net loss in those periods and the
effect of including them in the calculations would have been
anti-dilutive.





10


11.
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.





On
January 19, 2009, stock options to purchase 1,750,000 shares of the Company’s
common stock at an exercise price of $0.29 per share were granted to the
Company’s officers and directors, including 1,000,000 and 500,000 stock options
granted to George J. Coates and Gregory Coates, respectively. These options will
become vested on January 19, 2010. No stock options were granted and no stock
options vested during the three month period ended March 31, 2008. The
weighted-average fair value of 2,398,335 non-vested stock options at March 31,
2009 was approximately $727,000. Total compensation cost related to non-vested
stock options at March 31, 2009 that has not been recognized was approximately
$438,000. This non-cash compensation expense will be recognized in the future
over a remaining weighted average period of approximately 1.3
years.





At March
31, 2009, the fair value of 15,000 unvested, non-employee stock options granted
to the Company’s general corporate counsel was approximately $4,900.




For the
three months ended March 31, 2009 and 2008, the Company recorded non-cash stock
based compensation expense amounting to approximately $122,000 and $69,000,
respectively, relating to stock option grants. For the three months ended March
31, 2009 and 2008, approximately $73,000 and $41,000, respectively, of this
amount was included in research and development expenses and approximately
$49,000 and $28,000, respectively, of this amount was included in general and
administrative expenses in the accompanying statements of
operations.





A summary
of the activity for the quarter ended March 31, 2009 in the Company’s Stock
Option Plan for employees and directors is as follows:





Per
      Share Exercise Prices
                              
                              
                              Number
      Outstanding
                              
                              
                              Weighted
      Average Remaining Contractual Life (Years)
                              
                              
                              Number
      Exercisable
                              
                              
                              Weighted
      Average Exercise Price
                              
                              
                              Weighted
      Average Fair Value Per Share at Date of GrantBalance,
      1/1/09
                              
                              $
                              0.44
                              
                              
                              
                              1,775,000
                              
                              
                              
                              13
                              
                              
                              
                              1,151,666
                              
                              
                              $
                              0.44
                              
                              
                              $
                              0.40$
                              0.29
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -Granted,
      January 19, 2009
                              
                              $
                              0.29
                              
                              
                              
                              1,750,000
                              
                              
                              
                              15
                              
                              
                              
                              -
                              
                              
                              $
                              0.29
                              
                              
                              $
                              0.27Cancellation
      and Forfeitures
                              
                              $
                              0.44
                              
                              
                              
                              -Cancellation
      and Forfeitures
                              
                              $
                              0.29
                              
                              
                              
                              -Balance,
      3/31/09
                              
                              $
                              0.44
                              
                              
                              
                              1,775,000
                              
                              
                              
                              13
                              
                              
                              
                              1,151,666
                              
                              
                              $
                              0.44
                              
                              
                              $
                              0.40$
                              0.29
                              
                              
                              
                              1,750,000
                              
                              
                              
                              15
                              
                              
                              
                              -
                              
                              
                              $
                              0.29
                              
                              
                              $
                              0.27





Total
outstanding stock options at March 31, 2009 are 3,525,000.




A summary
of the activity for the quarter ended March 31, 2008 in the Company’s Stock
Option Plan for employees and directors is as follows:





Per
      Share Exercise Price
                    
                    
                    Number
      Outstanding
                    
                    
                    Weighted
      Average Remaining Contractual Life (Years)
                    
                    
                    Number
      Exercisable
                    
                    
                    Weighted
      Average Exercise Price
                    
                    
                    Weighted
      Average Fair Value Per Share at Date of GrantBalance,
      1/1/08
                    
                    $
                    0.44
                    
                    
                    
                    1,775,000
                    
                    
                    
                    14
                    
                    
                    
                    588,333
                    
                    
                    $
                    0.44
                    
                    
                    $
                    0.40Cancellation
      and Forfeitures
                    
                    $
                    0.44
                    
                    
                    
                    -Balance,
      3/31/08
                    
                    $
                    0.44
                    
                    
                    
                    1,775,000
                    
                    
                    
                    14
                    
                    
                    
                    588,333
                    
                    
                    $
                    0.44
                    
                    
                    $
                    0.40





The
weighted average fair value of the Company's stock-based compensation expense of
$0.27 per share for the stock option granted in January 2009 and $0.40 per share
for stock options granted in April 2007 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:




Granted January 2009
                
                Granted April 2007●
                Historical
      stock price volatility
                180
                
                180●
                Risk-free
      interest rate
                1.26%
                
                4.56%-4.64%●
                Expected
      life (in years)
                4
                
                4●
                Dividend
      yield
                0.00%
                
                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 that were also in the research
      and development stage.●
            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 its employees, officers and
      directors 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,
as discussed above.




11


12.
INCOME TAXES





Deferred income taxes are 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
taxes increased by approximately $97,000 and $267,000 for the three months ended
March 31, 2009 and 2008, respectively. This amount is fully offset by a
corresponding increase in the tax valuation allowance.





13.
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 CSRV
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 $525,000 through March 31, 2009.





Summarized
unaudited information for Coates Motorcycle is as follows:





March
      31, 2009
                  
                  
                  December
      31,2008Current
      assets
                  
                  $
                  55
                  
                  
                  $
                  55Total
      assets
                  
                  
                  55
                  
                  
                  
                  55Current
      liabilities
                  
                  
                  (690,243
                  )
                  
                  
                  (668,591
                  )Total
      liabilities
                  
                  
                  (1,582,243
                  )
                  
                  
                  (1,560,591
                  )Stockholders’
      deficiency
                  
                  
                  1,582,188
                  
                  
                  
                  1,560,536
  For
      the Three Months
                      Ended March 31:2009
                    
                    
                    2008Revenue
                    
                    $
                    -
                    
                    
                    $
                    -Operating
      expenses
                    
                    
                    100
                    
                    
                    
                    520Net
      loss
                    
                    
                    (21,753
                    )
                    
                    
                    (22,905
                    )





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 granted to George J. Coates and Gregory
Coates is summarized as follows:





For the Three Months
                      Ended March 31:2009
                    
                    
                    2008(a)George
      J. Coates
                    
                    $
                    64,200
                    
                    
                    $
                    60,000Gregory
      Coates
                    
                    
                    39,500
                    
                    
                    
                    29,000Bernadette
      Coates
                    
                    
                    19,000
                    
                    
                    
                    14,000





(a)
Includes compensation paid for vacation earned but not taken during the three
months ended March 31, 2008.





Barry C.
Kaye, Treasurer and Chief Financial Officer was paid compensation of
approximately $24,000 and $18,000 during the three months ended March 31, 2009
and 2008, respectively.





The
Company paid Coates Precision Engineering, Ltd, a company owned solely by George
J. Coates, approximately $-0- and $500 for services rendered in connection with
engineering certain materials for use in production during the three months
ended March 31, 2009 and 2008, respectively.





12


14.
LITIGATION AND CONTINGENCIES





Mark D.
Goldsmith, a former executive of the Company, filed suit January 2008 in which
he asserts that the Company is liable to him for breach of an employment
contract. In the opinion of management, Mr. Goldsmith’s performance was
unsatisfactory and, accordingly, he was offered the opportunity to resign.
Further, management is of the opinion that the claim of Mr. Goldsmith is
baseless because the Company had cause to terminate its relationship with Mr.
Goldsmith. The Company intends to vigorously defend this lawsuit and has
instituted a counterclaim against Mr. Goldsmith. The Company believes that Mr.
Goldsmith misrepresented his background and capabilities in order to induce it
and/or Coates Motorcycle Company, Ltd. ("CMC") to hire him. The Company is also
contending that certain of Mr. Goldsmith's business decisions were made to
further his self interest rather than the interests of the Company. The Company
believes that Mr. Goldsmith's claims have no basis in fact and,
accordingly, that the outcome of this legal action will not be material to
its financial condition or results of operations. A deposition has been taken
from Mr. Goldsmith on February 10, 2009. The Company is evaluating whether the
information disclosed in that deposition warrants the filing of a dispositive
motion. The Company intends to vigorously defend against Mr. Goldsmith’s claims
and pursue its counterclaims.





In March
2004, CIL, certain of its officers and directors and other related and unrelated
parties were named as co-defendants, along with WWE in a lawsuit brought in the
Superior Court of New Jersey captioned H. Alton Neff v. George Coates, Coates
International, Ltd. et al. A countersuit was also instituted by CIL and WWE
against Gary Sommer, a principal of one of the plaintiffs. A plaintiff contended
that he was 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 shares of the Company’s
restricted common stock if certain conditions were not met by 1107. The Company
maintained that such conditions were not met and therefore, the deposit
converted into shares of the Company’s restricted common stock. The claims
asserted by all of the parties were settled in March 2009 through mediation.
Pursuant to the terms of that settlement, in March 2009, CIL and WWE each paid
$92,500 to 1107. The Company’s $92,500 portion of the settlement was charged to
expense in December 2008. All parties executed mutual releases and all
claims have been dismissed with prejudice, without costs to any party. As a
condition of the settlement, Mr. Sommer endorsed to CIL a stock certificate
evidencing 25,000 shares of the Company’s common stock. In March 2009, the
shares of stock evidenced by that stock certificate were retired and restored to
authorized, unissued common stock status. The Company was not required to
return the $500,000 deposit originally made by 1107 and previously converted
into shares of its common stock.





In 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
had 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.





The
Company is not a party to any other litigation that is material to its
business.





15.
SUBSEQUENT EVENTS





Repurchase of the Company’s
Headquarters Facility





In April 2009,
the Company was notified that it was the successful bidder in an auction for the
sale of the land and building which serves as the Company’s headquarters and
research and development facility. The purchase price of approximately
$2,137,000 will be satisfied by the initial cash deposit of approximately
$214,000, application of the Company’s $195,000 security deposit under the
operating lease for the property, a $1,750,000 mortgage loan and a cash payment
at closing to cover any remaining applicable closing costs. Deposit on
land and building in the accompanying balance sheet at March 31, 2009 consists
of the cash deposit of approximately $214,000 and pre-closing costs incurred,
directly related to the re-purchase transaction.
 
 Upon closing of
this transaction, expected to occur during the second quarter of 2009, the
operating lease, which requires monthly rent payments of $32,500 would
automatically terminate. The Company has in place a commitment for the mortgage
loan, which would require interest-only monthly payments at a 12%
annual rate of interest, which would amount to $17,500. The mortgage term
would be for eighteen months with an option to extend for an additional six
months upon payment of 1⁄2% of the outstanding balance. The lender would also be
issued 100,000 warrants, which would expire within two years, to purchase shares
of the Company’s common stock at a price per share of $0.50. The terms of the
mortgage also would provide for an exit fee to be determined, not to
exceed $52,500. The terms of the mortgage loan commitment require that it
be secured by the property, all assets of the Company, a pledge of shares
of the Company’s common stock owned by, and other personal assets of, George J.
Coates and the personal indemnification from George J. Coates in the event that
repayment of the mortgage loan is impacted by the discovery of any environmental
liability on the property. This property was previously owned by the Company and
sold in 2005 for approximately $4,200,000.


13


Actions by Consent of
Majority Shareholder





(a)
            Designation
      of Series A Preferred Stock





In April
2009, the Board of Directors adopted a proposal declaring advisable the
designation of 25,000 of the Company’s 100,000,000 total authorized shares of
preferred stock as Series A Preferred Stock. Each share entitles the holder of
record to the right to vote 10,000 shares of common stock with respect to all
matters that are required by law to be submitted to a vote of
shareholders. Series A Preferred Stock have no other rights or obligations.
Specifically, Series A Preferred Stock will not have any rights to share in
dividends or any distribution of assets to any other shareholders of any other
class of the Company’s securities in a liquidation or for any other
purpose.





(b)
            Approval
      to Issue 10,000 Shares of Preferred
Stock





The Board
of Directors of the Company has adopted a proposal declaring advisable that in
consideration for the pledge of shares of common stock of the Company directly
and/or beneficially owned by George J. Coates, majority stockholder, Chairman,
CEO and President, and the granting of a personal guaranty covering all personal
assets of George J. Coates to secure new indebtedness of the
Company:




The
Company shall issue to George J. Coates, 10,000 fully paid and non-assessable
shares of Series A Preferred Stock. Each such share of Series A Preferred Stock
entitles the holder of record to the right to vote 10,000 shares of common stock
with respect to all matters that are required by law to be submitted to a vote
of shareholders. These shares of Preferred Stock will reduce the voting
percentage of all other shareholders, but will not affect their rights with
respect to any dividends and other distributions made by the Company and will
have no affect on the earnings per share applicable to holders of common stock.
Based on 273,964,732 shares of common stock outstanding as of April 30, 2009,
the voting rights of the holders of the Company’s common stock will be affected
as follows:





Percentage
      of voting rights held:
                
                George
      J. Coates
                
                
                All
      Other ShareholdersAs
      of April 30, 2009
                
                
                76.02%
                
                
                
                23.98%Immediately
      after issuance of the Series A Preferred Stock
                
                
                82.56%
                
                
                
                17.44%





(c)
            Conditional
      Anti-Dilution Protection for Shares of Common Stock Owned by George J.
      Coates





All
shares of the Company’s common stock directly or beneficially owned by George J.
Coates (“GJC Shares”) will be granted conditional anti-dilution protection. Such
anti-dilution protection will only be triggered in the event that any GJC Shares
pledged as collateral for any indebtedness of the Company are sold by the lender
in order to satisfy all or any portion of the Company’s outstanding
indebtedness, including any related unpaid accrued interest or other unpaid
obligations arising out of such indebtedness. In any such event, the Company
shall issue additional shares of common stock to George J. Coates so that he
shall hold the same percentage of the then resulting new total of outstanding
common shares after the issuance of such new shares of common stock to George J.
Coates as the percentage he held before the issuance of such new shares of
common stock.





In the
event that the conditional anti-dilution protection is triggered, the ownership
interests, share of dividends, share of any other distributions from the Company
and voting interests of all other holders of the Company’s common stock would be
diluted.





(d)
            Election of
      Directors





In
addition, the Board of Directors authorized and approved the nomination of
George J. Coates, Gregory Coates, Barry C. Kaye, Dr. Richard W. Evans, Dr.
Michael J. Suchar, Dr. Frank Adipietro, Glenn Crocker and Richard Whitworth as
directors to hold office until the next Annual Meeting of Stockholders or until
their respective successors shall have been duly elected and qualified. All of
the nominees are presently directors of the Company.





On April
30, 2009, George J. Coates, the majority stockholder of the Company approved
these actions by written consent in lieu of a meeting in accordance with
the Delaware General Corporation Law. On May 12, 2009, the Company filed a
definitive Information Statement on Schedule 14C with the Securities and
Exchange Commission to notify its shareholder of these actions. A copy of this
Information Statement is required to be mailed to all stockholders of record as
of April 30, 2009. Pursuant to Rule 14c-2 of the Securities Exchange Act,
stockholder approval of these amendments will not become effective before June
2, 2009, which is approximately 21 calendar days after May 12, 2009, the date
the Company initiated the mailing of the Information Statement to its
stockholders.





14




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 agreements 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 development of the Coates spherical rotary valve engine (“CSRV”)
system technology. We believe that the CSRV system technology delivers
significant competitive advantages over conventional internal combustion
engines, including a substantial improvement in fuel efficiency, a substantial
reduction in harmful emissions and longer intervals between schedule engine
maintenance. This technology has been successfully applied to natural gas fueled
industrial electric power generator engines, automobile engines, residential
generators and high performance racing car engines. We have also completed
designing and retrofitting the CSRV system technology into a diesel engine for
heavy trucks. The next steps on this diesel truck engine include completing the
mapping of the computer circuitry for certain truck functions powered by the
engine and testing.  We have been developing plans for transitioning
to large scale production in order to be properly positioned to take advantage
of this technology as it achieves acceptance in the marketplace.  This
includes searching for the optimal location, shipping logistics, manufacturing
facility and qualified labor pool for such large scale
manufacturing.  We continue to actively seek out new sources of
working capital to fund our manufacturing activities.





We are
also engaged in new research and development activities in connection with
applying this technology to other commercially feasible internal combustion
engine applications and are planning to manufacture engines and/or license the
technology to third party OEM's for multiple other applications and uses. We
believe the CSRV system technology has wide applicability to products of all
types powered by internal combustion engines.





Significant
Estimates





The
preparation of our financial statements in conformity with accounting principles
generally accepted in the United States, requires management to make estimates
and assumptions that affect the reported amount of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and reported amounts of revenues and expenses during the reporting
period. 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, and estimating
the rate of forfeitures of, 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.





15


Agreements with Well to Wire
Energy, Inc.





On
September 29, 1999, we signed a sublicense agreement with Well to Wire Energy,
Inc. (“WWE”), a company based in Canada that services the oil and gas industry.
This agreement exclusively licenses within Canada the use of the CSRV system
technology for industrial engines to be fueled by natural gas to generate
electrical power for the oil and gas industry (the “Canadian License”). The
agreement provided for a license fee of $5,000,000. A deposit payment in the
amount of $300,000 was received at that time. A separate research and
development agreement provided for WWE to pay us a $5,000,000 fee in
consideration for the development and delivery of certain prototype engines. We
completed development of the prototypes in accordance with this agreement at the
end of 2007. The research and development agreement has not been reduced to the
form of a signed written agreement. As of May 11, 2009, we have been paid a
total of approximately $4,003,000 by WWE under these agreements.





Additional
provisions of the Canadian License agreement are as follows:





●
            WWE
      shall have the exclusive right to use, lease and sell electric power
      generators that are based on the CSRV System technology within Canada for
      use in the oil and gas industry.●
            WWE
      shall have a specified right of first refusal to market the electric power
      generators worldwide in the oil and gas industry and landfill
      operations.●
            Upon
      commencement of the production and distribution of the electric power
      generators, the minimum annual number of 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 $150,000. We received a firm
      order from WWE for approximately 7,400 engine generators at a mutually
      agreed upon increased price per unit of $159,000. In the event WWE fails
      to purchase the minimum 120 Coates generator engines during any year, WWE
      will automatically lose its exclusivity. In such a case, WWE would retain
      non-exclusive rights to continue to use the Coates generator engine in the
      territory of Canada.●
            WWE
      shall not be required to pay us any royalties as part of the agreements
      between the parties.●
            All
      licensed rights under the Canadian License related to the CSRV system
      technology will remain with Coates.





In 2008,
we entered into a conditional second sublicense 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 us to
collect payments due under both the Canadian licensing and research and
development agreements and the $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 us, at the date of the Escrow Agreement, 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 us 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 us
totaling $1.5 million in prior years. As of May 11, 2009, we have received
approximately $690,000 in 2009 and $1,813,000 of non-refundable payments from
WWE for the year ended December 31, 2008 which was 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.





16


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 May
11, 2009, the remaining balance of the Release Payment was approximately
$6,997,000. Interest on the unpaid balance at 5% per annum of approximately
$333,000 is also due. To the extent that WWE is not successful or experiences
delays in raising such additional new equity capital, our cash flow, results of
operations and financial condition could be adversely affected.





WWE was
unable to remit the full amount of the Release Payment required to be made under
the Amended Escrow Agreement by April 30, 2009 (the “Extended Payment Period”).
In consideration of the severe world-wide economic climate and WWE’s continued
good faith efforts to make substantial periodic, non-refundable installments of
the Release Payment, we agreed to extend the due date for paying the entire
remaining balance of the Release Payment due under the Escrow Agreement to
July 31, 2009. Under the extension agreement, WWE is required to make periodic
installment payments throughout the extension period. As further incentive to
WWE and in view of the diminished level of risk that would result upon WWE
having made a substantial 45% non-refundable investment in the licenses, the
extension agreement provides that upon making an aggregate total of at least
$4,950,000, or 45% of the total $11 million originally due under the Escrow
Agreement, WWE would no longer be subject to the license cancellation
provisions. However, exclusivity would be forfeited if WWE failed to pay us the
entire remaining balance of the Release Payment. Interest continues to be
payable to us at the compounded rate of 5% per annum on the unpaid balance of
the Release Payment.  Such interest shall be recognized as income upon
receipt from WWE.





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 us as the power source for the generation of electrical energy
for the oil and gas industry and 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
system technology from us or our 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 we negotiate an offer with
another third party for a worldwide license to use the Licensed Product in the
oil and gas industry and landfill operations.





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 which were to commence October 27, 2008 in an amount
equal to WWE’s prior quarter net profits. As WWE has not generated a net profit
to date, no quarterly installment payments have been required. 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.





In 2008,
WWE secured an equipment lease finance commitment from Canada West Corporate
Finance, Inc. (“Canada West”), which is to be utilized for its CSRV engine
generator purchases and related equipment and parts over a five-year period
pursuant to its licensing agreement with us. The five-year WWE business plan on
which this agreement was based provides for the purchase of approximately 7,400
Engine Generators.   Although the initial price per unit under the
firm order we received from WWE was $159,000 per unit, the maximum price per
unit provided for under this finance commitment is $222,000. Should WWE fulfill
its five year business plan at a price per unit of $159,000, we would earn
revenues of almost $1.2 billion. The current economic environment, which is
characterized by tight credit markets, investor uncertainty about how to safely
invest their funds and low investor confidence, has introduced additional risk
and difficulty for borrowers. Accordingly, there can be no assurance that tight
credit markets will not affect the availability of funds under the financing
commitment obtained from Canada West by WWE.





17


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 CSRV system
technology into these engine blocks.




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 system
      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 periodic installments of the
      Release Payment due us under the Escrow Agreement to retain their
      exclusivity.




·
            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 March 31, 2009 Compared to Three Months Ended March 31,
2008




Total
revenues for the three months ended March 31, 2009, which amounted to
approximately $299,000, consisted of revenues from research and development of
approximately $215,000 and recognition of a gain on sale of land and building of
approximately $84,000.  The revenue from research and development was
comprised of non-refundable partial payments of the Release Payment provided for
by our Escrow Agreement with WWE established in connection with our licensing
and research and development agreements. The gain on sale of land and building
represents the amount of the deferred gain on the sale of the property, which
houses our offices and research and development facility, that was recognized in
the first quarter of 2009. No revenues were generated for the three months ended
March 31, 2008.




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 $137,000 for the three months ended March 31, 2009
and 2008, respectively. Included in research and development costs for the three
months ended March 31, 2009 and 2008 were approximately $84,000 and $74,000,
respectively, of allocated compensation and benefits and approximately $73,000
and $41,000, respectively, of stock-based compensation expense. The amount of
stock-based compensation expense in 2009 increased due to the grant of
additional employee stock options in January 2009 to purchase 1,750,000 shares
of common stock.




General
and administrative expenses increased to approximately $610,000 for the three
months ended March 31, 2009 from approximately $340,000 in the corresponding
period in 2008. This net increase of approximately $270,000 primarily resulted
from an increase in rent expense of approximately $97,000 in connection with the
lease of our principal facility. The conditions for recognition of the gain on
this transaction were satisfied in November 2008. Subsequent thereto payments
under the related lease were recorded as rent expense in accordance with the
accounting for an operating lease. Prior to recognition of this gain, the
transaction was accounted for under the finance method and the lease payments
were recorded as interest expense. The remainder of the approximately $270,000
increase in general and administration expenses primarily resulted from an
increase in legal and professional fees of approximately $94,000, an increase in
compensation and benefits of approximately $25,000, an increase in marketing and
printing expenses of approximately $20,000, an increase in travel and
entertainment expenses of approximately $20,000 related to pursuing
opportunities to market our technology in China and a net increase in other
expenses of approximately $14,000, offset by a decrease in patent maintenance
expense of approximately $21,000.




18




Depreciation
and amortization expense decreased to approximately $4,000 in the three months
ended March 31, 2009 from approximately $9,000 in the comparable period in
2008.  This decrease was primarily due to removal of building and
building improvements from the Company’s books in connection with the
recognition of the sale of land and building in the fourth quarter of 2008 and
discontinuance of depreciation of assets which became fully
depreciated.




Interest
expense, net was approximately $400 for the three months ended March 31, 2009.
For the three months ended March 31, 2008 interest expense, net amounted to
approximately $ 95,000 in connection with the accounting for the sale/leaseback
transaction on our principal facility which was being accounted for in
accordance with the finance method during that period.




The
change in deferred taxes for the three months ended March 31, 2009 and 2008 was
fully offset by a valuation allowance, resulting in a $-0- net income tax
provision.




We
experienced a net loss for the three month periods ended March 31, 2009 and
2008, of approximately $475,000 and $581,000, respectively.




Liquidity and Capital
Resources




Our cash
position at March 31, 2009 was approximately $284,000, a decrease of
approximately $438,000 from the cash position of approximately $722,000 at
December 31, 2008. We had negative working capital of approximately ($453,000)
at March 31, 2009 which represents an approximately ($419,000) decrease from the
approximately ($34,000) of negative working capital at December 31, 2008. Our
current liabilities of approximately $1,235,000 at March 31, 2009 decreased by
approximately $13,000 from approximately $1,248,000 at December 31,
2008.





Operating
activities utilized cash of approximately ($480,000) in the three months ended
March 31, 2009. Cash utilized by operating activities in the three months ended
March 31, 2009 results primarily from a net loss of approximately ($475,000),
increased by non-cash gain on sale of land and building and reduced by non-cash
expenses for stock based compensation expense of $122,000 and depreciation and
amortization of approximately $4,000. In addition, operating cash was utilized
for inventory purchases of approximately ($10,000) and a cash reduction of
accounts payable and accrued liabilities of approximately ($41,000) offset by a
reduction in prepaid and other assets of approximately $5,000.





Cash for
investing activities of approximately $219,000 was used for a deposit and
certain pre-closing expenses in connection with the repurchase of the land and
building which serves as our principal facility. No cash was utilized for
investing activities during the three months ended March 31, 2008.





Financing
activities generated cash of approximately $260,000 represented by the gross
proceeds from the sales of common stock and warrants for the three months ended
March 31, 2009. Cash of approximately $8,000 was generated from the sale of
shares of our common stock for the three months ended March 31,
2008.





We have
incurred recurring losses from operations through March 31, 2009, with the
exception of the year ended December 31, 2008 and had a Stockholders’ Deficiency
of approximately $1,191,000. In addition, the current economic environment,
which is characterized by tight credit markets, investor uncertainty about how
to safely invest their funds and low investor confidence, has introduced
additional risk and difficulty in our challenge to secure needed additional
working capital. These factors raise substantial doubt about our ability to
continue as a going concern. Our Independent Registered Public Accountants have
stated in their Auditor’s Report dated March 30, 2009 with respect to our
financial statements as of and for the year ended December 31, 2008 that these
circumstances raise substantial doubt about our ability to continue as a going
concern.





19


For the
three months ended March 31, 2009, we raised approximately $260,000 of new
working capital from sales of our common stock and stock warrants and we also
received $215,000 in Release Payments from WWE which is being used for working
capital purposes. Subsequent to March 31, 2009, we received an additional
Release Payment of $475,000 from WWE.





In the
opinion of management, we will be required to continue to raise additional
working capital to fully achieve our objectives as we are planning to enter 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 source 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 offering of our equity
securities to prospective institutional investors introduced by Stonegate
Securities. We are carefully managing the pace at which we draw working capital
from the equity line of credit 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. During the second quarter of 2009, we received a $475,000
payment due from WWE under the Escrow Agreement.





Contractual Obligations and
Commitments





The
following table summarizes our contractual obligations and commitments at March
31, 2009:





Amount
      Due WithinTotal
                
                2009
                
                2010
                
                2011Lease
      Obligations(1)
                
                $
                1,040,000
                
                
                $
                292,500
                
                
                $
                390,000
                
                
                $
                357,500Employment
      Agreements(2)
                
                
                1,033,333
                
                
                
                300,000
                
                
                
                400,000
                
                
                
                333,333Total
                
                $
                2,073,333
                
                
                $
                592,500
                
                
                $
                790,000
                
                
                $
                690,833







(1)
            In
      April, 2009, we were the successful bidder of an auction for the sale of
      the property under this lease. This property serves as our headquarters
      and research and development facility. Upon closing of this transaction,
      the operating lease, which requires monthly rent payments of $32,500 would
      be automatically terminated and the obligation would be satisfied without
      any further payments under the lease. As this purchase would be financed
      in part with a mortgage loan, we would become obligated to make monthly
      mortgage payments estimated to be approximately $17,500 per month. The
      initial term of this mortgage is for eighteen months. At our option, we
      can extend the maturity for an additional six months upon payment of a fee
      equal to 1/2% of the then outstanding balance of the mortgage loan. This
      represents an improvement in our cash flow and reduction in our general
      and administrative expenses of approximately $15,500 per
      month.(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 our achievement of an adequate level of
      working capital, as defined.





Plan of
Operation





We have
completed development of the CSRV System-based generator engine and are
preparing to commence the production phase of our operations. Initially, we
intend to sell the engine/generators to WWE. WWE has delivered a firm purchase
order for over 7,400 CSRV system technology Industrial Electric Power Generators
intended to be installed in oil fields throughout Canada over a five-year
period. Once production of these orders commences, fulfillment is expected to
occur over a five year period. We intend 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, expect to manufacture
the generator engine in the two following ways:




●
            Assembly
      – to develop assembly lines within our premises.  We have been
      evaluating proposals from certain state officials interested in securing
      our commitment to establish large scale manufacturing operations within
      their state and expect to make a final decision in this regard during
      2009. When the demand for our products justifies it, we will take the
      required steps in order to increase our work force.  We
      anticipate that we will recruit a significant number of new employees and
      make substantial capital expenditures in connection with establishing such
      large scale operations.●
            Licensing
      the technology to Original Equipment Manufacturers (“OEM's”) – to take
      advantage of third party manufacturers’ production capacity by signing OEM
      agreements.




20


Our
ability to establish such manufacturing operations, recruit plant workers,
finance initial manufacturing inventories and fund capital expenditures is
highly dependent on our ability to successfully raise substantial new working
capital in an amount and at a pace which matches our business plans. Sources of
such new working capital include sales of our equity and/or debt securities
through private placement and/or secondary public offerings, pursuing and
entering into additional sublicensing agreements with OEM's and/or distributors,
additional payments from WWE for the Escrow Release Payment and positive working
capital generated from sales of our CSRV products to WWE and others. There can
be no assurance that we will be successful in raising adequate new working
capital or even any new working capital to carry out our business
plans.  The current economic environment, which is characterized by
tight credit markets, investor uncertainty about how to safely invest their
funds and low investor confidence, has introduced additional risk and difficulty
in our challenge to secure such additional working capital.




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, we have incurred recurring losses from
operations, and, as of March 31, 2009, had a Stockholders’ Deficiency of
approximately $1,191,000. These factors raise substantial doubt about our
ability to continue as a going concern. Our Independent Registered Public
Accountants have stated in their Auditor’s Report on our financial statements as
of December 31, 2008 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. We
continue to actively seek out new sources of working capital; however, there can
be no assurance that we will be successful in these efforts.





The
accompanying financial statements do not include any adjustments that might be
necessary if we are unable to continue as a going concern.




Item
3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK





Not
applicable.





Item
4T. CONTROLS AND PROCEDURES




a) Evaluation of
Disclosure Controls. 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 Financial Officer (“CFO”) (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 CFO 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 CFO, as appropriate, to
allow timely decisions regarding required disclosure.
 
 (b)
  Changes in internal control over financial reporting. There have
been no changes in our internal control over financial reporting that occurred
during the last fiscal quarter that has materially affected, or is reasonably
likely to materially affect, our internal control over financial
reporting.




21


PART
II - OTHER INFORMATION




Item 1. LEGAL PROCEEDINGS





Mark D.
Goldsmith, a former executive of CIL, filed suit on January 2008, in which he
asserts that we are liable to him for breach of an employment contract. In the
opinion of management, Mr. Goldsmith’s performance was unsatisfactory and,
accordingly, he was offered the opportunity to resign. Further, management is of
the opinion that the claim of Mr. Goldsmith is baseless because we had cause to
terminate our relationship with Mr. Goldsmith. We intend to vigorously defend
this lawsuit and have instituted a counterclaim against Mr. Goldsmith. We
believe that Mr. Goldsmith misrepresented his background and capabilities in
order to induce us and/or Coates Motorcycle Company, Ltd. ("CMC") to hire him.
We are also contending that certain of Mr. Goldsmith's business decisions were
made to further his self interest rather than the interests of CIL. We believe
that Mr. Goldsmith's claims have no basis in fact, and, accordingly, that the
outcome of this legal action will not be material to our financial condition or
results of operations. A deposition was taken from Mr. Goldsmith on February 10,
2009. We are evaluating whether the information disclosed in that deposition
warrants the filing of a dispositive motion. We intend to vigorously defend
against Mr. Goldsmith’s claims and pursue our counterclaims.




In March
2004, CIL, certain of its officers and directors and other related and unrelated
parties were named as co-defendants, along with WWE in a lawsuit brought in the
Superior Court of New Jersey captioned H. Alton Neff v. George Coates, Coates
International, Ltd. et al. A countersuit was also instituted by CIL and WWE
against Gary Sommer, a principal of one of the plaintiffs. A plaintiff contended
that he was 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 us provided, inter alia, that a $500,000 deposit
made by 1107 to us would convert to shares of our restricted common stock if
certain conditions were not met by 1107. We maintained that such conditions were
not met and therefore, the deposit converted into shares of our restricted
common stock. The claims asserted by all of the parties were settled in March
2009 through mediation. Pursuant to the terms of that settlement, in March 2009,
CIL and WWE each paid $92,500 to 1107. Our $92,500 portion of the settlement was
charged to expense in 2008. All parties executed mutual releases and all
claims have been dismissed with prejudice, without costs to any party. As a
condition of the settlement, Mr. Sommer endorsed to CIL a stock certificate
evidencing 25,000 shares of our common stock. In March 2009, the shares of stock
evidenced by that stock certificate were retired and restored to authorized,
unissued common stock status. We were not required to return the $500,000
deposit originally made by 1107 and previously converted into shares of our
common stock.





In April
2007, we 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 us. We have notified the
holder of this note that we do 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.





We are
not a party to any other litigation that is material to our
business.





Item
1A. RISK FACTORS





Not applicable.





Item
2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS





In March
2009, we sold 838,096 shares of our common stock, 333,333 warrants, each to
purchase one share of our common stock at an exercise price of $0.30 per share
and 85,714 warrants, each to purchase one share of our common stock at an
exercise price of $0.35 per share in private sales of unregistered,
restricted securities to the son of a director pursuant to stock purchase
agreements and received net proceeds of $260,000. Such shares were issued
pursuant to an exemption from registration at Section 4(2) of the Securities Act
of 1933.


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 March 31, 2009 covered by this report to
a vote of our 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





None.





(b)
Exhibits




ExhibitNumber
                        
                        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.




22


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.Date:
      May   13, 2009
            By:
            George J. CoatesGeorge
      J. CoatesPresident,
      Chief Executive Officer
              and
      Principal Executive Officer




Date:
      May 13 , 2009
            By:
            /s/ Barry C. KayeBarry
      C. KayeTreasurer,
      Chief Financial Officer
              and
      Principal Financial Officer