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 September 30, 2008o
              TRANSITION
      REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACTFor
      the transition period from _________________ to
      _________________




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




Delaware
              
              22-2925432(State
      or other Jurisdiction of
              
              (I.R.S.
      EmployerIncorporation
      or Organization)
              
              Identification
      No.)
  Highway
34 & Ridgewood Road, Wall Township, New Jersey 07719
 (Address
of Principal Executive Office) (Zip Code)
 
 (732)
449-7717
 (Registrant's
telephone number including area code)
 
 Indicate
by check mark whether the Registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the Registrant was required
to file such reports) and (2) has been subject to such filing requirements for
the past 90 days.
  Yes x No o
  Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act.)
  Yes o No x
  Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
  Large
accelerated filer ‚                                                                                                           Accelerated
filer Non-accelerated filer ‚
  Non-accelerated
filer ‚ (Do not check
if a smaller reporting company)Smaller reporting company x
 
 As of
November 12, 2008, 273,426,636 shares of the Registrant’s common stock were
issued and 273,126,636 shares were outstanding.





COATES
INTERNATIONAL, LTD.


QUARTERLY
REPORT ON FORM 10-Q





CONTENTS





SEPTEMBER
30, 2008

















PagePART
      1 – FINANCIAL INFORMATIONItem
      1. Financial Statements (Unaudited):Condensed
      Balance Sheets
              2Condensed
      Statements of Operations
              3Condensed
      Statements of Cash Flows
              4Notes
      to the Condensed Financial Statements
              5-12Item
      2.    Management's Discussion and Analysis of
      Financial Condition and Results of Operations
              13-20Item
      3.    Quantitative and Qualitative Disclosures About
      Market Risk
              20Item
      4T.  Controls and Procedures
              20PART
      II  -  OTHER INFORMATION
              21Item
      1.    Legal Proceedings
              21Item
      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 and Reports on Form 8-K
              22SIGNATURES
              23

















Coates
International, Ltd.


Condensed
Balance Sheets








September
      30, 2008
                
                
                December
      31, 2007Assets
                
                (Unaudited)Current
      AssetsCash
                
                $
                530,828
                
                
                $
                959,181Inventory, net
                
                
                440,325
                
                
                
                402,191Other
      assets
                
                
                -
                
                
                
                2,223Total Current
    Assets
                
                
                971,153
                
                
                
                1,363,595Property,
      plant and equipment, net
                
                
                1,448,985
                
                
                
                1,474,023Deferred
      licensing costs, net
                
                
                73,504
                
                
                
                76,716Security
      deposits
                
                
                197,500
                
                
                
                197,500Total Assets
                
                $
                2,691,142
                
                
                $
                3,111,834Liabilities
      and Stockholders’ DeficiencyCurrent
      LiabilitiesAccounts payable and accrued
      liabilities
                
                $
                1,026,400
                
                
                $
                947,901Total Current
      Liabilities
                
                
                1,026,400
                
                
                
                947,901License
      deposits
                
                
                375,000
                
                
                
                375,00010%
      Convertible note, due March 2010
                
                
                20,000
                
                
                
                20,000Finance
      obligation
                
                
                3,876,607
                
                
                
                3,876,607Total Liabilities
                
                
                5,298,007
                
                
                
                5,219,508Commitments
      and Contingencies
                
                
                -
                
                
                
                -Stockholders'
      DeficiencyPreferred
      stock, $0.001 par value, 100,000,000 shares authorized, no
      shares
                  issued
      or outstanding
                
                
                -
                
                
                
                -Common
      stock, $.0001 par value, 1,000,000,000 shares authorized,
                  273,426,636
      and 273,411,636 shares issued and 273,126,636 and 273,411,636 shares
      outstanding at September 30, 2008 and December 31, 2007,
      respectively
                
                
                27,343
                
                
                
                27,341Additional
      paid-in capital
                
                
                20,780,353
                
                
                
                20,587,403Accumulated
      deficit
                
                
                (23,325,077
                )
                
                
                (22,722,418
                )Less:
      Treasury Stock, at cost (300,000 shares)
                
                
                (89,484
                )
                
                
                -Total
      Stockholders' Deficiency
                
                
                (2,606,865
                )
                
                
                (2,107,674
                )Total Liabilities and
      Stockholders' Deficiency
                
                $
                2,691,142
                
                
                $
                3,111,834








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




2




Coates
International, Ltd.


Condensed
Statements of Operations


(Unaudited)





Three
      Months Ended
                    September
      30,
                  
                  
                  Nine
      Months Ended
                    September
      30,2008
                  
                  
                  2007
                  
                  
                  2008
                  
                  
                  2007Revenue
      from Research and Development
                  
                  $
                  490,183
                  
                  
                  $
                  -
                  
                  
                  $
                  1,190,183
                  
                  
                  $
                  -Operating
      Expenses:Research
      and development costs
                  
                  
                  199,176
                  
                  
                  
                  107,515
                  
                  
                  
                  494,651
                  
                  
                  
                  478,674General
      and administrative expenses
                  
                  
                  285,370
                  
                  
                  
                  310,903
                  
                  
                  
                  979,331
                  
                  
                  
                  1,102,435Depreciation
      and amortization expense
                  
                  
                  9,417
                  
                  
                  
                  10,275
                  
                  
                  
                  28,250
                  
                  
                  
                  36,898Total
      Operating Expenses
                  
                  
                  493,963
                  
                  
                  
                  428,693
                  
                  
                  
                  1,502,232
                  
                  
                  
                  1,618,007Loss
      From Operations
                  
                  
                  (3,780
                  )
                  
                  
                  (428,693
                  )
                  
                  
                  (312,049
                  )
                  
                  
                  (1,618,007
                  )Interest
      expense, net
                  
                  
                  (98,185
                  )
                  
                  
                  (97,993
                  )
                  
                  
                  (290,610
                  )
                  
                  
                  (293,393
                  )Loss
      Before Income Taxes
                  
                  
                  (101,965
                  )
                  
                  
                  (526,686
                  )
                  
                  
                  (602,659
                  )
                  
                  
                  (1,911,400
                  )Provision
      for income taxes
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Net
      Loss
                  
                  $
                  (101,965
                  )
                  
                  $
                  (526,686
                  )
                  
                  $
                  (602,659
                  )
                  
                  $
                  (1,911,400
                  )Basic
      net income (loss) per share
                  
                  $
                  0.00
                  
                  
                  $
                  0.00
                  
                  
                  $
                  0.00
                  
                  
                  $
                  (0.01
                  )Diluted
      net income (loss) per share
                  
                  $
                  0.00
                  
                  
                  $
                  0.00
                  
                  
                  $
                  0.00
                  
                  
                  $
                  (0.01
                  )Basic
      weighted average number of shares
                  
                  
                  273,382,614
                  
                  
                  
                  270,910,465
                  
                  
                  
                  273,411,363
                  
                  
                  
                  268,625,017Diluted
      weighted average number of shares
                  
                  
                  273,382,614
                  
                  
                  
                  270,910,465
                  
                  
                  
                  273,411,363
                  
                  
                  
                  268,625,017























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




3


Coates
International, Ltd.


Condensed
Statements of Cash Flows


(Unaudited)





Nine
      Months Ended
                        September
      30,2008
                      
                      
                      2007Net
      Cash Used in Operating Activities
                      
                      $
                      (346,820
                      )
                      
                      $
                      (1,595,110
                      )Cash
      Flows Used in Investing Activities:Acquisition
      of property, plant and equipment
                      
                      
                      -
                      
                      
                      
                      (7,784
                      )Net
      Cash Used in Investing Activities
                      
                      
                      -
                      
                      
                      
                      (7,784
                      )Cash
      Flows From Financing Activities:Purchase
      of Treasury Stock
                      
                      
                      (89,485
                      )
                      
                      
                      -Proceeds
      from issuance of common stock
                      
                      
                      7,952
                      
                      
                      
                      1,707,195Proceeds
      from issuance of 10% convertible note
                      
                      
                      -
                      
                      
                      
                      120,000Proceeds
      of promissory note from related party
                      
                      
                      -
                      
                      
                      
                      100,000Repayment
      of promissory note from related party
                      
                      
                      -
                      
                      
                      
                      (100,000
                      )Repayment
      of demand loans from related party
                      
                      
                      -
                      
                      
                      
                      (92,337
                      )Deferred
      offering costs paid
                      
                      
                      -
                      
                      
                      
                      (72,955
                      )Net
      Cash  (Used in) Provided by Financing Activities
                      
                      
                      (81,533
                      )
                      
                      
                      1,661,903Net
      (Decrease) Increase in Cash
                      
                      
                      (428,353
                      )
                      
                      
                      59,009Cash
      - Beginning of Period
                      
                      
                      959,181
                      
                      
                      
                      254,242Cash
      - End of Period
                      
                      $
                      530,828
                      
                      
                      $
                      313,251Schedule
      of Supplemental Cash Flow Data:Cash
      paid for Interest
                      
                      $
                      293,599
                      
                      
                      $
                      293,513





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





4


Coates
International, Ltd.


Notes
to the Condensed Financial Statements





1.
BASIS OF PRESENTATION





The
accompanying unaudited condensed financial statements of Coates International,
Ltd. (the “Company”) have been prepared in accordance with generally accepted
accounting principles for interim financial information. Accordingly, they do
not include all of the information and notes required by accounting principles
generally accepted in the United States (“GAAP”) for complete financial
statements. In the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have been
included. The results of operations for the three and nine month periods ended
September 30, 2008 and 2007 are not necessarily indicative of the results that
may be expected for any other interim period or for the full
year.  The unaudited condensed financial statements should be read in
conjunction with the financial statements and footnotes thereto included in the
Company’s annual report on Form 10-K for the year ended December 31, 2007 and
the quarterly reports on Form 10-Q for the quarters ended June 30, 2008 and
March 31, 2008.





2.
ACCOUNTING POLICIES





Revenue
Recognition





Revenue
from research and development activities is recognized when earned and
realization is reasonably assured, provided that financial risk has been
transferred from the Company to its customer. For the three and nine months
ended September 30, 2008, the Company recognized approximately $490,000 and
$1,190,000, respectively, of revenues from its research and development
agreement with Well to Wire Energy, Inc. (“WWE”).





Net
Income (Loss) per Share





Basic net
income (loss) per share is based on the weighted average number of common shares
outstanding without consideration of potentially dilutive shares of common
stock. There were no shares of preferred stock outstanding during the nine
months ended September 30, 2008 and 2007. Diluted net income per share is based
on the weighted average number of common and potentially dilutive common shares
outstanding, when applicable. Dilutive net loss per share does not include any
dilutive common shares outstanding since their inclusion would be antidilutive.
For the three months ended September 30, 2008, there were 44,444 potentially
dilutive common shares outstanding.





Use
of Estimates





The
preparation of financial statements in conformity with GAAP requires management
to make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reported period.  Actual results could differ from those
estimates.





3.
WELL TO WIRE ENERGY, INC. ESCROW AGREEMENT AND FINANCING COMMITMENT





In April
2008, the Company entered into a conditional second license agreement with
WWE for the territory of the United States (the “US License”). The US
License provides for a license fee of $50 million and annual minimum purchases
of Coates CSRV Systems as a condition of exclusivity.  The US license
has been deposited into an escrow account and the grant under the license is not
effective until the conditions for release from escrow are
satisfied.





The
escrow agreement was established to provide a more secure mechanism for the
Company to collect payments due under both the prior Canadian licensing and
research and development agreements and the new $50 million US License (the
“Escrow Agreement”).  The Escrow Agreement provides that the US
License shall be held in escrow until WWE remits a release payment (the
“Release Payment”). The Release Payment consists of (i) an initial down
payment required under the US License of $1 million and (ii) $8.5 million in
payment of the balance of the monies due to the Company in connection
with the license for the territory of Canada, including the Canadian license
agreement and the research and development agreement (the “Canadian
Agreements”). While the US License is held in escrow there shall not be any
grant of license to WWE. WWE is expected to make non-refundable periodic
payments to the Company in unspecified amounts as partial payments of the
Release Payment until the Release Payment has been paid in full. The first $3.8
million of the Release Payment, which has been designated as payment of the fees
due under the Research and Development Agreement, is being recognized as revenue
at the time realization of the amount due is reasonably assured. Upon full
satisfaction of the Release Payment, WWE would be granted a license for the
territory of the United States under the US License agreement.




5





WWE is a
privately held company and its ability to make the license payments due to us
and to honor the minimum purchase requirements under the licenses is dependent
on the success of its continued efforts to raise new equity
capital.  WWE has made nonrefundable payments to the Company totaling
$1.5 million in prior years. For the nine months ended September 30, 2008, the
Company recognized additional research and development revenues of approximately
$1,190,000 from WWE. At September 30, 2008, the remaining balance of the Release
Payment was approximately $8,625,000. Subsequent to September 30, 2008, the
Company received additional Release Payments from WWE of approximately
$323,000.  To the extent that WWE is not successful or experiences
delays in raising such additional new equity capital, the Company’s cash flow,
results of operations and financial position could be adversely
affected.





WWE was
unable to remit the full amount of the Release Payment required under the Escrow
Agreement to be made by September 30, 2008 (the “Extended Payment Period”). In
recognition of WWE’s good faith effort to pay the Release Payment as evidenced
by the aggregate non-refundable payments of $3,013,000 already made to the
Company for the Canadian Research and Development Agreement, the Canadian
License Agreement and the deposit on the US License Agreement, In October 2008,
the Company agreed to accommodate WWE’s request for an additional extension of
time to pay the full amount of the Release Payment under the Escrow
Agreement.





The
Extension Agreement provides that WWE shall have until April 30, 2009 to pay the
full balance of the Release Payment (the “Payment Extension Date”). Interest
shall be payable to the Company at the compounded rate of 5% per annum on the
unpaid balance of the Release Payment.  As an incentive to expedite
payment by WWE, all interest shall be forgiven if WWE is able to pay the entire
balance of the Release Payment on or before December 31, 2008. The Extension
Agreement also provides that the 75% of the net proceeds from any offer of
securities by WWE shall be applied towards the Release Payment until the balance
is paid in full. Should WWE fail to pay the entire balance of the Release
Payment by the Payment Extension Date, the Company would be entitled to retain
all moneys paid and the Research and Development Agreement, License Agreements
and Escrow Agreements would become automatically canceled without WWE having any
rights of redemption or reinstatement.  Due to the contingent nature
of the interest component of the Extension Agreement, no interest income has
been accrued to date.





In May
2008, the Company was advised that WWE had secured an approximately $1.2 Billion
equipment lease finance agreement, from Canada
West Corporate Finance, Inc.,which is to be utilized for its Coates
CSRV engine generator purchases over the next five years pursuant to its
licensing agreement with the Company. The five-year WWE business plan on which
this agreement was based provides for the purchase of approximately 7,400 Engine
Generators.  On October 1, 2008, this financing agreement was
reconfirmed, expanded in scope and increased in amount.  WWE can now
depend on this agreement to finance any of its purchases of equipment from the
Company. In addition, the price per unit that may be paid to us by WWE under
this facility was increased to $222,000. Accordingly, should WWE fulfill its
five year business plan, this agreement would exceed an aggregate amount of $1.6
Billion.




4.
COMMON STOCK





On
February 26, 2007, the Company’s common stock commenced trading on the Over the
Counter Bulletin Board (“OTCBB”) market system under the ticker symbol
COTE.





The
Company commenced a private placement offering in December 2006 (the “Offering”)
of “Units” consisting of (i) one share of the Company’s 6% Series A Convertible
Preferred Stock (the “Preferred Stock”) and (ii) a Warrant to purchase five
thousand shares of the Company’s Common Stock at an initial exercise price of
$1.10 per share (the “Warrants”).




6





On
September 16, 2008, the Board of Directors ratified a stock buy back program
authorizing the Company to, from time to time through December 31, 2009,
reacquire up to 2,000,000 of its shares of common stock outstanding through
unsolicited purchases through a registered broker-dealer on the
OTCBB.  In September 2008, the Company purchased 300,000 shares of its
common stock on the open market at a cost of $89,484. This amount is reflected
as Treasury stock in the accompanying balance sheet as of September 30, 2008.
The
Company retired these shares in November 2008.




5.
ISSUANCE OF 10% CONVERTIBLE NOTES





In March
2007, the Company issued a 10% Convertible Subordinated Note, due March 2010
(“Convertible Note”) in the principal amount of $100,000 to one of its outside
directors and received cash proceeds of $100,000. In April 2007, the Company
issued an additional 10% Convertible Note in the principal amount of $20,000 to
another outside director and received cash proceeds of $20,000. The proceeds
from the Convertible Notes were used for working capital purposes. The
Convertible Notes are convertible at the option of the holder into shares of the
Company’s common stock at an initial conversion rate that is determined by
dividing the principal amount of notes being converted by $0.45. As the closing
price of the Company’s common stock on the date of the transaction was $0.35 per
share, there was no beneficial conversion feature. Interest accrues at the rate
of 10% per annum and is payable in cash only at maturity. All interest shall be
forfeited upon conversion, in which case the holder would be entitled to
dividends declared, if any, on the Company’s common stock during the time the
convertible note was outstanding. On May 16, 2007, $100,000 principal amount of
these convertible notes was converted into 222,222 shares of our common stock.
The Company has reserved 44,444 shares of its common stock for conversion of the
balance of these notes.





6.
INVESTMENT AGREEMENT WITH DUTCHESS PRIVATE EQUITIES FUND, LTD. AND REGISTRATION
OF SECURITIES





On April
26, 2007, the Company entered into an Investment Agreement with Dutchess Private
Equities Fund, Ltd. (the “Investor”). Pursuant to this Agreement, the Investor
has committed to purchase up to $10,000,000 of our common stock over the course
of thirty-six (36) months. The amount that the Company shall be entitled to
request from each purchase (“Puts”) shall be equal to, at the Company’s
election, either (i) up to $500,000 or (ii) 200% of the average daily volume
(U.S. market only) of the common stock for the ten (10) trading days prior to
the applicable put notice date, multiplied by the average of the three (3) daily
closing bid prices immediately preceding the put date. The put date shall be the
date that the Investor receives a put notice of a draw down from the Company.
The purchase price shall be set at ninety-three percent (93%) of the lowest
closing Best Bid price of the common stock during the pricing period. The
pricing period shall be the five (5) consecutive trading days immediately after
the put notice date. There are put restrictions applied on days between the put
date and the closing date with respect to that particular Put. During this time,
the Company shall not be entitled to deliver another put notice. Further, the
Company shall reserve the right to withdraw that portion of the Put that is
priced below seventy-five percent (75%) of the lowest closing bid prices for the
10-trading day period immediately preceding each put notice.





In
connection with this transaction, the Company filed a registration statement on
Form SB-2 with the Securities and Exchange Commission (“SEC”) covering
15,000,000 shares of the common stock underlying the Investment Agreement. This
registration statement was declared effective by the SEC on June 22, 2007. The
Company shall have an ongoing obligation to register additional shares of our
common stock as necessary underlying the draw downs. The Company also included
in the registration statement the registration of approximately 4,230,000 shares
of common stock representing the 266,667 shares reserved for conversion of the
10% convertible notes (222,222 of which were converted in May 2007), 630,000
shares of common stock related to the stock and warrants issued in connection
with a completed private placement of securities and 3,333,333 shares of common
stock sold in April and May 2007.





During
the nine months ended September 30, 2008, the Company sold 15,000 shares of its
common stock under this equity line of credit and received proceeds of
approximately $8,000. During the year ended December 31, 2007, the Company sold
2,341,803 shares of its common stock under this equity line of credit and
received proceeds of $1,215,855. The amount recorded to additional paid in
capital in 2007 was reduced by offering costs approximating
$73,000.




7





7.
LOSS PER SHARE





At
September 30, 2008, the Company had 2,029,444 shares 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) 628,333 vested stock options and 1,146,667 non-vested stock options
to purchase shares of common stock at a price per share of $0.44. For the three
months ended September 30, 2008 and 2007 and the nine month periods
ended September 30, 2008 and 2007, none of the potentially issuable shares of
common stock were assumed to be converted because the Company incurred a net
loss for those periods and the effect of including them in the calculation would
have been anti-dilutive.





8.
STOCK OPTIONS





The
Company’s 2006 Stock Option and Incentive Plan (the “Stock Plan”) was adopted by
the Company’s Board of Directors in October 2006. In September 2007, the Stock
Plan, by consent of George J. Coates, majority shareholder, was adopted by our
shareholders. The Stock Plan provides for the grant of stock-based awards to
employees, officers and directors of, and consultants or advisors to, the
Company and its subsidiaries, if any.  Under the Stock Plan, the
Company may grant options that are intended to qualify as incentive stock
options (“incentive stock options”) within the meaning of Section 422 of
the Internal Revenue Code of 1986, as amended (the “Code”), options not intended
to qualify as incentive stock options (“non-statutory options”), restricted
stock and other stock-based awards.  Incentive stock options may be
granted only to employees of the Company.  A total of 12,500,000
shares of common stock may be issued upon the exercise of options or other
awards granted under the Stock Plan.  The maximum number of shares
with respect to which awards may be granted to any employee under the Stock Plan
shall not exceed 25% of the 12,500,000 shares of common stock covered by the
Stock Plan.





The Board
of Directors or Compensation Committee may, in its sole discretion, amend,
modify or terminate any award granted or made under the Stock Plan, so long as
such amendment, modification or termination would not materially and adversely
affect the participant.





There
were no stock options outstanding at the beginning of 2007. The Company granted
options to purchase 1,775,000 shares of common stock (1,750,000 shares to
officers and directors) on April 18, 2007 at an exercise price of $0.44 per
share. The options vest equitably over a 3-4 year vesting period and expire
fifteen years after the service inception date. The fair value of shares vested
during the three and nine month periods ended September 30, 2008, was
approximately $-0- and $12,000, respectively, and during the three and nine
month periods ended September 30, 2007, was approximately $-0- and $220,000,
respectively.




The
Company also granted 25,000 five-year non-employee stock options to its
corporate general counsel on April 18, 2007 at an exercise price of $0.44 per
share, which is being accounted for in accordance with the guidance in Emerging
Issues Task Force Issue No. 96-18, "Accounting for Equity Instruments that are
Issued to Other than Employees for Equity or in Conjunction with Selling Goods
or Services". The options vest equitably over a 4-year vesting period. In
accordance therewith, the fair value of each option is estimated on the balance
sheet date for non-vested options and on the vesting date for vested options. No
shares became vested during the three month periods ended September 30, 2008 and
2007. The fair value of shares vested during the nine months ended September 30,
2008 and 2007 was approximately $1,730 and $1,650, respectively.





During
the three month periods ended September 30, 2008 and 2007, no stock options
became vested.  During both of the nine month periods ended September
30, 2008 and 2007, 35,000 stock options became vested. The weighted-average fair
value of 1,146,667 nonvested employee stock options at September 30, 2008 was
approximately $463,000. Total compensation cost related to nonvested employee
stock options at September 30, 2008 that has not been recognized was
approximately $111,000. This non-cash compensation expense will be recognized in
the future over a remaining weighted average period of approximately 2.55
years.




8





At
September 30, 2008, the fair value of the unvested portion of non-employee stock
options granted to the Company’s general corporate counsel was approximately
$2,990.




For the
three months ended September 30, 2008 and 2007, the Company recorded non-cash
stock based compensation expense amounting to approximately $58,000 and $63,000,
respectively, relating to stock option grants.  For the three months
ended September 30, 2008 and 2007, approximately $47,000 and $41,000,
respectively, of this amount was included in research and development expenses
and approximately $11,000 and $22,000, respectively, of this amount is included
in general and administrative expenses in the accompanying statements of
operations. For the nine months ended September 30, 2008 and 2007, the Company
recorded non-cash stock based compensation expense amounting to approximately
$185,000 and $352,000, respectively, relating to stock option grants. For the
nine months ended September 30, 2008 and 2007, approximately $135,000 and
$245,000, respectively, of this amount was included in research and development
expenses and approximately $50,000 and $107,000, respectively, of this amount is
included in general and administrative expenses in the accompanying statements
of operations.





A summary
of the activity in the Company’s Stock Option Plan for employees and directors
is as follows:




Exercise
      Price Per Share
                  
                  
                  Number
      Outstanding
                  
                  
                  Weighted
      Average Remaining Contractual Life
                  
                  
                  Number
      Exercisable
                  
                  
                  Weighted
      Average Exercise Price
                  
                  
                  Weighted
      Average Fair Value at Date of GrantBalance,
      1/1/07
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Granted,
      April 18, 2007
                  
                  $
                  0.44
                  
                  
                  
                  1,775,000
                  
                  
                  
                  14
                  
                  
                  
                  628,333
                  
                  
                  $
                  0.44
                  
                  
                  $
                  0.40Balance,
      9/30/08
                  
                  $
                  0.44
                  
                  
                  
                  1,775,000
                  
                  
                  
                  14
                  
                  
                  
                  628,333
                  
                  
                  $
                  0.44





No stock
options were exercised, forfeited or expired during the three and nine month
periods ended September 30, 2008 and 2007. The weighted average fair value of
the Company's stock-based compensation expense of $0.40 per share was estimated
using the Black-Scholes option pricing model which requires highly subjective
assumptions including the expected stock price volatility. These assumptions
were as follows:




●
            Historical
      stock price volatility
            
            
            180●
            Risk-free
      interest rate
            
            
            4.56%-4.64%●
            Expected
      life (in years)
            
            
            4●
            Dividend
      yield
            
            
            0.00





The
valuation assumptions were determined as follows:




●
            Historical
      stock price volatility: The Company obtained the volatility factor of
      other publicly traded engine manufacturers.●
            Risk-free
      interest rate: The Company bases the risk-free interest rate on the
      interest rate payable on U.S. Treasury securities in effect at the time of
      the grant for a period that is commensurate with the assumed expected
      option life.●
            Expected
      life: The expected life of the options represents the period of time
      options are expected to be outstanding. The Company has no historical data
      on which to base this estimate. Accordingly, the Company estimated the
      expected life based on its expectation that the executives will be subject
      to frequent black out periods during the time that the stock
      options will be exercisable and based on the Company’s expectation
      that it will complete its research and development phase and commence its
      initial production phase. The vesting period of these options was also
      considered in the determination of the expected life of each stock option
      grant.●
            No
      expected dividends.




The same
methodology and assumptions were utilized in estimating the fair value of
non-employee stock options granted to the Company’s general corporate counsel,
which, at September 30, 2008 and 2007, approximated $6,000 and $7,000,
respectively.




9




9.
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
income tax assets increased by approximately $90,000 and $183,000, respectively,
for the three months ended September 30, 2008 and 2007, respectively. Deferred
income tax assets decreased by approximately ($60,000) and increased by
approximately $572,000 for the nine months ended September 30, 2008 and 2007,
respectively. These amounts were fully offset by a corresponding increase or
(decrease) in the tax valuation allowance.





10.
RELATED PARTY TRANSACTIONS





The
Company owns approximately 30% of the outstanding shares of common stock of
Coates Motorcycle Company, Ltd. (“Coates Motorcycle”), a company that was
researching and developing a heavy cruiser motorcycle equipped with the Coates
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 $512,000 through September 30,
2008.





Summarized
unaudited information for Coates Motorcycle is as follows:





For
      the Three Months
                  Ended September 30:
                
                
                For
      the Nine Months
                  Ended September 30:2008
                
                
                2007
                
                
                2008
                
                
                2007Revenue
                
                $
                -
                
                
                $
                -
                
                
                $
                -
                
                
                $
                -Operating
      expenses
                
                
                -
                
                
                
                120,265
                
                
                
                620
                
                
                
                410,677Net
      loss
                
                
                (22,395
                )
                
                
                (142,647
                )
                
                
                (67,796
                )
                
                
                (474,056
                )





September
      30, 2008
                
                
                December
      31,2007Current assets
                
                $
                55
                
                
                $
                175Total
      assets
                
                
                55
                
                
                
                175Current
      liabilities
                
                
                (646,196
                )
                
                
                (579,020
                )Total
      liabilities
                
                
                (1,538,196
                )
                
                
                (1,470,520
                )Stockholders’
      deficiency
                
                
                1,538,141
                
                
                
                1,470,345




10




The
approximate amount of compensation and benefits paid to George J. Coates,
Gregory Coates and Bernadette Coates, exclusive of non-cash stock based
compensation for employee stock options recognized for George J. Coates and
Gregory Coates, for the three and nine month periods ended September 30, 2008
and 2007, is summarized as follows:





For the Three Months
                  Ended September 30:
                
                
                For the Nine Months
                  Ended September 30:2008
                
                
                2007
                
                
                2008
                
                
                2007George
      J. Coates (a)
                
                $
                80,000
                
                
                $
                54,000
                
                
                $
                201,000
                
                
                $
                173,000Gregory
      Coates (a)
                
                
                39,000
                
                
                
                24,000
                
                
                
                103,000
                
                
                
                77,000Bernadette
      Coates (b)
                
                
                18,000
                
                
                
                10,000
                
                
                
                52,000
                
                
                
                31,000





(a)
            Includes
      compensation paid for vacation earned but not taken in 2008 and
      2007.


(b)
            Includes
      compensation paid for vacation earned but not taken in
    2008.





Effective
in April 2008, the annual base salaries for George J. Coates, Gregory Coates and
Bernadette Coates increased to approximately $250,000, $150,000 and $67,000,
respectively.





Barry C.
Kaye, Treasurer and Chief Financial Officer was paid consulting fees
of  approximately $15,000 and $20,000 during the three months ended
September 30, 2008 and 2007, respectively, and approximately $53,000 and $64,000
during the nine months ended September 30, 2008 and 2007,
respectively.





The
Company paid Coates Precision Engineering, Ltd, a company owned solely by George
J. Coates, approximately $500 and $5,000 for services rendered in connection
with engineering certain materials for use in production during the three months
and nine month periods ended September 30, 2008 and 2007,
respectively.





11.
LITIGATION AND CONTINGENCIES





The
Company, certain of its officers and directors and other related and unrelated
parties were named as defendants in a lawsuit brought in the Superior Court of
New Jersey captioned H. Alton Neff v. George Coates, Coates International, Ltd.
et al. Plaintiff contends that he is the assignee of 1107 North West Central
Avenue Inc. ("1107"). Preliminary agreements and an amendment thereto relating
to purchase of a certain license by 1107 from the Company provided, inter alia,
that a $500,000 deposit made by 1107 to the Company would convert to stock of
the Company if certain conditions were not met by 1107. The Company maintains
that 1107 did not fulfill such conditions, and failed to make a certain payment,
and therefore, the deposit converted into shares of the Company's restricted
Common Stock. On February 13, 2007, the Superior Court of New Jersey dismissed
the complaint “with prejudice.” The plaintiffs and a third party defendant filed
notices of appeal.  Oral argument before the appellate court was held
on April 8, 2008 and its decision was released on May 8, 2008. The trial court’s
dismissal of H. Alton Neff’s (“Neff”) claims against the Company and George J.
Coates was affirmed.  The claims of 1107 were reinstated and the
defenses of two of the other named defendants to the counterclaim and third
party complaint of the Company and George J. Coates were reinstituted. The
Company will pursue counterclaims and third party claims and vigorously defend
against the claims of 1107.





In April
2007, the Company received a demand letter from a law firm requesting payment of
approximately $77,000 in connection with a promissory note issued to the law
firm as security for the payment of future services to the Company. The Company
has notified the holder of this note that it does not intend to honor the
promissory note because the law firm did not provide the services contemplated
to be performed as consideration for the promissory note. No further action to
pursue collection of this promissory note has been taken to date by the holder.
At this time, it is not possible to reasonably estimate the outcome of this
matter, and, accordingly, no amount has been accrued.




11





On
January 25, 2008, a complaint was filed with the Superior Court of New Jersey
Law Division (the “Court”) on behalf of Mark Goldsmith, a former executive of
the Company, as the plaintiff, which named the Company, Coates Motorcycle
Company, Ltd. and George J. Coates as Defendants. The complaint alleges breach
of contract with respect to Mr. Goldsmith’s employment agreements with the
Company and Coates Motorcycle and seeks compensatory damages consisting of
compensation, severance, stock options and other employee benefits, punitive
damages, interest and attorney’s fees. On March 20, 2008, an answer to Mr.
Goldsmith’s complaint was filed with the Court, along with separate defenses and
separate counterclaims against Mr. Goldsmith filed by each of the Defendants.
The counterclaims assert that Mr. Goldsmith misrepresented his background and
capabilities in order to induce the Company to hire him and that certain of his
business decisions were made to further his self interest rather than the
interests of the Company. The counterclaims allege breach of contract, fraud and
breach of covenant by Mr. Goldsmith and seek compensatory damages, punitive
damages, interest, attorney’s fees, costs of suit and other just and equitable
relief. The court has assigned this matter to mandatory mediation. An
unsuccessful mediation session was held on June 23, 2008.





In the
opinion of management, Mr. Goldsmith’s complaint is without merit and the
Company intends to vigorously defend against this complaint asserted by Mr.
Goldsmith and will diligently pursue its counterclaims. The Company has without
prejudice to its position, accrued compensation under his employment agreement
for accounting purposes only, of approximately $96,000 of his salary during
2007. Although the Company does not intend to make any payments to Mr. Goldsmith
in connection with this employment agreement, this amount has been included in
accounts payable and accrued liabilities in the accompanying balance
sheets.





12.
SUBSEQUENT EVENT





In
November 2008, pursuant to a sale/leaseback agreement, the Company had entered
into during 2005, the Company’s option to repurchase the property which serves
as its principal offices, warehousing and manufacturing facility,
lapsed.  The Company had originally realized net proceeds from this
transaction of approximately $3,877,000. This amount has been reflected in the
Company’s balance sheet as a finance obligation since the date of the
sale/leaseback. The Company had previously recognized a net gain for income tax
reporting purposes, however, in accordance with generally accepted accounting
principles; the gain was required to be deferred for financial reporting
purposes until expiration or exercise of the repurchase option. The lapsing of
this option now requires the recognition of the sale of the property and the
recording of the income from the gain of approximately $2,604,000 in the fourth
quarter of 2008. After recording the sale of the property in November 2008, the
land, building, accumulated depreciation and finance obligation will no longer
be presented in the Company’s balance sheet. In addition, the payments due under
the property lease will be reported as rent expense in accordance with the
required accounting treatment for an operating lease. Prior to the lapsing of
this option, such payments were reported as interest on the finance
obligation.

















12




Item
2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF




FINANCIAL
CONDITION AND RESULTS OF OPERATIONS




Forward Looking
Statements




This
quarterly report on Form 10-Q contains forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995 and Federal
securities laws, and is subject to the safe-harbor created by such Act and laws.
Forward-looking statements may include our statements regarding our goals,
beliefs, strategies, objectives, plans, including product and service
developments, current dependence on our contract with Well to Wire Energy, Inc.,
future financial conditions, results or projections or current expectations. In
some cases, you can identify forward-looking statements by terminology such as
"may," "will," "should," "expect," "plan," "anticipate," "believe," "estimate,"
"predict," "potential" or "continue," the negative of such terms, or other
comparable terminology. These statements are subject to known and unknown risks,
uncertainties, assumptions and other factors that may cause actual results to be
materially different from those contemplated by the forward-looking statements.
The business and operations of Coates International, Ltd. are subject to
substantial risks, which increase the uncertainty inherent in the
forward-looking statements contained in this report. Except as required by law,
we undertake no obligation to release publicly the result of any revision to
these forward-looking statements that may be made to reflect events or
circumstances after the date hereof or to reflect the occurrence of
unanticipated events. Further information on potential factors that could affect
our business is described in our various periodic reports filed with the SEC.
Readers are also urged to carefully review and consider the various disclosures
we have made in this and such previously filed reports.




Background




We have
completed the development of the Coates spherical rotary valve engine
(“CSRV”).  We have successfully integrated the CSRV into commercial
electric power generators and 35 KW synchronous home generators.  The
CSRV engine can be powered by various alternate fuels including natural gas,
landfill gas, ethanol and bio-diesel among many others.  Results of
independent testing of the CSRV engine indicated more than a 30% improvement in
fuel efficiency and a significant reduction in harmful emissions. We are also
currently developing a prototype diesel truck engine incorporating our CSRV
technology that would be suitable for the heavy trucking industry. We continue
to make meaningful progress in developing this prototype. We have completed
incorporating the CSRV technology into this prototype and have built a custom
gear box to accommodate the prototype engine’s high pressure fuel injection
system. Additional work is required to develop a computer controlled fuel
injection system expected to increase engine efficiency. Upon completion of all
aspects of development of this prototype engine, it will be mounted in a long
haul tractor and load tested. We are targeting penetration of the heavy trucking
industry by retrofitting existing trucks with our diesel engine
design.  The diesel truck engine is expected to achieve substantial
improvements in fuel efficiency and reduce harmful emissions.





We are
currently due remaining payments aggregating approximately $8.3
million from Well to Wire Energy, Inc. (“WWE”) in connection with the Canadian
licensing and research and development agreements and the United States
licensing agreement covering our commercial electric power generators discussed
hereinafter.  The first $3.8 million of 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 realization of collection
of the amount due is reasonably assured. WWE is in the process of undertaking to
raise new equity capital through a private placement of its equity securities in
order to, among, other things, fund the remaining payments due to us. We plan to
commence production of the engine generators for WWE during the fourth quarter
of this year.





We are
also currently engaged in new research and development activities in connection
with applying our technology to other commercially feasible internal combustion
engine applications and intend to manufacture engines and/or license the
technology to third party original equipment manufacturers for other
applications and uses.





Significant
Estimates





The
Company utilizes significant estimates in the preparation of its financial
statements. These significant estimates include assigning useful lives to our
property, plant and equipment, determining an appropriate amount to reserve for
obsolete and slow moving inventory, assigning expected lives to our stock
options granted and selecting a volatility factor for our stock options in order
to estimate the fair value of our stock options on the date of
grant.




13





Agreements with Well to Wire
Energy, Inc.





On
September 29, 1999, the Company signed a Licensing Agreement with WWE, an oil
and gas company in Canada, relating to the distribution in Canada of 6-cylinder
engines modified with the Coates Rotary Valve System fueled by natural gas to
generate electrical power needed to operate oil extracting equipment in
consideration for future payments. A separate Research and Development Agreement
between the Company and WWE provided for development and delivery of
certain prototype engines.  The Company received initial deposits on
these agreements aggregating $1,500,000 during 1999, 2000 and 2001 and
received additional non-refundable payments in 2008 as discussed
hereinafter.





On
      July 7, 2006, we signed a confirmation letter agreement with WWE that
      provided as follows:





The
      Company is to ship to WWE the third power unit of the Company’s CSRV Power
      Generator with output depending on the fuel used. The generator is powered
      by an 855 cubic inch, 6 cylinder industrial electric power engine modified
      with the CSRV system (the “Generator”).  Payment of the
      remaining balance of fees due under these agreements is provided for in
      the Escrow Agreement discussed
hereinafter.




WWE
      will have the exclusive right to use, lease, and sell the generators
      manufactured by the Company, which incorporate the Company’s CSRV System
      technology, as the power source for the generation of electrical energy
      for the oil and gas industry and from landfills that are based within
      Canada.




WWE
      will have a right of first refusal to market the CSRV Power Generators,
      manufactured by the Company as the power source for the generation of
      electrical energy for the oil and gas industry and from landfills,
      worldwide.




The
      Company and WWE have agreed that the minimum annual number of CSRV Power
      Generators to be purchased by WWE in order to maintain exclusivity is
      120.  Until otherwise agreed between the parties, the price per
      Generator shall be US $150,000.  The minimum purchase
      requirement shall become effective upon payment by WWE of a sufficient
      portion of the Release Payment provided for by the Escrow Agreement, as
      determined by the Company.




WWE shall
not be required to pay any royalties to us as part of these agreements. All
patent and other intellectual property rights related to the engine remain with
the Company.




In April
2008, we entered into a conditional second license agreement with Well to
Wire Energy, Inc. (“WWE”) for the territory of the United States (the
“US License”). The US License provides for a license fee of $50 million and
annual minimum purchases of Coates CSRV Electric Power Generators to be used in
the oil and gas industry as a condition of exclusivity.  The US
license has been deposited in to an escrow account and the grant under the
license is not effective until the conditions for release from escrow are
satisfied.





The
escrow agreement was established to provide a more secure mechanism for the
Company to collect payments due under both the prior Canadian licensing and
research and development agreements and the new $50 million US License (the
“Escrow Agreement”).  The Escrow Agreement provides that the US
License shall be held in escrow until WWE remits a release payment (the
“Release Payment”). The Release Payment consists of (i) an initial down
payment required under the US License of $1 million and (ii) $8.5 million in
payment of the balance of the monies due to the Company in connection
with the license for the territory of Canada, including the Canadian license
agreement and the research and development agreement (the “Canadian
Agreements”). While the US License is held in escrow, there shall not be any
grant of license to WWE. WWE is expected to make non-refundable periodic
payments to the Company in unspecified amounts as partial payments of the
Release Payment until the Release Payment has been paid in full. The first $3.8
million of the Release Payment, which has been designated as payment of the fees
due under the Research and Development Agreement, is being recognized as revenue
at the time realization of the amount due is reasonably assured. 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.




14





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.  WWE has made nonrefundable payments to the Company totaling
$1.5 million in prior years. For the nine months ended September 30, 2008, the
Company recognized additional research and development revenues of approximately
$1,190,000 from WWE. At September 30, 2008, the remaining balance of the Release
Payment was approximately $8,625,000. Subsequent to September 30, 2008, the
Company received additional Release Payments from WWE of approximately $323,000.
To the extent that WWE is not successful or experiences delays in raising such
additional new equity capital, the Company’s cash flow, results of operations
and financial position could be adversely affected.





WWE was
unable to remit the full amount of the Release Payment required under the Escrow
Agreement to be made by September 30, 2008 (the “Extended Payment Period”). In
recognition of WWE’s good faith effort to pay the Release Payment as evidenced
by the aggregate non-refundable payments of $3,013,000 already made to the
Company for the Canadian Research and Development Agreement, the Canadian
License Agreement and the deposit on the US License Agreement, in October 2008,
the Company agreed to accommodate WWE’s request for an additional extension of
time to pay the full amount of the Release Payment under the Escrow
Agreement.





The
Extension Agreement provides that WWE shall have until April 30, 2009 to pay the
full balance of the Release Payment (the “Payment Extension Date”). Interest
shall be payable to the Company at the compounded rate of 5% per annum on the
unpaid balance of the Release Payment.  As an incentive to expedite
payment by WWE, all interest shall be forgiven if WWE is able to pay the entire
balance of the Release Payment on or before December 31, 2008. The Extension
Agreement also provides that the 75% of the net proceeds from any offer of
securities by WWE shall be applied towards the Release Payment until the balance
is paid in full. Should WWE fail to pay the entire balance of the Release
Payment by the Payment Extension Date, the Company would be entitled to retain
all moneys paid and the Research and Development Agreement, License Agreements
and Escrow Agreements would become automatically canceled without WWE having any
rights of redemption or reinstatement.  Due to the contingent nature
of the interest component of the Extension Agreement, no interest income has
been accrued to date.





The US
License would, if WWE is able to satisfy the Escrow Agreement release
provisions, grant to WWE the right to use, sell and lease Licensed Products,
manufactured by the Company as the power source for the generation of electrical
energy for the oil and gas industry and from landfills.  Licensed
Products consist of CSRV Valve Systems, CSRV Valve Seals, CSRV Rotary Valve
Spheres, CSRV Valve Components and CSRV Engines for the Oil and Gas Industry and
Landfills.





The
manufacture of any Licensed Products by WWE is prohibited.  WWE is
required to procure all internal combustion engines incorporating the CSRV Valve
System from the Company or its designee. The license granted to WWE is exclusive
within the Territory, provided that WWE satisfies the minimum annual purchase
commitment of 120 internal combustion engines incorporating the CSRV System, the
Coates Engines and all component parts. The agreement also grants WWE a right of
first refusal in the event that the Company negotiates an offer with another
third party for a worldwide license to use the Licensed Product.





After
payment of the Release Payment required under the Escrow Agreement, the
remaining unpaid balance of the US License fee of $49 million is payable in
quarterly installments commencing October 27, 2008 in amount equal to WWE’s
prior quarter net profits. As WWE did not generate a net profit for the quarter
ended September 30, 2008, no quarterly installment payment was due on October
27, 2008. In any event, the entire balance of the licensing fee must be paid in
full on or before February 12, 2012.





Acceleration
of the balance of the licensing fee payments shall be required in the event that
WWE completes a stock offering or private placement offering.  The
entire unpaid balance of the licensing fee shall become due and payable if WWE
raises $100 million or more from such offering.  If WWE raises $25
million or less from any such offering, then WWE must pay us 20% of the amount
raised towards the licensing fee.




15





In May
2008, the Company was advised that WWE had secured an approximately $1.2 Billion
equipment lease finance agreement, Canada West
Corporate Finance, Inc.,which is to be utilized for its Coates CSRV
engine generator purchases over the next five years pursuant to its licensing
agreement with the Company. The five-year WWE business plan on which this
agreement was based provides for the purchase of approximately 7,400 Engine
Generators.  On October 1, 2008, this financing agreement was
reconfirmed, expanded in scope and increased in amount.  WWE can now
depend on this agreement to finance any of its purchases of equipment from the
Company. In addition, the price per unit that may be paid to us by WWE under
this facility was increased to $222,000. Accordingly, should WWE fulfill its
five year business plan this agreement would exceed an aggregate amount of $1.6
Billion.




We
      do not currently have the production capacity to fulfill orders for this
      number of engine generators over the next five
      years.  Management believes that it could be successful in
      entering into a procurement contract with one or more major engine
      suppliers in the United States to deliver engine blocks incorporating our
      proprietary pistons and heads.  Under this approach, we would
      complete the production of the engines by incorporating the Coates
      Spherical Rotary Valve system into these engine blocks.There
      are a number of inherent risks associated with achieving this level of
      revenues over the next five years, including:Although
      we intend to pursue numerous other opportunities to generate revenues from
      production of internal combustion engines incorporating the CSRV
      technology and/or licensing of this technology to original equipment
      manufacturers, until we are able to enter into definitive agreements with
      new customers, our revenues will be concentrated with a single customer,
      WWE.  WWE will be required to remit a sufficient portion of the
      Release Payment due to us under the Escrow Agreement prior to the
      commencement of production of the Coates CSRV Electric Power Natural Gas
      Generators.There
      can be no assurances that we will have adequate capital resources to
      procure a sufficient number of engine blocks, inventory and parts on a
      timely basis, as well as cover the payroll costs for an increased labor
      force and overhead that would be required in order to fulfill orders for
      this volume of engine generators over the next five years. In the event
      that we are unable to fulfill this volume of orders, our revenues and
      profitability would be negatively impacted to the extent of any such
      shortfall.As
      with any business, many aspects of our operations and our future outlook
      are subject to events and influences which are not within our control,
      such as the current worldwide economic crisis.  This could have
      an adverse impact on the Company and our results of
      operations.  For example:





The
      current severe limitation on the availability of credit and investor
      uncertainty could result in delays or the inability to acquire additional
      working capital needed to commence meaningful
  production.




WWE
      may experience additional challenges and delays in raising additional
      equity capital needed to make the remaining balance of the Release Payment
      due to us under the Escrow
Agreement.




Demand
      for our technology and products could be significantly
      reduced.




Estimates
      used in the preparation of our financial statements may need to be
      revised.




Results of Operations –
Three Months Ended September 30, 2008 Compared to Three Months Ended September
30, 2007




Revenues
for the three months ended September 30, 2008, which amounted to approximately
$490,000, were derived from non-refundable payments of a portion of the Release
Payment provided for by our Escrow Agreement with WWE received in connection
with our licensing and research and development agreements. There were no
revenues generated for the three months ended September 30, 2007.




16




Research
and development expenses in connection with developing other commercially viable
applications of the CSRV technology to internal combustion engines were
approximately $199,000 and $108,000 for the three months ended September 30,
2008 and 2007, respectively. The net increase in research and development costs
of approximately $91,000 was primarily attributable to an increase in payroll
and related expenses of approximately $80,000 allocated to research and
development activities, an increase in stock based compensation expense
allocated to research and development of approximately $6,000 and an increase in
parts and materials of approximately $5,000. Research and development activities
in 2008 primarily consisted of applying the CSRV technology to additional
internal combustion engine applications including the development of a prototype
diesel truck engine suitable for the heavy trucking industry, a residential home
use generator and additional activities on developing an engine for the
automobile racing industry.




General
and administrative expenses decreased to approximately $285,000 for the three
months ended September 30, 2008 from approximately $311,000 in the corresponding
period in 2007. This net decrease of ($26,000) primarily resulted from a
decrease in stock based compensation expense of approximately ($11,000), a
reduction in testing expenses of approximately ($10,000), a decrease in
compensation and benefits of approximately ($7,000), a reduction in office
expenses of approximately ($5,000), a decrease in marketing and trade show
expenses of approximately ($5,000), a decrease in patent maintenance expenses of
approximately ($4,000) and a net decrease in other expenses of approximately
($6,000), offset by an increase in legal and professional fees of approximately
$22,000.




Depreciation
and amortization expense decreased to approximately $9,000 in the three months
ended September 30, 2008 from approximately $10,000 in the comparable period in
2007. This decrease was primarily due to discontinuance of depreciation of
assets which became fully depreciated.




Interest
expense increased slightly to approximately $99,000 during the three months
ended September 30, 2008 from $98,000 during the comparable period in
2007.




The
change in deferred taxes for the three months ended September 30, 2008 and 2007
was fully offset by a valuation allowance, resulting in a $-0- net income tax
provision. The Company experienced a net loss for the three month periods ended
September 30, 2008 and 2007 of approximately ($102,000) and ($527,000),
respectively.





Results of Operations – Nine
Months Ended September 30, 2008 Compared to Nine Months Ended September 30,
2007




Revenues
for the nine months ended September 30, 2008, which amounted to approximately
$1,190,000, were derived from non-refundable payments of a portion of the
Release Payment provided for by our Escrow Agreement with WWE received in
connection with our licensing and research and development agreements. There
were no revenues generated for the nine months ended September 30,
2007.




Research
and development expenses in connection with developing other commercially viable
applications of the CSRV technology to internal combustion engines were
approximately $495,000 and $479,000 for the nine months ended September 30, 2008
and 2007, respectively. The net increase in research and development costs of
approximately $16,000 was primarily attributable to an increase in payroll and
related expenses related to increased research and development activities of
approximately $110,000, an increase in parts and materials of approximately
$16,000, offset by a decrease in stock based compensation expense allocated to
research and development of approximately ($110,000). Research and development
activities in 2008 primarily consisted of applying the CSRV technology to
additional internal combustion engines applications including the development of
a prototype diesel truck engine suitable for the heavy trucking industry, a
residential home use generator and additional activities on developing an engine
for the automobile racing industry.




General
and administrative expenses decreased to approximately $979,000 for the nine
months ended September 30, 2008 from approximately $1,102,000 in the
corresponding period in 2007. This net decrease of approximately ($123,000)
primarily resulted from a decrease in stock based compensation expense allocated
to general and administrative expenses of approximately ($57,000), a reduction
in legal and professional fees of approximately ($44,000), a decrease in testing
expenses of approximately ($20,000), a reduction of payroll and related expenses
for general and administrative activities of approximately ($35,000), a decrease
in offering costs charged to expense of approximately ($15,000) and a net
decrease in other general administrative expenses of approximately ($5,000),
offset by an increase in marketing and trade show expenses of approximately
$50,000 and an increase in patent maintenance expenses of approximately
$3,000.




17




Depreciation
and amortization expense decreased to approximately $28,000 in the nine months
ended September 30, 2008 from approximately $37,000 in the comparable period in
2007.  This decrease of approximately $9,000 was primarily due to
discontinuance of depreciation of assets which became fully
depreciated.




Interest
expense remained relatively constant at approximately $295,000 during the nine
months ended September 30, 2008 and 2007.




The
change in deferred taxes for the nine months ended September 30, 2008 and 2007
was fully offset by a valuation allowance, resulting in a $-0- net income tax
provision. The Company experienced a net loss for the nine month periods ended
September 30, 2008 and 2007, of approximately ($603,000) and ($1,911,000),
respectively.




Liquidity and Capital
Resources




Our cash
position at September 30, 2008 was approximately $531,000, a decrease of
approximately $428,000 from the cash position of approximately $959,000 at
December 31, 2007. We had negetive working capital of approximately ($55,000) at
September 30, 2008 which represents an approximately ($471,000) decrease from
the approximately $416,000 of positive working capital at December 31, 2007. Our
current liabilities of approximately $1,026,000 at September 30, 2008 increased
by approximately $78,000 from approximately $948,000 at December 31,
2007.





Operating
activities utilized cash of approximately ($347,000) in the nine months ended
September 30, 2008, a decrease of approximately $1,248,000 from the cash
utilized for operating activities of approximately ($1,595,000) for the nine
months ended September 30, 2007. Cash utilized by operating activities in the
nine months ended September 30, 2008 results primarily from a cash basis net
loss of approximately ($389,000) (after adding back non-cash expenses for stock
based compensation expense of approximately $185,000 and depreciation and
amortization of approximately $28,000) and an
increase in inventory of approximately $38,000, offset by an
increase in accounts payable and accrued liabilities of approximately $79,000
and a decrease in prepaid and other assets of approximately $2,000.





No cash
was utilized for investing activities during the nine months ended September 30,
2008 as compared with approximately $8,000 utilized during the nine months ended
September 30, 2007 for the purchase of property, plant and
equipment.





For the
nine months ended September 30, 2008, the Company utilized cash of approximately
($82,000) which consisted of the repurchase of shares of common stock at a cost
of approximately ($89,000) offset by proceeds for the issuance of common stock
of approximately $8,000.





In the
opinion of management, we will be required to continue to raise additional
working capital to fully achieve our objectives as we continue to work towards
being able to commence the production phase of our operations and continue
research and development activities in connection with developing other
commercially viable applications of our CSRV technology to internal combustion
engines. 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 possible private
placement offering of our equity securities to prospective institutional
investors introduced by Stonegate Securities. We do not intend to commence the
private placement offering of securities with Stonegate Securities prior to
commencing initial production. We are actively pursuing additional working
capital from these sources. The Company is carefully managing the pace at which
it draws working capital from the equity line with Dutchess. There can be no
assurance that we will be able to obtain the necessary working capital for our
production phase on a time frame that will enable us to optimize our production
capacity.  We continue to actively seek out additional sources of new
working capital.




18




Contractual Obligations and
Commitments





The
following table summarizes our contractual obligations and commitments at
September 30, 2008:





Amount Due WithinTotal
                  
                  
                  2008
                  
                  
                  2009
                  
                  
                  2010
                  
                  
                  2011Sale/Leaseback
      Arrangement(1)
                  
                  $
                  1,235,000
                  
                  
                  $
                  97,500
                  
                  
                  $
                  390,000
                  
                  
                  $
                  390,000
                  
                  
                  $
                  357,500Employment
      Agreements(2)
                  
                  
                  1,225,475
                  
                  
                  
                  100,000
                  
                  
                  
                  400,000
                  
                  
                  
                  400,000
                  
                  
                  
                  325,475Total
                  
                  $
                  2,460,475
                  
                  
                  $
                  197,500
                  
                  
                  $
                  790,000
                  
                  
                  $
                  790,000
                  
                  
                  $
                  682,975





(1)
            Although
      the total finance obligation reflected in the Company’s balance sheet at
      September 30, 2008 amounts to approximately $3,877,000, only the amounts
      reflected in the above table constitute a contractual commitment. This is
      a result of the required finance method of accounting treatment for the
      underlying sale/leaseback transaction. This accounting treatment is being
      applied because the Company’s option to repurchase this property through
      November 2008, represents a continuing interest in the property. Under
      this method, the property and the finance obligation continue to be
      reported on the Company’s balance sheet until the exercise or expiration
      of the repurchase option. In November 2008, the option to repurchase the
      property expired unexercised. Accordingly, the Company has recognized a
      gain on the sale of the property in November 2008 of approximately
      $2,605,000 and recorded the sale of the property for financial reporting
      purposes. Monthly payments required by the sale/leaseback agreement
      subsequent to the recognition of the sale of the property are being
      recorded as rent expense.




(2)
            Our
      obligation under employment agreements would increase to $675,000 per year
      through October 17, 2009 and to $550,000 per year from October 18, 2009
      through October 23, 2011, upon the Company achieving an adequate level of
      working capital, as defined.





Plan of
Operation





We plan
to enter the production phase of our operations during the first quarter of next
year.  The working capital from the WWE Release Payments will be
utilized to fund the “ramp up” of our production activities in fulfillment of
orders from WWE for our CSRV Electric Power Generators (“CSRV Generators”). WWE
plans to draw upon its $1.6 billion lease finance commitment to fund the
purchases of the CSRV Generators from us. Upon commencement of production, our
revenues, profits and operating cash flows will initially be dependent on a
single customer, WWE. The Company intends to take advantage of the fact that
essentially all the components of the CSRV generator engine may be readily
sourced and acquired from subcontractors, and, accordingly, intends to
manufacture the generator engine in the two following ways:





·
            Assembly
      - to develop assembly lines within the Company’s premises. The Company is
      evaluating various opportunities to expand or acquire additional
      manufacturing capacity. We are also evaluating the desirability of
      outsourcing various aspects of the engine manufacturing to major engine
      suppliers in the U.S. As demand for our products justifies it, the Company
      will endeavor to increase its work force, accordingly. It is our intention
      to increase our production capacity in an orderly manner to ensure that
      proper training is conducted and effective operating procedures are
      implemented. We expect to add a significant number of new employees to our
      work force within the next 12 to 24 months as we commence
      production.




·
            Licensing
      the technology to Original Equipment Manufacturers (“OEM”) to take
      advantage of third party manufacturers’ production capacity and
      know-how.




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.





The
current economic worldwide economic crisis could have a negative impact on our
plans as previously discussed.




19





Going
Concern





As shown
in the accompanying financial statements, the Company has incurred recurring
losses from operations, and, as of September 30, 2008, had a Stockholders’
Deficiency of approximately $2,607,000. These factors raise substantial doubt
about the Company’s ability to continue as a going concern. Our independent
registered public accounting firm has stated in their Auditors’ Report as of
December 31, 2007 and for the year then ended that this raises substantial doubt
about our ability to continue as a going concern.





Management
is continuing to carefully monitor its costs and is restricting variable costs
to only those expenses that are necessary to carry out our business plans. The
Company continues to actively seek out new sources of working capital; however,
there can be no assurance that it will be successful in these
efforts.





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




Item
3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK





N/A.





Item
4T. CONTROLS AND PROCEDURES




Pursuant
to Rule 13a-15(b) under the Securities Exchange Act of 1934 (“Exchange Act”),
the Company carried out an evaluation, with the participation of the Company’s
management, including the Company’s Chief Executive Officer (“CEO”) and Chief
Accounting Officer (“CAO”) (the Company’s principal financial and accounting
officer), of the effectiveness of the Company’s disclosure controls and
procedures (as defined under Rule 13a-15(e) under the Exchange Act) as of the
end of the period covered by this report. Based upon that evaluation, the
Company’s CEO and CAO concluded that the Company’s disclosure controls and
procedures are effective to ensure that information required to be disclosed by
the Company in the reports that the Company files or submits under the Exchange
Act, is recorded, processed, summarized and reported, within the time periods
specified in the SEC’s rules and forms, and that such information is accumulated
and communicated to the Company’s management, including the Company’s CEO and
CAO, as appropriate, to allow timely decisions regarding required
disclosure.





Management’s Report on
Internal Controls over Financial Reporting





Internal
control over financial reporting is a process to provide reasonable assurance
regarding the reliability of consolidated financial reporting and the
preparation of financial statements for external purposes in accordance with
U.S. generally accepted accounting principles.  There has been no change in
the Company’s internal control over financial reporting during the nine months
ended September 30, 2008 that has materially affected, or is reasonably likely
to materially affect, the Company’s internal control over financial
reporting.




The
Company’s management, including the Company’s CEO and CAO, does not expect that
the Company’s disclosure controls and procedures or the Company’s internal
controls will prevent all errors and all fraud. A control system, no matter how
well conceived and operated, can provide only reasonable, not absolute,
assurance that the objectives of the control system are met. Further, the design
of a control system must reflect the fact that there are resource constraints,
and the benefits of controls must be considered relative to their costs. Because
of the inherent limitations in all control systems, no evaluation of the
controls can provide absolute assurance that all control issues and instances of
fraud, if any, within the Company have been detected.





Management
conducted an evaluation of the effectiveness of our internal control over
financial reporting based on the framework inInternal Control – Integrated
Frameworkissued by the Committee of
Sponsoring Organizations of the Treadway Commission. Based on this evaluation,
management concluded that the company’s internal control over financial
reporting was effective as of September 30, 2008.





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




20




PART
II - OTHER INFORMATION




Item 1. LEGAL PROCEEDINGS




The
Company, certain of its officers and directors and other related and unrelated
parties were named as defendants in a lawsuit brought in the Superior Court of
New Jersey captioned H. Alton Neff v. George Coates, Coates International, Ltd.
et al. Plaintiff contends that he is the assignee of 1107 North West Central
Avenue Inc. ("1107"). Preliminary agreements and an amendment thereto relating
to purchase of a certain license by 1107 from the Company provided, inter alia,
that a $500,000 deposit made by 1107 to the Company would convert to stock of
the Company if certain conditions were not met by 1107. The Company maintains
that 1107 did not fulfill such conditions, and failed to make a certain payment,
and therefore, the deposit converted into shares of the Company's restricted
Common Stock. On February 13, 2007, the Superior Court of New Jersey dismissed
the complaint “with prejudice.” The plaintiffs and a third party defendant filed
notices of appeal.  Oral argument before the appellate court was held
on April 8, 2008 and its decision was released on May 8, 2008. The trial court’s
dismissal of H. Alton Neff’s (“Neff”) claims against the Company and George J.
Coates was affirmed.  The claims of 1107 were reinstated and the
defenses of two of the other named defendants to the counterclaim and third
party complaint of the Company and George J. Coates were reinstituted. The
Company will pursue counterclaims and third party claims and vigorously defend
against the claims of 1107.





In April
2007, the Company received a demand letter from a law firm requesting payment of
approximately $77,000 in connection with a promissory note issued to the law
firm as security for the payment of future services to the Company. The Company
has notified the holder of this note that it does not intend to honor the
promissory note because the law firm did not provide the services contemplated
to be performed as consideration for the promissory note. No further action to
pursue collection of this promissory note has been taken to date by the holder.
At this time, it is not possible to reasonably estimate the outcome of this
matter, and, accordingly, no amount has been accrued.





On
January 25, 2008, a complaint was filed with the Superior Court of New Jersey
Law Division (the “Court”) on behalf of Mark Goldsmith a former executive of the
Company, as the plaintiff, which named the Company, Coates Motorcycle Company,
Ltd. and George J. Coates as Defendants. The complaint alleges breach of
contract with respect to Mr. Goldsmith’s employment agreements with the Company
and Coates Motorcycle and seeks compensatory damages consisting of compensation,
severance, stock options and other employee benefits, punitive damages, interest
and attorney’s fees. On March 20, 2008, an answer to Mr. Goldsmith’s complaint
was filed with the Court, along with separate defenses and separate
counterclaims against Mr. Goldsmith filed by each of the Defendants. The
counterclaims assert that Mr. Goldsmith misrepresented his background and
capabilities in order to induce the Company to hire him and that certain of his
business decisions were made to further his self interest rather than the
interests of the Company. The counterclaims allege breach of contract, fraud and
breach of covenant by Mr. Goldsmith and seek compensatory damages, punitive
damages, interest, attorney’s fees, costs of suit and other just and equitable
relief. The court has assigned this matter to mandatory mediation. An
unsuccessful mediation session was held on June 23, 2008.





In the
opinion of management, Mr. Goldsmith’s complaint is without merit and the
Company intends to vigorously defend against this complaint asserted by Mr.
Goldsmith and will diligently pursue its counterclaims. The Company has without
prejudice to its position, accrued compensation under his employment agreement
for accounting purposes only, of approximately $96,000 of his salary during
2007. Although the Company does not intend to make any payments to Mr. Goldsmith
in connection with this employment agreement, this amount has been included in
accounts payable and accrued liabilities in the accompanying balance
sheets.





21




Item
1A. RISK FACTORS




NotApplicable.





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





None





Item 3. DEFAULTS UPON SENIOR SECURITIES





None





Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS





No matter
was submitted during the quarter ending September 30, 2008 covered by this
report to a vote of the Company’s shareholders, through the solicitation of
proxies or otherwise.





Item 5. OTHER INFORMATION




None





Item 6. EXHIBITS AND REPORTS ON FORM 8-K.





(a) Reports
on Form 8-K and Form 8K-A





None.





(b)
Exhibits




Exhibit
                Number
              Description31.1
      *
              Section
      302 Certification of Chief Executive Officer pursuant to Rule
      13a-14(a)/15d-14(a) under the Securities Exchange Act of 1934 as adopted
      pursuant to Section 302 of the Sarbanes-Oxley Act of
  2002.31.2
      *
              Section
      302 Certification of Principal Financial Officer pursuant to Rule
      13a-14(a)/15d-14(a) under the Securities Exchange Act of 1934 as adopted
      pursuant to Section 302 of the Sarbanes-Oxley Act of
  2002.32.1
      *
              Certification
      of Chief Executive Officer pursuant to 18 U.S.C. 1350, as adopted pursuant
      to Section 906 of the Sarbanes-Oxley Act of 2002.32.2
      *
              Certification
      of Principal Financial Officer pursuant to 18 U.S.C. 1350, as adopted
      pursuant to Section 906 of the Sarbanes-Oxley Act of
  2002.





* Filed
herewith.




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:
      November 13, 2008
              By:
              /s/ George
      J. CoatesGeorge
      J. CoatesPresident,
      Chief Executive Officer
                and
      Principal Executive Officer




Date:
      November 13 , 2008
                By:
                /s/ Barry
      C. KayeBarry
      C. KayeTreasurer,
      Chief Financial Officer
                  and
      Principal Financial Officer
      23