SECURITIES AND EXCHANGE COMMISSION

                             WASHINGTON, D.C. 20549

                                   FORM 10-QSB


               [X]QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934
                      For Quarter Ended September 30, 1998

                                       OR

               [ ]TRANSITION REPORT PURSUANT O SECTION 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934
                For the Transition Period from _______ to _______

                         Commission file number 33-94884

                           COATES INTERNATIONAL, LTD.
             (Exact Name of Registrant as Specified in its Charter)

                               Delaware 22-2925432
                (State or other Jurisdiction of (I.R.S. Employer
               Incorporation 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 _____

     The number of shares of  Registrant's  Preferred Stock Series A, $0.001 par
value, outstanding as of September 30, 1998, was 6,572,424 shares.
                                                                 1

<PAGE>



                           COATES INTERNATIONAL, LTD.
                          [A DEVELOPMENT STAGE COMPANY]


                                      INDEX


                                                                       Page
                                                                      Number

PART  1  -  FINANCIAL INFORMATION

Item 1   Financial Statements (unaudited)                             

     Balance Sheet
     - September 30, 1998                                                 3

    Statements of Operations
   - Three and six months ended September 30, 1998 and 1997
      and since inception                                                 4

   Statements of Cash Flows
   - Three and six months ended September 30, 1998 and 1997
      and since inception                                                 5

  Notes to Consolidated Financial Statements                              6

Item 2  Management's Discussion and Analysis of Financial Condition      7-8
            And Results of Operations

PART II - OTHER INFORMATION                                               9

SIGNATURES                                                               10

FINANCIAL DATA SCHEDULE                                                  23

                                        2

<PAGE>



PART I - Item 1
                           Coates International, Ltd.
                          (A Development Stage Company)
                                  Balance Sheet
                               September 30, 1998
                                   (Unaudited)


<TABLE>
<CAPTION>
      Assets
Current Assets
<S>                                                                                        <C>             
   Cash                                                                                    $         96,791
   Restricted cash                                                                                 112,000
   Due from related parties                                                                         16,543
                                                                                            --------------

      Total Current Assets                                                                         225,334
                                                                                            --------------

Property, Plant and Equipment, - Net of Accumulated Depreciation of $358,983                     1,577,236
                                                                                            --------------

Other Assets
   Mortgage Loan Costs, Net of Accumulated Amortization of $11,315                                  33,946
   Deposit                                                                                           2,500
                                                                                            --------------

      Total Assets                                                                               1,839,016
                                                                                            ==============

      Liabilities and Stockholders' Equity

Current Liabilities
   Mortgage payable                                                                                500,000
   Accounts payable and accrued expenses                                                           961,274
   Accrued interest payable                                                                        106,559
   Due to stockholder                                                                               12,505
                                                                                            --------------

        Total Current Liabilities                                                                1,580,338
                                                                                            --------------

Stockholders' Equity
   Preferred stock, Series A, $.001 par value, 14,000,000 shares authorized - voting,  
      non-cumulative convertible, 6,572,424 shares issued and outstanding                            6,572
   Common stock, $.001 par value, 20,000,000 shares authorized - no shares issued                        -
   Additional paid-in capital                                                                   10,703,368
   Deficit accumulated during the development stage                                           (10,451,262)
                                                                                            --------------

        Total Stockholders' Equity                                                                 258,678
                                                                                            --------------
                                                                                          $      1,839,016
        Total Liabilities and Stockholders' Equity
                                                                                            ==============
</TABLE>



See notes to the condensed financial statements.

                                        3

<PAGE>




                           Coates International, Ltd.
                          (A Development Stage Company)
                            Statements of Operations



<TABLE>
<CAPTION>

                                                                                                                Period From
                                                                                                                 August 31,
                                                                                                               1988 (Date of
                                                                                                                 Inception)
                                                                                                                  Through
                                                                                                               September 30,
                                                                                                                    1998
                                                                                                              ----------------
                                             Three Months Ended                   Nine Months Ended
                                               September 30,                        September 30,
                                      --------------------------------    ---------------------------------   ----------------
                                           1998             1997               1998              1997
                                      ---------------  ---------------    ---------------   ---------------   ----------------
                                        (Unaudited)      (Unaudited)        (Unaudited)       (Unaudited)       (Unaudited)
                                      ---------------  ---------------    ---------------   ---------------   ----------------

<S>                                 <C>               <C>                <C>               <C>              <C>               
Revenue                             $               - $              -   $              -  $              - $          687,375
                                      ---------------  ---------------    ---------------   ---------------   ----------------

Operating Expenses:
   Research and development costs              98,410           68,373            282,958           204,564          3,336,180
   General and administrative
      expenses                                171,247          193,699            384,055           766,610          7,328,125
   Depreciation expense                         3,212            9,975              4,818            29,925            324,488
                                      ---------------  ---------------    ---------------   ---------------   ----------------

      Total Operating Expenses                272,869          272,047          (671,831)         1,001,099         10,988,793
                                      ---------------  ---------------    ---------------   ---------------   ----------------

   Loss From Operations                     (272,869)        (272,047)          (671,831)       (1,001,099)       (10,301,418)
                                      ---------------  ---------------    ---------------   ---------------   ----------------

Other Income (Expense):
   Interest income                                432           10,747                824            10,760            125,690
   Interest expense                          (29,157)          (3,600)           (36,538)          (10,800)          (275,534)
                                      ---------------  ---------------    ---------------   ---------------   ----------------

      Total Other Income (Expense)           (28,725)            7,147           (35,714)              (40)          (149,844)
                                      ---------------  ---------------    ---------------   ---------------   ----------------

Net (Loss)                          $       (301,594) $      (264,900)   $      (707,545)  $    (1,001,139) $     (10,451,262)
                                      ===============  ===============    ===============   ===============   ================

(Loss) Per Share                    $          (0.05) $         (0.04)   $         (0.11)  $         (0.17)
                                      ===============  ===============    ===============   ===============
                                            6,572,424        6,022,954          6,572,313         5,983,602
Weighted Average Number of Shares
   Outstanding
                                      ===============  ===============    ===============   ===============
</TABLE>









See notes to the condensed financial statements.


                                        4

<PAGE>



                           Coates International, Ltd.
                          (A Development Stage Company)
                            Statements of Cash Flows



<TABLE>
<CAPTION>

                                                                                                      Period From
                                                                                                      August 31,
                                                                                                     1988 (Date of
                                                                                                      Inception)
                                                                                                        Through
                                                                                                       September
                                                                                                          30,
                                                                                                         1998
                                                                                                   -----------------
                                                                        Nine Months Ended
                                                                          September 30,
                                                                ---------------------------------  -----------------
                                                                     1998              1997
                                                                ---------------   ---------------  -----------------
                                                                  (Unaudited)       (Unaudited)       (Unaudited)
                                                                ---------------   ---------------  -----------------

<S>                                                            <C>              <C>               <C>               
Cash Flows From Operating Activities                           $      (642,920) $     (1,768,396) $      (8,634,094)
                                                                ---------------   ---------------  -----------------

Cash Flows From Investing Activities                                          -                 -        (1,621,710)
                                                                ---------------   ---------------  -----------------

Cash Flows From Financing Activities
    Proceeds from mortgage payable                                      454,739                 -            454,739
    Repayment of mortgage payable                                     (160,000)                 -          (160,000)
    Proceeds of additional paid-in capital                              289,247         1,010,617          2,596,685
    Proceeds from issuance of stock                                     129,000           950,000          7,467,148
    Payment for treasury stock                                                -                 -           (30,000)
    Proceeds from (repayment of) stockholder loans                      (8,524)                 -             24,023
                                                                ---------------   ---------------  -----------------
    Net Cash Provided by Financing Activities                           704,462         1,960,617         10,352,595
                                                                ---------------   ---------------  -----------------

    Net Increase in Cash                                                 61,542           192,221             96,791
    Cash - Beginning of Periods                                          35,249            13,641                  -
                                                                ---------------   ---------------  -----------------
    Cash - End of Periods                                      $         96,791 $         205,862 $           96,791
                                                                ===============   ===============  =================
</TABLE>















See notes to the condensed financial statements.


                                        5

<PAGE>




                           Coates International, Ltd.
                          (A Development Stage Company)
                   Notes to the Condensed Financial Statements


BASIS OF PRESENTATION

    The accompanying unaudited condensed financial statements have been prepared
    in accordance  with  generally  accepted  accounting  principles for interim
    financial  information  and with the  instructions to Item 310 of Regulation
    S-B.  Accordingly,  they do not include all of the information and footnotes
    required by generally accepted accounting  principles 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.  Operating results for the three months and nine months ended
    September  30, 1998 and 1997 are not  necessarily  indicative of the results
    that may be  expected  for the  years  ended  December  31,  1998 and  1997,
    respectively. The unaudited condensed financial statements should be read in
    conjunction with the consolidated financial statements and footnotes thereto
    included in the  Company's  annual  report on Form 10-KSB for the year ended
    December 31, 1997.

RELATED PARTY TRANSACTION

    Subcontract  Labor - The Company  subcontracts its project expense (payroll,
    insurance and supplies) from an entity in which George J. Coates is the sole
    stockholder.  During the nine  months  ended  September  30,  1998 and 1997,
    $72,512 and $144,000, respectively, were paid for these services.

COMMITMENTS AND CONTINGENCIES

    The  Company is a defendant  in various  lawsuits  incident to the  ordinary
    course of business which are not possible to determine the probable  outcome
    or the amount of liability,  if any, under these lawsuits.  However,  in the
    opinion of  management,  the  disposition  of these lawsuits will not have a
    material  adverse  effect on the Company's  financial  position,  results of
    operations, or cash flows.

MORTGAGE PAYABLE

    The Company  acquired a new mortgage  during June 1998.  The old mortgage of
    $160,000 was settled from the proceeds of the new mortgage. Terms of the new
    mortgage are such that the principal amount will be due in one year, monthly
    interest  payments  only will be made at 18% per annum,  and the mortgage is
    secured by a first  mortgage on the land and buildings of the Company with a
    net book value at September 30, 1998 of $1,549,663.  The Company's principal
    stockholder and Chief Executive  Officer has also personally  guaranteed the
    mortgage.

                                        6

<PAGE>



            ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
                       CONDITION AND RESULTS OF OPERATIONS

Coates  International  Ltd.  ("CIL" or the "Company") is a Delaware  corporation
organized in October 1991 by George J. Coates, as the successor in interest to a
Delaware  corporation  of  the  same  name  incorporated  in  August  1988  (the
"Predecessor   Entity").   As  a  result  of  a  dispute  with  certain   former
employee-directors  who  claimed  top  own  approximately  nine  percent  of the
Predecessor  Entity's  outstanding  capital stock,  the  Predecessor  Entity was
reorganized  in  November  1991.  Pursuant  to  the  reorganization,  all of the
Predecessor  Entity's assets subject to liabilities were distributed to CIL, the
non- litigating  stockholders of the Predecessor  Entity became the stockholders
of CIL, and the Predecessor Entity was dissolved.

CIL has completed the basic  development of a spherical rotary valve system (the
"Coates System"), the development of which was initiated by its founder,  George
J. Coates, for use in internal  combustion engines of all types. With respect to
the Coates System, seven applicable Unites States patents (the "Coates Patents")
have been issued to George J.  Coates.  CIL holds a  non-exclusive  license from
George J.  Coates and his son Gregory  Coates,  to  manufacture,  sell and grant
sub-licenses with respect to products based on the Coates Patents, within all of
the countries,  their  territories and  possessions,  comprising  North America,
South America and Central  America (the "License  Areas").  George J. Coates and
Gregory Coates have also agreed, as long as CIL remains  independent and viable,
not to compete with CIL in the  manufacture,  assembly,  use or sale of internal
combustion  engines  utilizing the  technology  falling  within the scope of the
Coates  Patents  in the  Licensed  Areas,  or to grant  any other  exclusive  or
non-exclusive  license in the Licensed  Areas  except  through CIL. In addition,
George J. Coates and Gregory Coates have executed an agreement  granting CIL the
right to retain any moneys including  royalties  received from Nicholson McLaren
or from Noble Motor Sport  (manufacturer of Ascari racing cars) for manufacture,
sale, use or assembly of internal combustion engines anywhere in the world using
the technology falling within the scope of the Coates Patents.  Recently, during
October,  1998,  George J. Coates and Gregory  Coates  granted CIL an exclusive,
worldwide license covering the Coates Patents, conditioned upon CIL successfully
raising equity  capital:  see copy of Exclusive  Conditional  Worldwide  License
Agreement, dated October 9, 1998, attached as an exhibit to this Report.

CIL has a short  operating  history,  during which it has primarily  devoted its
attention to developing the technology associated with the Coates System. During
such time CIL has also  arranged  for  certain  tests in order to  evaluate  the
effectiveness  of the  technology.  CIL has also devoted much time attempting to
interest  various  persons and  entities in  acquiring  sub-licenses  to use the
technology.

CIL is  currently  manufacturing  components  for  high  performance  automotive
engines modified with the Coates System on a limited basis at its Wall Township,
New Jersey,  manufacturing facility.  Except as may be set forth herein, CIL has
not sold any automotive engines or components during the quarter ended September
30, 1998.  CIL has received  numerous oral and written  inquiries from potential
customers,  expressing  an interest in  acquiring  high  performance  automotive
racing engines modified with the Coates System.  No assurances can be given that
these inquiries will result in binding sales orders. CIL intends to aggressively
pursue all inquiries  with the goal of obtaining  firm orders.  CIL's ability to
generate  revenues and achieve  profitable  operations is principally  dependent
upon the  execution of  sub-license  agreements  with engine  manufacturers  and
retrofitters  and upon the  Company's  successful  marketing  and  sales of high
performance  automotive,  motorcycle and marine racing engines.  Despite limited
success  to date due  principally  to its  lack of  funding,  CIL will  continue
aggressively  to pursue the marketing of Coates  System  technology to potential
sub-licensees.


                                        7

<PAGE>



Results of Operations for the Quarters Ended September 30, 1998 and 1997

No revenues were  recognized  during the quarters and nine months  periods ended
September 30, 1998, and 1997. The Company was not able to successfully  complete
certain prototype engine  configurations  and, as a consequence,  did not obtain
binding orders,  owing to a continuing shortage of working capital that dictated
a rigorous  cost savings  course of action.  The relative  scarcity of financial
and, especially, personal resources that could be brought to bear on the ongoing
research and  development  work is causing  significant  delays in advancing the
testing and trial of such engine  configurations.  Management  is  continuing to
seek  additional  funding,  however  at this  time,  cannot  with any  degree of
certainty predict whether such efforts will be successful.

The absence of revenues  caused all operating and interest  expenses to directly
reflect in the net result as losses.  Total operating  expenses  incurred during
the last quarter  amounted to $272,869  compared to $272,047 for the same period
in 1997. Somewhat higher research and development expenses,  which showed little
change from the  preceding  quarter,  were largely  offset by lower  general and
administrative expenses.

After recognizing $28,725 net interest expense,  the Company's operations show a
net loss from  operations  of $301,594 or $0.05 per share for the quarter  ended
September  30,  1998,  compared to a net loss of $264,900 or $0.04 per share for
the same quarter in the preceding year. The  corresponding  figures for the nine
month periods show a loss of $707,545 or $0.11 per share in 1998,  and a loss of
$1,001,139 or $0.17 per share in 1997.

Total losses since inception in August 1988 through September 30, 1998 amount to
$10,451,262 .


Liquidity and Capital Resources

  The Company's balance sheet and financial  condition did not change materially
during the quarter.  However, the losses experienced during this period affected
cash flow and,  therefore,  the Company's cash position . Cash on hand currently
is  insufficient to guaranty an orderly  retirement of liabilities  unless their
due dates are extended. The new mortgage obtained in June, 1998 in the amount of
$500,000  will be due within less than twelve  (12)  months.  It is secured by a
first  lien on the land and  buildings  of the  Company  in Wall  Township,  New
Jersey.   Management  is  currently  exploring  various  alternative   financing
arrangements  to raise  additional  capital  through a  combination  of  private
placements and debt financing.  At the time of this Report, no binding financial
arrangements have been consummated.



                                        8

<PAGE>




PART  II  -  OTHER INFORMATION


Item 1        LEGAL PROCEEDINGS

The response to this item can be found in the  Company's  annual  report on Form
10-KSB,  Item  3,  for  the  year  ended  December  31,  1997,  which  is  being
incorporated herein by reference to such report.


Item 2        CHANGES IN SECURITIES   -  None


Item 3        DEFAULTS ON SENIOR SECURITIES    -  None
              -----------------------------


Item 4        SUBMISSION OF MATTERS TO A VOTE OF
              SECURITIES' HOLDERS      -  None


Item 5        OTHER INFORMATION     -  None


Item 6        EXHIBITS AND REPORTS ON FORM 8-K

              (b) The Company filed a current  report on Form 8-K on October 22,
1998 with the U.S. Securities and Exchange Commission,  disclosing under Item 5,
the execution and delivery of a certain Exclusive  Conditional Worldwide License
Agreement,  dated  October 9, 1998,  by and between the Company,  Mr.  George J.
Coates and  Gregory  Coates,  a copy of which is  attached  to this Report as an
Exhibit.





                                        9

<PAGE>






                                   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: December 7, 1998            By: s/George J. Coates
                                   -------------------
                                    George J. Coates
                                    Chief Executive and Chief Financial Officer


































coat10q.998

                                       10

<PAGE>



                                     EXHIBIT




                       SECURITIES AND EXCHANGE COMMISSION

                             WASHINGTON, D.C. 20549


                               -------------------


                                    FORM 8-K

                                 CURRENT REPORT



                     PURSUANT TO SECTION 13 OR 15(d) OF THE

                         SECURITIES EXCHANGE ACT OF 1934


Date of Report (Date of earliest event reported):  October 22, 1998

                    Coates International, Inc.
         Exact name of Registrant as specified in charter)

 Delaware        33-94884         22-2925432
(State or other       (Commission            (IRS employer
jurisdiction of       file number)           identification
incorporation                                           no.)


  Highway 34 & Ridge Road, Wall, New Jersey      07719
(Address of principal executive office)         Zip Code

Registration telephone number, including area code: (732) 449-7717


Former name or former address, if changed since last report)




                                       11

<PAGE>




Item 5.       Other Events.

              On October 9, 1998,  Registrant  received an exclusive,  worldwide
              license to make, use and sell products  incorporating  the patents
              owned by George J. Coates, the founder and controlling shareholder
              of  Registrant,  and his son,  Gregory  Coates,  which  cover  the
              "Coates  Spherical Rotary Valve" system.  This new license,  which
              supersedes the previous license,  expands the territorial coverage
              of the previous  license held by Registrant from those  countries,
              their  territories  and  possessions,  comprising  North  America,
              Central  America and South  America,  to all the  countries in the
              world.  The new license  automatically  terminates  under  certain
              conditions  involving  bankruptcy or receivership and in the event
              Registrant  fails to obtain equity financing in the minimum amount
              of  $2,000,000  by  January  17,  1999.  A copy of the  "Exclusive
              Conditional Worldwide License Agreement", dated October 9, 1998 is
              annexed to this Current Report as an exhibit.

              In  consideration   of  the  grant  of  this  worldwide   license,
              Registrant  agreed to (a) issue to George J.  Coates  (i)  500,000
              shares of its Series A Preferred  Stock (ii) 500,000 shares of its
              Common Stock and (iii) 500,000  shares of a new series of Series A
              Preferred Stock with  supervoting  rights  entitling its holder to
              exercise  1,000  votes per share on all  shareholder  matters.  In
              addition,  Registrant  agreed  to pay to George  J.  Coates  (x) a
              license  payment  in the  amount  of  $2,500,000  when,  as and if
              Registrant  has  sufficient  capital to make such  payment and (y)
              royalty  payments  in  amounts  equal to twenty  (20%)  percent of
              royalties   received  by  Registrant  from  its  future  licensing
              activities.

                                       12

<PAGE>



Item 7.       Financial Statements and Exhibits.

              (c)      Exhibits.

              (10)     Exclusive Conditional Worldwide License Agreement, dated
              October 9, 1998, by and between Coates International, Ltd.,
              George J. Coates and Gregory Coates.

                                   SIGNATURES


              Pursuant to the  requirements  of the  Securities  Exchange Act of
     1934, as amended,  the Registrant has duly caused this Current Report to be
     signed on its behalf by the undersigned hereunto duly authorized.


     October 22, 1998                   Coates International, Ltd.



                                        By: s/George J. Coates
                                            George J. Coates, President
                                            and Chief Executive Officer

































coates2.8k


                                       13

<PAGE>



                EXCLUSIVE CONDITIONAL WORLDWIDE LICENSE AGREEMENT

     THIS AGREEMENT,  dated this 9th day of October, 1998, by and between GEORGE
J. COATES,  individually,  residing at 1811 Murray  Drive,  Wall  Township,  New
Jersey  07719  (hereinafter  referred to as  "LICENSOR  I") and GREGORY  COATES,
residing at 1811  Murray  Drive Wall  Township,  New Jersey  07719  (hereinafter
referred  to as  "LICENSOR  II"),  and  COATES  INTERNATIONAL,  LTD.  having its
principle place of business at Route 34 and Ridgewood  Road, Wall Township,  New
Jersey 07719, (hereinafter referred to as "LICENSEE").

                              B A C K G R O U N D:

     WHEREAS,  LICENSOR I is the  patentee and owns and has the right to license
certain  PATENT  RIGHTS  (as  hereinafter   defined)  used  in  the  design  and
construction of internal  combustion  engines employing  spherical rotary valves
(the "COATES SPHERICAL ROTARY VALVE SYSTEM"); and
     WHEREAS, LICENSOR II has loaned LICENSOR I funds to reimburse Coates
International, Ltd. for patent expenses; and
     WHEREAS, LICENSOR I has granted to LICENSOR II and LICENSOR has accepted an
exclusive, revocable license with the right to sublicense; and
     WHEREAS,  LICENSOR  I and  LICENSOR  II had each  granted to  LICENSEE,  by
License Agreement,  dated December 22, 1997, an exclusive  revocable license for
all of the  countries,  their  territories  and  possessions,  comprising  North
America,  Central  America and South  America to make,  use, sell and have made,
LICENSED PRODUCT falling within the scope of the PATENT RIGHTS; and
     WHEREAS,  it is the  desire of  LICENSOR  I and  LICENSOR  II to modify and
expand  upon the  previously  granted  license for the  consideration  set forth
herein and to render the previously granted licenses superseded by this

                                       14

<PAGE>



license and hence null and void.
     NOW  THEREFORE,  in  consideration  of the premises and covenants and other
good and valuable  consideration  and the mutual  promises of the performance of
the  undertakings  herein,  it is agreed by and between  the  parties  hereto as
follows:
                             ARTICLE I - DEFINITIONS 

     1.1 - "CSRV  VALVE  SYSTEM"  shall  mean a  cylinder  head or heads  for an
internal combustion engine manufactured in accordance with the PATENT RIGHTS (as
hereinafter defined).

     1.2 - "IMPROVEMENTS" shall mean any improvement, change, or modification to
the CSRV VALVE SYSTEM  which may be  developed,  created,  or acquired by either
party to this  Agreement,  but only to the extent that the same comes within the
scope  of one or  more  of the  claims  of the  patent  rights  (as  hereinafter
defined).

     1.3 - "PATENT  RIGHTS" shall mean the patents as listed in Attachment  1.3.

     1.4 - "PROTOTYPES" shall mean LICENSED PRODUCT manufactured for testing and
evaluation purposes only.

     1.5 - "TERRITORY"  shall mean all of the countries,  their  territories and
possessions, either currently existing or hereinafter formed, in the world.

                          ARTICLE II - LICENSES GRANTED

     2.1 - LICENSES GRANTED TO LICENSEE

              (1) LICENSOR I and LICENSOR II (hereinafter referred to jointly as
"LICENSOR") hereby grants to LICENSEE an exclusive license in the TERRITORY,  to
make,  use, sell, and have made,  product falling within the scope of the PATENT
RIGHTS, and to prevent others from making, using, selling or having

                                       15

<PAGE>



made  product  falling  within  the  scope  of the  PATENT  RIGHTS;

  (2)  LICENSOR hereby grants to LICENSEE the exclusive right to
manufacture  and sell  PROTOTYPES  falling within the scope of the PATENT RIGHTS
anywhere in the world.

     2.2 - IMPROVEMENTS

     If LICENSORS have heretofore  brought about or shall  hereafter  during the
term of this  Agreement  bring  about  any  IMPROVEMENTS  to the  PATENT  RIGHTS
LICENSORS  shall  promptly  disclose  such  IMPROVEMENTS  TO LICENSEE.  Any such
IMPROVEMENTS shall become subject to this Agreement.

     2.3 - PATENT MARKINGS

     LICENSEE shall mark on an exposed  surface of all products made through use
of the PATENT RIGHTS hereunder, appropriate patent markings identifying LICENSOR
I as the owner of the pertinent PATENT RIGHTS. The content, formal language used
in such  markings  shall be in  accordance  with the laws and  practices  of the
countries where such products  bearing such markings are made, sold, or used and
shall be approved by LICENSOR I.

     2.4      ACKNOWLEDGMENT OF LICENSE

     On all CSRV VALVE SYSTEMS, LICENSEE and Sublicensee shall acknowledge that
the same are manufactured under license from LICENSOR I.  Unless otherwise
agreed to by the parties, the following notice shall be used by LICENSEE and
sublicensees on an exposed surface of all products:  "Manufactured under
License from George J. Coates".  Sublicensees shall use the notice:
"Manufactured under License from Coates International, Ltd. and George J.
Coates."  Such notices shall be used in all descriptive materials,

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instruction and service manuals relating to the CSRV VALVE SYSTEM.

                             ARTICLE III - PAYMENTS

     3.1 - In  consideration  for the grant of this license,  the LICENSEE shall
grant to LICENSORS,  shares of stock in LICENSEE. The shares shall be granted as
follows:  500,000 Series A Preferred shares to LICENSOR I; 500,000 Common Shares
to LICENSOR I; the LICENSEE shall cause the creation of a new series of Series A
Preferred  shares with voting rights for all shareholder  matters equal to 1,000
votes per share and to issue 500,000 of the to-be-created new series A Preferred
shares to LICENSOR I.

     3.2 - In further  consideration  of the granting of this License,  LICENSEE
shall (a) pay all costs associated with the PATENT RIGHTS  identified  herein in
the  TERRITORY;  (b) pay to  LICENSOR I a license  payment  fee in the amount of
$2,500,000,  payable when, as and if the LICENSEE has sufficient capital to make
such  payment,  and;  (c) pay to  LICENSOR I a royalty  payment in the amount of
twenty (20%) percent of any and all royalties  received by the LICENSEE pursuant
to any and all license,  royalty or other  agreement with any third party in the
TERRITORY derived from the manufacture, assembly or sale of any part, accessory,
component  or engine  incorporating  any aspect of the PATENT  RIGHTS,  the CSRV
VALVE SYSTEM or IMPROVEMENTS.

            ARTICLE IV - REPRESENTATIONS, OBLIGATIONS, WARRANTIES AND
                                   DISCLAIMERS

     4.1 - LICENSOR I represents  and warrants  that  LICENSOR I is the rightful
owner of the PATENT  RIGHTS and has the  exclusive  right to license  all of the
PATENT RIGHTS and that all such PATENT RIGHTS pertaining to the CSRV VALVE

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SYSTEM under LICENSOR'S control and possession in the TERRITORY are set forth in
Attachment 1.4. Further, LICENSOR I and LICENSOR II have the power and authority
to execute,  deliver and perform its obligations  under this Agreement,  nor the
performance of its  obligations  hereunder will constitute a breach of the terms
or provisions of any contract or agreement to which LICENSOR is a party.

     4.2 - LICENSEE  will use its best  efforts to execute all such tasks as may
be  necessary  to bring  about the speedy  manufacture,  sale or use of products
manufactured  with the use of the PATENT  RIGHTS  consistent  with good business
practice;  and ensure that all steps  within its power are  undertaken  with all
reasonable  speed to ensure  that such  products  made by  LICENSEE  comply with
relevant  government  regulations  and to ensure that all steps within its power
are  undertaken  with  all  reasonable  speed to  ensure  that  sublicenses  are
negotiated and executed with respect to the PATENT RIGHTS.

                      ARTICLE V - DURATION AND TERMINATION

     5.1 - Subject to the  provisions  of  Section  5.1  hereof,  all rights and
obligations under this Agreement shall expire upon the last to expire patents of
the PATENT RIGHTS.

     5.2 - This Agreement shall terminate effective immediately upon:

          (a)  The filing by LICENSEE of an involuntary petition in bankruptcy,
     the  entry  of a  decree  or order  by a court  or  agency  or  supervisory
     authority  having  jurisdiction  in the premises for the  appointment  of a
     conservator, receiver, trustee in bankruptcy or liquidator for LICENSEE in

                                       18

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     any insolvency, readjustment of debt, marshaling of assets and liabilities,
     bankruptcy or similar proceedings,  or the winding up or liquidation of its
     affairs,  and  the  continuance  of any  such  petition,  decree  or  order
     undismissed  or  unstayed  and  in  effect  for  a  period  of  sixty  (60)
     consecutive days; or

              (b) The  voluntary  or  involuntary  consent  of  LICENSEE  to the
     appointment of a conservator, receiver, trustee in bankruptcy or liquidator
     in  any  insolvency,   readjustment  of  debt,  marshaling  of  assets  and
     liabilities,  bankruptcy or similar proceedings of or relating to LICENSEE,
     or relating to  substantially  all of its  property,  or if LICENSEE  shall
     admit in writing its  inability  to pay its debts  generally as they become
     due, file a petition to pay its debts  generally as they become due, file a
     petition to take advantage of any applicable insolvency,  reorganization or
     bankruptcy statute,  make an assignment for the benefit of its creditors or
     voluntarily suspend payment of its obligations; or

              (c) the failure of LICENSEE to successfully consummate the private
placement of the minimum 400,000 of its Common Shares being offered  pursuant to
LICENSEE'S  Confidential  Private  Offering  Memorandum,  dated  October,  1998,
pursuant to the terms and provisions set forth therein.

                ARTICLE VI - LIMITATION OF ASSIGNMENT BY LICENSEE

     6.1 - This License is non-assignable and the rights,  duties and privileges
of LICENSEE hereunder shall not be sold, transferred,  hypothecated, or assigned
by LICENSEE, either in whole or in part without the consent of

                                       19

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LICENSORS.
                           ARTICLE VII - GOVERNING LAW
orced in
     7.1 - This  Agreement  shall be governed by and  construed  and enforced in
accordance  with  the Laws of the  State of New  Jersey  and each  party  hereby
submits to the  jurisdiction  of any state or federal  court in the State of New
Jersey in the event of any claims arising under this Agreement.

                         ARTICLE VIII - ENTIRE AGREEMENT

     8.1 - This Agreement sets forth the entire  Agreement and  understanding by
and  between  LICENSOR  and  LICENSEE as to the  subject  matter  hereof and has
priority over all documents,  verbal consents and understandings made before the
execution of this  Agreement  and none of the terms of this  Agreement  shall be
amended  or  modified  except in a written  document  signed  by  LICENSORS  and
LICENSEE hereto.

     8.2 - Should any portion of this  Agreement  be  declared  null and void by
operation of law, or otherwise,  the remainder of this Agreement shall remain in
full force and effect.

     8.3 - This  Agreement is understood by the parties  hereto to  specifically
supersede both the February 17, 1997 License from LICENSOR I to LICENSEE and any
subsequent  amendments  thereto as well as the  Agreement  from  LICENSOR  II to
LICENSEE  dated  February  22,  1997  as well as the  License  Agreement,  dated
December 22, 1997, executed and delivered by and between LICENSOR I, LICENSOR II
and LICENSEE and any subsequent amendments thereto.


                                       20

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                              ARTICLE IX - NOTICES

     9.1 - Any notice,  consent or approval  required under this Agreement shall
be in English and in writing,  and shall be delivered to the following addresses
(a) personally by hand, (b) by Certified Air Mail, postage prepaid,  with return
receipt requested, or (c) by telefax, confirmed by such Certified Air Mail:

     If to the LICENSORS:

              Mr. George J. Coates
              c/o COATES INTERNATIONAL, LTD.
              Route 34 & Ridgewood Road
              Wall Township, NJ 07719-9738
              Telephone:  (732) 449-7717
              Telefax:    (732) 449-7736

              Mr. Gregory Coates
              c/o COATES INTERNATIONAL, LTD.
              Route 34 & Ridgewood Road
              Wall Township, NJ 07719-9738
              Telephone:  (732) 449-7717
              Telefax:    (732) 449-7736

     If to LICENSEE:

              COATES INTERNATIONAL, LTD.
              Route 34 & Ridgewood Road
              Wall Township, NJ 07719-9738

     All notices shall be deemed  effective  upon the date  delivered by hand or
sent.  If either party  desires to change the address to which notice is sent to
such party, it shall so notify the other party in writing in accordance with the
foregoing.

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                            ARTICLE X - MISCELLANEOUS

     10.1 - Headings and References - Headings in this Agreement are included

herein for ease of reference only and have no legal effect.  Reference herein to
Sections or  Attachments  are to Sections  and  Attachments  to this  Agreement,
unless expressly stated otherwise.

     10.2 - Reference on Disclosure of Terms and Provisions

                  (a)  This Agreement shall be distributed solely to: (i) those
personnel  of  LICENSORS  and  LICENSEE  who  shall  have a need  to know of its
contents;  (ii) those  persons whose  knowledge of its contents will  facilitate
performance of the obligations of the parties under this agreement;  (iii) those
persons, if any, whose knowledge of its contents is essential in order to permit
LICENSEE or LICENSORS to place,  maintain or secure benefits as required by law,
regulation or judicial order.

     IN WITNESS WHEREOF, the parties have cause this Agreement to be executed as
of the date first above written by their authorized representatives.
ATTEST:

                       s/George J. Coates
                       GEORGE J. COATES - INDIVIDUALLY

                       s/Gregory Coates
                       GREGORY COATES - INDIVIDUALLY

                      COATES INTERNATIONAL, LTD.

                       BY:   s/George J. Coates
                                GEORGE J. COATES
                                PRESIDENT AND CHIEF
                                EXECUTIVE OFFICER


coatlic2.agr

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