Securities
      and Exchange Commission





Washington,
      D.C. 20549





Form
      10-QSB





x
            QUARTERLY
                REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
                1934For
                the quarterly period ended September 30, 2006o
            TRANSITION
                REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACTFor
                the transition period from _________________ to
                _________________





Commission
      file number 33-948884





Coates
      International, Ltd.


(Exact
      Name of Registrant as Specified in its Charter)


Delaware
              22-2925432(State
                  or other Jurisdiction of
                Incorporation
                  or Organization)
              (I.R.S.
                  Employer
                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 [ ]




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




As
      of
      September 30, 2006, there were **266,894,278** shares
      of the Registrant’s common stock issued and outstanding.











**Coates
      International, Ltd.**


**Index
      to Form 10-QSB for the Third Quarter of 2006**





PagePART
                I - FINANCIAL INFORMATIONItem
                1. Financial Statements (Unaudited)Condensed
                Balance Sheet
            2Condensed
                Statements of Operations.
            3Condensed
                Statements of Cash Flows
            4Notes
                to the Condensed Financial Statements
            5-10Item
                2. Management's Discussion and Analysis of Financial Condition and
                Results
                of Operations
            11-15Item
                3. Controls and Procedures
            15PART
                II - OTHER INFORMATION
            16Item
                1. LEGAL PROCEEDINGS
            16Item
                6. EXHIBITS AND REPORTS ON FORM 8-K
            16SIGNATURES
            17










**Coates
      International, Ltd.**


**Condensed
      Balance Sheet**


**September
      30, 2006**


**(Unaudited)**








AssetsCurrent
                AssetsCash
            
            $
            558,839Inventory
            
            
            562,777Prepaid
                expenses
            
            
            57,363Total
                Current Assets
            
            
            1,178,979Deferred
                offering costs
            
            
            112,542Investment
                - related party
            
            
            -Property,
                plant and equipment, net of accumulated depreciation of
                $748,039
            
            
            1,509,816Patents,
                net of accumulated amortization of $2,913
            
            
            80,541Security
                deposits
            
            
            197,500Total
                Assets
            
            $
            3,079,378Liabilities
                and Stockholders’ ImpairmentCurrent
                LiabilitiesAccounts
                payable
            
            $
            6,436Accrued
                expenses
            
            
            912,630Due
                to related parties
            
            
            92,337Total
                Current Liabilities
            
            
            1,011,403License
                deposits
            
            
            940,000Finance
                obligation
            
            
            3,876,607Total
                Liabilities
            
            
            5,828,010Stockholders'
                ImpairmentCommon
                stock, $.0001 par value, 1,000,000,000 shares authorized,
              266,894,278
                shares issued and outstanding
            
            
            26,689Additional
                paid-in capital
            
            
            17,176,155Accumulated
                deficit
            
            
            (19,951,476
            )Total
                Stockholders' Impairment
            
            
            (2,748,632
            )Total
                Liabilities and Stockholders' Impairment
            
            $
            3,079,378








See
      notes
      to condensed financial statements.





**Coates
      International, Ltd.**


**Condensed
      Statements of Operations**


**(Unaudited)**





Three
                  Months Ended
                September30,
              
              Nine
                  Months Ended
                September
                  30,2006
              
              2005
              
              2006
              
              2005Revenue
              
              $
              -
              
              $
              -
              
              $
              -
              
              $
              -Operating
                  Expenses:General
                  and administrative expenses
              
              
              369,205
              
              
              131,575
              
              
              1,129,515
              
              
              545,501Research
                  and development
              
              
              -
              
              
              4,467
              
              
              -
              
              
              10,918Depreciation
                  and amortization expense
              
              
              16,069
              
              
              12,307
              
              
              41,564
              
              
              43,941Total
                  Operating Expenses
              
              
              385,274
              
              
              148,349
              
              
              1,171,079
              
              
              600,360Loss
                  From Operations
              
              
              (385,274
              )
              
              (148,349
              )
              
              (1,171,079
              )
              
              (600,360
              )Other
                  Income (Expense)Equity
                  loss on investment - related party
              
              
              -
              
              
              (54,059
              )
              
              -
              
              
              (237,428
              )Interest
                  income
              
              
              4,263
              
              
              -
              
              
              30,127
              
              
              -Interest
                  expense
              
              
              (97,500
              )
              
              (32,070
              )
              
              (289,666
              )
              
              (93,841
              )Gain
                  on sale of stock -related party
              
              
              -
              
              
              32,000
              
              
              -
              
              
              47,000Total
                  Other (Expense)
              
              
              (93,237
              )
              
              (54,129
              )
              
              (259,539
              )
              
              (284,269
              )Loss
                  Before Income Taxes
              
              
              (478,511
              )
              
              (202,478
              )
              
              (1,430,618
              )
              
              (884,629
              )Income
                  Taxes
              
              
              -
              
              
              -
              
              
              -
              
              
              -Net
                  Loss
              
              $
              (478,511
              )
              $
              (202,478
              )
              $
              (1,430,618
              )
              $
              (884,629
              )Net
                  Loss per share (Basic and diluted)
              
              $
              -0-
              
              $
              -0-
              
              $
              (0.01
              )
              $
              -0-Weighted
                  Average Number of Common
                Shares
                  Outstanding
              
              
              266,894,278
              
              
              265,894,278
              
              
              266,894,278
              
              
              265,873,670


See
        notes
        to condensed financial statements.













**Coates
      International, Ltd.**


**Condensed
      Statements of Cash Flows**


**(Unaudited)**





Nine
                  Months Ended
                September
                  30,2006
              
              2005Cash
                  Flow From Operating Activities
              
              $
              (1,158,876
              )
              $
              (535,643
              )Cash
                  Flow From Investing ActivitiesAcquisition
                  of Fixed Assets
              
              
              (47,070
              )
              
              (2,255
              )Sale
                  of Stock in Minority Interest - related party
              
              
              -
              
              
              47,000Outlays
                  for Patents and Trademarks
              
              
              (27,996
              )
              
              (62,391
              )Net
                  Cash Used for Investing Activities
              
              
              (75,066
              )
              
              (17,646
              )Cash
                  Flow From Financing ActivitiesPayments
                  for deferred offering costs
              
              
              (90,042
              )
              
              -Repayment
                  of mortgage
              
              
              -
              
              
              (2,284
              )Proceeds
                  (repayment) of related party loan
              
              
              (45,300
              )
              
              200,437Short
                  term borrowings
              
              
              -
              
              
              37,786Proceeds
                  from issuance of stock
              
              
              -
              
              
              145,000Net
                  Cash (Used for) Provided by Financing Activities
              
              
              (135,342
              )
              
              380,939Net
                  (Decrease) in Cash
              
              
              (1,369,284
              )
              
              (172,350
              )Cash
                  - Beginning of Period
              
              
              1,928,123
              
              
              180,182Cash
                  - End of Period
              
              $
              558,839
              
              $
              7,832Schedule
                  of Supplemental Cash Flow Data:Cash
                  paid for:Income
                  taxes
              
              $
              146,467
              
              $
              4,054Interest
              
              $
              127,166
              
              $
              93,841





See
      notes
      to condensed financial statements.








**Coates
      International, Ltd.**


**Notes
      to 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 and nine months ended September 30, 2006 and
      2005 are not necessarily indicative of the results that may be expected for
      future periods. 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/A for the year ended
      December 31, 2005, and its quarterly report on Form 10-QSB for the period ended
      June 30, 2006.





**USE
      OF ESTIMATES**





The
      preparation of financial statements in conformity with generally accepted
      accounting principles 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.





**NEW
      SIGNIFICANT ACCOUNTING POLICY**





Stock
      Based Compensation





During
      October 2006, the 2006 Stock Option and Incentive Plan (“Stock Plan”) was
      adopted by the Company’s Board of Directors. The Company will account for stock
      options granted pursuant to this plan in accordance with the accounting
      provisions of Financial Accounting Standards Board (“FASB”) Statement No.
      123(R), Share-Based Payment (“Statement 123(R)”). Stock-based compensation
      expense for all stock based compensation awards granted will be based on the
      grant-date fair value estimate in accordance with the provisions of Statement
      123(R).





**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 researches
      and develops a heavy cruiser motorcycle equipped with the Coates SRV
      engine. Gregory
      Coates, our Chairman of the Board is the majority stockholder of Coates
      Motorcycle. During the nine months ended September 30, 2005, the Company sold
      9,400 of its shares of common stock of Coates Motorcycle for $47,000.





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.








Summarized
      information for Coates Motorcycle is as follows:




For
                the Nine Months Ended September 30,
            
            2006
            
            2005Revenue
            
            $
            -
            
            $
            -Operating
                expenses
            
            
            675,005
            
            
            820,551Net
                loss
            
            
            (731,432
            )
            
            (794,244
            )




As
                of September 30,
            
            2006
            
            2005Current
                assets
            
            $
            153,886
            
            $
            121,227Total
                assets
            
            
            726,792
            
            
            516,988Current
                liabilities
            
            
            (477,203
            )
            
            (579,467
            )Total
                liabilities
            
            
            (1,379,585
            )
            
            (583,967
            )Stockholders’
                impairment
            
            
            652,793
            
            
            66,979





During
      the three month period ended September 30, 2005, the Company received $55,000
      from Coates Motorcycle as reimbursement of general and administrative expenses
      incurred on its behalf. For the nine month period ended September 30, 2005,
      a
      total of $65,991 was received from Coates Motorcycle for such purpose.





George
      J.
      Coates, a previous officer of the Company and currently a significant employee
      and majority stockholder, has made loans to the Company at various times to
      provide working capital, the outstanding balance of which was $92,337 at
      September 30, 2006. These borrowings are in the form of demand loans which
      carry
      no interest and are repaid from time to time depending upon cash availability.





The
      Company paid $32,050 and $73,458 during the nine months ended September 30,
      2006
      and 2005, respectively, to Coates Precision Engineering, Ltd. a Company owned
      solely by George J. Coates, for services in connection with engineering certain
      materials for use in production. This amount is reflected in inventory on the
      accompanying balance sheet.





**EQUITY
      METHOD LOSSES AND IMPAIRMENT OF INVESTMENT IN RELATED
      PARTY**





Emerging
      Issues Task Force ("EITF") 98-13, "Accounting by an Equity Method Investor
      for
      Investee Losses When the Investor has Loans to and Investments in Other
      Securities of the Investee", requires an investor using the equity method,
      that
      has reduced the value of the investment to $-0-, but also has loans outstanding
      or other forms of equity such as preferred stock to continue to report its
      share
      of the losses. Accordingly, during the nine months ended September 30, 2005,
      the
      Company recorded losses from its investment in Coates Motorcycle in the amount
      of $237,428.





The
      Company computed its share of the losses in accordance with EITF 99-10
      "Percentage Used to Determine the Amount of Equity Method Losses," where the
      percent ownership was based on the assumed conversion of the Preferred Series
      A
      Stock held by the Company.





**SUBSEQUENT
      EVENTS**





**1.**
            **New
                Licensing Agreement with George J. Coates and Gregory Coates
                -**





On
      October 23 2006, we signed a license agreement with George J. Coates and Gregory
      Coates (the “New Coates License Agreement”), that replaces the license
      agreements signed on December 22, 1997







**SUBSEQUENT
      EVENTS (CONTINUED)**




and
      November 10, 2005. The New Coates License Agreement will become effective upon
      the closing by us of the sale of at least $10,000,000 of our capital stock,
      provided that such investment occurs on or before December 31, 2006. The Company
      is currently in discussions to extend the effective date beyond December 31,
      2006. Under the New Coates License Agreement, George J. Coates and Gregory
      Coates granted to us: (A) an exclusive, perpetual, royalty-free, fully paid-up
      license to all intellectual property that is currently owned or controlled
      by
      them that relates to an internal combustion engine that includes the CSRV System
      (the “CSRV Engine”) plus any such intellectual property that is developed by
      them during their employment with us and for five years after termination of
      such employment for the purpose of development, manufacturing, sale and/or
      distribution of the CSRV Engine; and (B) a perpetual, royalty-free, fully
      paid-up license to all intellectual property that is currently owned or
      controlled by them or that is developed by them during their employment with
      us
      and for five years after termination of employment that do not relate to the
      CSRV Engine for the purpose of development, manufacturing, sale and/or
      distribution of the CSRV Engine. The license under (B) above shall be exclusive
      through the earlier to occur of: (i) the end of any four consecutive fiscal
      quarters in which we recognize revenue of at least $200 million (the “Threshold
      Date”); or (ii) December 31, 2009, and thereafter shall become non-exclusive.
      The licenses in (A) and (B) above are limited to North, South and Central
      America, provided, however, that until the Threshold Date such licenses shall
      apply worldwide. In addition, after the Threshold Date such licenses shall
      include all countries outside of North America, Central America and South
      America in which we will have sold our products through the Threshold Date
      for
      at least $5 million in the aggregate, provided, however, that such licenses
      shall be non-exclusive.




Under
      the
      New Coates License Agreement, George J. Coates and Gregory Coates agreed that
      they will not grant any licenses as follows: (I) until the Threshold Date with
      respect to intellectual property that relates to the CSRV Engine other than
      to
      us; and (II) until the earlier to occur of the Threshold Date or December 31,
      2009 with respect to intellectual property that can be useful in the marketing
      or manufacture of the CSRV Engine. In addition, if the employment of George
      J.
      Coates or Gregory Coates terminates because the Company terminated it for cause,
      or if one of them terminates **** his
      own
      employment without good reason before the Threshold Date, then such person
      shall
      not be entitled to grant any right in intellectual property that relates to
      the
      CSRV Engine or that can be useful in the marketing or manufacture of the CSRV
      Engine for five years thereafter.





**2.**
            **New
                Licensing Agreement with the Coates Trust
                -**





On
      October 23, 2006 we signed a license agreement with the Coates Trust, a trust
      formed under the laws of the Commonwealth of the Bahamas (the “Trust”, the
“Trust License Agreement”). The beneficiaries of the Trust are certain members
      of the Coates family, including George and Gregory Coates, and it holds certain
      rights to the CSRV technology outside of the North America, South America and
      Central America. The Trust License Agreement perfects our rights to market
      and
      sell products based on our technology as set forth in the description of the
      New
      Coates License Agreement, and will become effective at the same time as the
      New
      Coates License becomes effective. The Company is currently in discussions to
      extend the effective date beyond December 31, 2006. The Trust License Agreement
      provides for a payment to the Trust of royalties of $100 for every CSRV Engine
      we, our affiliates and sublicensees sell that includes intellectual property
      rights licensed to us by the Trust. In addition, we will pay 50% of all payments
      received from our sublicensees for sublicensing to them, rights licensed to
      us
      under the Trust License Agreement.





**3.**
            **Employment
                Contracts**





On
      October 18 and 23, 2006, we signed employment contracts with George J. Coates
      and with three new executives, who are serving as our directors. Payment of
      salaries under these agreements is deferred until








**SUBSEQUENT
      EVENTS (CONTINUED)**





the
      earlier to occur of (i) the
      closing by us of the sale of at least $10,000,000 of our capital stock, or
      (ii) December
      31, 2006. The Company is currently in discussions to extend the effective date
      beyond December 31, 2006. Under
      the
      four employment agreements the employees are entitled to terminate their
      employment with us under certain circumstances, referred to as a good reason,
      thus receiving severance payment and full acceleration of their options. Such
      circumstances include reduction in salary or benefits and diminution in
      authority or responsibility to a non-executive position.





Under
      the
      four employment agreements, the employees are entitled to customary benefits
      and
      expense reimbursement, as well as an annual bonus to be determined by the
      Compensation Committee of the Board of Directors. Summary of additional
      compensation terms under the employment agreements appears in the table
      below:





Name
                and position
            Annual
                compensation
            No.
                of stock options*
            Life
                insurance
            Severance
                payment**
            Term
                of the AgreementGeorge
                Coates, non executive, significant employee
            $300,000
            3,000,000
            $2,000,000
            One
                year salary ***
            Five
                yearsGregory
                Coates, President, Technology Division
            $200,000
            3,000,000
            $2,000,000
            One
                year salary ***
            Five
                yearsMark
                D. Goldsmith, President and Chief Executive Officer
            $200,000
            1,500,000
            None
            Salary
                for remaining term of agreement, One year minimum
            Three
                yearsBarry
                C. Kaye, Treasurer and Chief Financial Officer
            $125,000
            25,000
            None
            One
                year salary
            Three
                years





*  The
      Options have not been granted, yet the Company undertook to grant them as stated
      above. The options will be granted under the following terms: the options vest
      in three equal installments each year, the first installment to vest once the
      employment agreement that includes the undertaking to grant the options becomes
      effective. The options will immediately fully vest in the event the employee
      terminates his employment for a good reason, or if we terminate such an employee
      without cause. The exercise price will equal the fair market value on the date
      of grant.





**  The
      entitlement for the severance payment is subject to the employee terminating
      his
      employment for a good reason.





***  The
      severance payment shall be increased to an amount equal to two years salary
      in
      the event such termination for a good reason occurs after the Threshold
      Date.





Under
      their employment agreements, George and Gregory Coates undertook to vote all
      their shares in the Company to elect to our Board of Directors at least two
      ‘Independent Directors’ as defined by the rules of the SEC and NASDAQ. In
      addition, our rights in intellectual property rights developed by George and
      Gregory Coates will be as set forth in the new license agreements described
      above. Under their employment agreements, we are not entitled to terminate
      the
      employment of either George or Gregory Coates other than for cause.








**SUBSEQUENT
      EVENTS (CONTINUED)**





**4.**
            **2006
                Stock Option and Incentive
                Plan**





The
      Company’s 2006 Stock Option and Incentive Plan (the “Stock Plan”) was adopted by
      the Company’s Board of Directors in October 2006. 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. 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 individual employee under the Stock Plan shall not exceed 25%
      of
      that number.





The
      Stock
      Plan is administered by the Board of Directors and the Compensation Committee.
      Subject to the provisions of the Stock Plan, the Board of Directors and the
      Compensation Committee each has the authority to select the persons to whom
      awards are granted and determine the terms of each award, including the number
      of shares of Common Stock subject to the award. Payment of the exercise price
      of
      an award may be made in cash, in a “cashless exercise” through a broker, or if
      the applicable stock option agreement permits, shares of Common Stock or by
      any
      other method approved by the Board or Compensation Committee. Unless otherwise
      permitted by the Company, awards are not assignable or transferable except
      by
      will or the laws of descent and distribution.





Upon
      the
      consummation of an acquisition of the business of the Company, by merger or
      otherwise, the Board shall, as to outstanding awards (on the same basis or
      on
      different bases as the Board shall specify), make appropriate provision for
      the continuation of such awards by the Company or the assumption of such awards
      by the surviving or acquiring entity and by substituting on an equitable basis
      for the shares then subject to such awards either (a) the consideration
      payable with respect to the outstanding shares of Common Stock in connection
      with the acquisition, (b) shares of stock of the surviving or acquiring
      corporation or (c) such other securities or other consideration as the
      Board deems appropriate, the fair market value of which (as determined by the
      Board in its sole discretion) shall not materially differ from the fair market
      value of the shares of Common Stock subject to such awards immediately preceding
      the acquisition. In addition to or in lieu of the foregoing, with respect to
      outstanding stock options, the Board may, on the same basis or on different
      bases as the Board shall specify, upon written notice to the affected optionees,
      provide that one or more options then outstanding must be exercised, in whole
      or
      in part, within a specified number of days of the date of such notice, at the
      end of which period such options shall terminate, or provide that one or more
      options then outstanding, in whole or in part, shall be terminated in exchange
      for a cash payment equal to the excess of the fair market value (as determined
      by the Board in its sole discretion) for the shares subject to such Options
      over
      the exercise price thereof. Unless otherwise determined by the Board (on the
      same basis or on different bases as the Board shall specify), any
      repurchase rights or other rights of the Company that relate to a stock option
      or other award shall continue to apply to consideration, including cash, that
      has been substituted, assumed or amended for a stock option or other award
      pursuant to these provisions. The Company may hold in escrow all or any portion
      of any such consideration in order to effectuate any continuing
      restrictions.





The
      Board
      may at any time provide that any stock options shall become immediately
      exercisable in full or in part, that any restricted stock awards shall be free
      of some or all restrictions, or that any other stock- ****








**SUBSEQUENT
      EVENTS (CONTINUED)**





based
      awards may become exercisable in full or in part or free of some or all
      restrictions or conditions, or otherwise realizable in full or in part, as
      the
      case may be.





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.







**Item
      2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF**




**FINANCIAL
      CONDITION AND RESULTS OF OPERATIONS**




**Forward
      Looking Statements**







This
      quarterly report on Form 10-QSB 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 period reports filed with the SEC.
      Readers are also urged to carefully review and consider the various disclosures
      we have made in this report.




Background




Coates
      International Ltd. ("We", "our", "us", "CIL" or the "Company") has completed
      the
      development of the Coates Spherical Rotary Valve (“CSRV”) technology, which has
      been designed for use in internal combustion engines of all types. We are now
      preparing to enter the production phase of our operations. In this phase, our
      primary focus will be production of our generator for up to 300 kilowatts per
      hour, depending on the fuel used (the 855 cubic inch, 6 cylinder industrial
      electric power generator, incorporating the CSRV engine, the “Generator”). We
      are also actively seeking opportunities to license our technology to original
      equipment manufacturers interested in incorporating our technology into other
      applications.





Agreements
      with Well to Wire Energy, Inc.





On
      September 29, 1999, CIL signed an agreement (the "WWE Agreement") with Well
      to
      Wire Energy, Inc. ("WWE"), an oil and gas company in Canada, relating to the
      distribution in Canada of V-8 cylinder engines modified with the Coates Rotary
      Valve System to be fueled by natural gas to generate electrical power for future
      payments, of which a deposit payment in the amount of $300,000 was made. A
      separate research and development agreement between CIL and WWE provides
      for development and delivery of certain prototype engines.





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





·
            The
                Company expects to ship to WWE in the near term the third power unit
                of
                the Generator. Upon receipt of the Generator, and pending test results
                meeting WWE’s expectations, the balance of $3,905,000 on account of the
                research and development agreement mentioned above will become due
                to the
                Company by WWE. In addition, 180 days later, the balance of US $4,700,000
                on account of the distribution agreement mentioned above will become
                due
                to the Company by WWE in 16 equal quarterly
                installments.










·
            WWE
                will have the exclusive right to use, lease, and sell the generators
                that
                are based on the CSRV System technology within
                Canada.





**·**
            WWE
                will have a right of first refusal to market the generators that
                are based
                on the CSRV System technology worldwide.





·
            The
                Company and WWE have agreed that the minimum annual number of Generators
                to be purchased by WWE in order to maintain exclusivity is 120. Until
                otherwise agreed between the parties, the price per Generator shall
                be US
                $150,000. The minimum purchase requirement shall start in
                2007.





·
            WWE
                shall not be required to pay any royalties to us as part of these
                agreements.





·
            Patent
                Rights. All patent and other intellectual property rights related
                to the
                engine will remain with CIL.





**RESULTS
      OF OPERATIONS - THREE MONTHS ENDED SEPTEMBER 30, 2006 COMPARED TO THREE MONTHS
      ENDED SEPTEMBER 30, 2005**




No
      revenues were generated during the three month periods ended September 30,
      2006
      and 2005. Total operating expenses for the three month periods ended September
      30, 2006 and 2005, respectively, were $385,274 as compared to $148,349. Research
      and development expenses were $ -0- and $4,467 for the three month periods
      ended
      September 30, 2006 and 2005, respectively. This reflects the Company’s shift
      from R&D activities to pre-production activities as efforts were directed
      towards completion of the third prototype production engine for WWE.
      Approximately $69,188 represented labor charges for the three month period
      ended
      September 30, 2006.




General
      and administrative expenses increased to $369,205 for the three months ended
      September 30, 2006 from $131,575 in the corresponding three month period in
      2005. This $237,630, or 181% increase primarily resulted from increased legal
      fees of approximately $111,000, increased patent maintenance expenses of
      approximately $30,000, a $55,000 reduction in the amount of general and
      administrative expenses reimbursed by Coates Motorcycle Company, Ltd., an
      increase in salaries and wages of approximately $18,000 and an increase in
      real
      estate taxes of approximately $12,000.




Interest
      expense increased to $97,500 from $32,070 for the three months ended September
      30, 2006 and 2005, respectively, primarily due to the higher balance of the
      finance obligation, arising from a 2005 sale/leaseback transaction, the balance
      of which was $3,876,607 at September 30, 2006. See a more detailed discussion
      of
      this transaction below under the “Results of Operations - Nine Months Ended
      September 30, 2006 Compared to Nine Months ended September 30, 2005.” This
      transaction is being accounted for under the finance obligation method required
      under generally accepted accounting principles for sale/leasebacks as a result
      of the option granted to the Company to repurchase the property. In 2005, the
      interest expense incurred primarily related to interest on a mortgage loan
      which
      had a balance of approximately $863,000 at September 30, 2005. This mortgage
      loan was secured by the Company’s property that contains its principal offices,
      warehouse and manufacturing facilities.




The
      Company experienced a net loss for the three month periods ended September
      30,
      2006 and 2005, of $478,511 and $202,478, respectively. The net loss for the
      three month period ended September 30, 2005 included the Company’s share of
      losses based on its equity ownership in Coates Motorcycle amounting to $54,059
      and a gain on sale of common stock of $32,000.









**RESULTS
      OF OPERATIONS - NINE MONTHS ENDED SEPTEMBER 30, 2006 COMPARED TO NINE MONTHS
      ENDED SEPTEMBER 30, 2005**




No
      revenues were generated during the nine month periods ended September 30, 2006
      and 2005. Total operating expenses for the nine month periods ended September
      30, 2006 and 2005, were $1,171,079 and $600,360, respectively, an increase
      of
      95%. Research and development expenses were $ -0- and $10,918 for the nine
      month
      periods ended September 30, 2006 and 2005, respectively. This decrease in
      research and development expenses reflects the Company’s shift from R&D
      activities to production activities as efforts were directed towards completion
      of the third prototype production engine for Well-to-Wire. Approximately
      $157,563 for the nine month period ended September 30, 2006 represented labor
      charges.




General
      and administrative expenses increased to $1,129,515 for the nine months ended
      September 30, 2006 from $545,501 in the corresponding nine month period in
      2005.
      This $584,014, or 107% increase primarily resulted from increased legal fees
      of
      approximately $311,000, increased professional fees of approximately $80,000,
      increased patent maintenance costs of approximately $76,000, an approximately
      $66,000 reduction in the amount of general and administrative expenses
      reimbursed by Coates Motorcycle Company, Ltd., an increase in real estate taxes
      of approximately $29,000, an increase in salaries and wages of approximately
      $27,000, an increase in scrapped materials of approximately $19,000, an increase
      in miscellaneous taxes of approximately $15,000, an increase in shop supply
      expenses of approximately $10,000 and an increase in property insurance of
      approximately $8,000 offset by a refund of previously expensed testing fees
      in
      the amount of $(40,000), lower expenditures for marketing of approximately
      $(14,000), a reduction in insurance costs of approximately $(9,000) and a
      reduction in telecommunications costs of approximately $(8,000).




Interest
      expense increased to $289,666 from $93,841 for the nine months ended September
      30, 2006 and 2005, respectively, primarily due to the higher balance of the
      finance obligation, arising from the 2005 sale/leaseback transaction, the
      balance of which was $3,876,607 at September 30, 2006. This transaction is
      being
      accounted for under the finance obligation method required under generally
      accepted accounting principles for sale/leasebacks as a result of the option
      granted to the Company to repurchase the property. In 2005, the interest expense
      incurred primarily related to interest on the mortgage loan which had a balance
      of approximately $863,000 at September 30, 2005. This mortgage loan was secured
      by the Company’s property which contains its principal offices, warehouse and
      manufacturing facility.




The
      Company experienced a net loss for the nine month periods ended September 30,
      2006 and 2005, of $1,430,618 and $884,629 respectively. The net loss for the
      nine month period ended September 30, 2005 included the Company’s share of
      losses based on its equity ownership in Coates Motorcycle amounting to $237,428
      and a gain on sale of common stock of $47,000.




In
      the
      fourth quarter of 2005, the Company entered into a sale/leaseback arrangement
      for its principal offices, warehouse and manufacturing facility. The sale price
      for this facility was $4,200,000. Pursuant to generally accepted accounting
      principles this transaction was accounted for under the finance method because
      the Company has a continuing interest in the property, represented by an option
      to repurchase the property at any time during the first three years of the
      agreement for $5,200,000. The Company realized net proceeds from this
      transaction of approximately $3,900,000, which was partially used to repay
      the
      $868,182 remaining balance of a mortgage loan bearing interest at a 13.99%
      annual rate and the balance of the proceeds is being utilized for working
      capital purposes. The monthly rental payments provided for by the lease
      agreement are being accounted for as interest expense.





Had
      this
      transaction qualified for sale reporting, the Company would have realized a
      net
      gain of approximately $2,400,000. This gain will be recognized upon expiration
      or exercise of the option to repurchase. The new lease agreement with the
      purchaser, which is being accounted for on the finance method, provides for
      monthly payments of $32,500 over a six year period. Under the finance method,
      these payments are to be accounted for as interest expense at the implicit
      annual interest rate of 10.06%. In addition, the land, building and building
      improvements will continue to be carried at cost and depreciated. Under the
      lease agreement, the Company is responsible for all real estate taxes and
      operating expenses of the property, including insurance.







**Liquidity
      and Capital Resources**




The
      Company’s cash position at September 30, 2006 was $558,839, a decrease of
      $1,369,284 or 71% from the cash position of $1,928,123 at December 31, 2005
      and
      a decrease $453,854 or 45% from the cash position of $1,102,693 at June 30,
      2006. CIL’s working capital of $167,576 at September 30, 2006 represents a
      $1,554,166 decrease from the $1,721,743 working capital position at December
      31,
      2005. CIL’s current liabilities of $1,011,403 at September 30, 2006 have
      increased $204,079 from $807,324 at December 31, 2005 and increased $109,013
      from current liabilities of $902,390 at June 30, 2006.





Operating
      activities utilized cash of approximately $(1,159,000) in the nine months ended
      September 30, 2006 and approximately $(406,000) in the three months ended
      September 30, 2006. Cash utilized by operating activities in the nine months
      ended September 30, 2006 results primarily from a net loss of approximately
      $(1,431,000), an increase in inventory of approximately $(153,000), payment
      of
      income taxes of approximately $(127,000), offset by a decrease in prepaid
      expenses of approximately $134,000, and non-cash expenses of approximately
      $418,000.





Investing
      activities utilized cash of approximately $(75,000) in the nine months ended
      September 30, 2006 and approximately $(33,000) in the three months ended in
      the
      same period. Cash utilized by investing activities in the nine months ended
      September 30, 2006 was primarily used for outlays for patents and trademarks
      of
      approximately $(28,000) and purchases of property, plant and equipment of
      approximately $(47,000).





Financing
      activities utilized cash of approximately $(135,000) for the nine months ended
      September 30, 2006 and $(15,000) for the three months ended September 30, 2006.
      Cash utilized for financing activities for the nine month period ended September
      30, 2006 was primarily used for deferred offering costs incurred of
      approximately $(90,000) and repayment of a related party loan of approximately
      $(45,000).





In
      connection with our agreements with WWE, we have completed the construction
      and
      testing of the last of the three prototype CSRV generators (the “Production
      Model”) to the satisfaction of our own production standards. We expect to
      deliver this third Production Model before the end of the year. Upon testing
      and
      acceptance by WWE to ensure the production model complies with their
      specifications, the balance of $3,905,000 under the research and development
      agreement with WWE shall become due and payable. Under the distribution
      agreement, the balance due to us of $4,700,000 is payable in equal quarterly
      payments over a four year period, commencing 180 days following successful
      delivery and testing of the third prototype engine. In the opinion of
      management, we will be required to raise additional working capital to
      completely achieve our planned production phase of our operations. The source
      of
      such additional working capital is anticipated to come from the cash flows
      under
      the agreements with WWE and/or closing of a sale of our capital stock or other
      borrowings. We are actively pursuing additional working capital from both of
      these sources. If these additional sources of working capital are not realized,
      it may become necessary to alter our planned production phase of our operations.
      There can be no assurance, however, that these agreements will be consummated
      in
      accordance with the Company’s expectations nor that payments will be received as
      called for in the agreements. Furthermore, there can be no assurance that we
      will be successful in raising additional working capital for our operations.





**Outlook**





We
      believe that our future success will depend upon our ability to (i) identify
      new
      sources of working capital by selling capital stock and/or new borrowings,
      (ii)
      gain acceptance in the marketplace for our technology and products based on
      the
      competitive advantages that we believe are inherent in the Coates Rotary Valve
      System technology (iii) profitably commence the manufacture and sale of
      generators powered with 855 cubic inch, 6 cylinder engines that incorporate
      the
      Coates Rotary Valve System and meet or exceed the required minimum performance
      specifications to WWE, (iv) identify and enter into additional agreements to
      license the Coates Rotary Valve System technology to be applied by third party
      manufacturers, and (v) increase the demand for manufactured products which
      incorporate our Coates Rotary Valve System technology. Our current anticipated
      levels of revenue and cash flow are subject to many uncertainties and cannot
      be
      assured. In order to have sufficient cash to meet our anticipated requirements
      for the next twelve months, we may be dependent upon our ability to obtain
      additional financing. The inability to generate sufficient cash from operations
      or to obtain the required additional funds could require us to curtail
      operations.








Currently,
      the prototypes of the CSRV System-based generator engine are undergoing final
      performance and other tests. Upon the successful completion of the above tests,
      the Company intends to market the engine/generators to parties who have conveyed
      conditional orders and/or expressed interest in our generator engines. We expect
      that purchase orders for a significant number of the Company's generator engines
      will thereafter be converted to firm orders, the fulfillment of these orders
      to
      be completed over the next three to five years. 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
                has
                been evaluating various opportunities to expand or acquire additional
                manufacturing capacity. When the demand for our products justifies
                it, the
                Company will take the required steps in order to increase its work
                force.
                We may hire up to about 200 employees within 12 to 24
                months.





·
            Licensing
                the technology to Original Equipment Manufacturers - to take advantage
                of
                third party manufacturers’ production ability by signing OEM
                agreements.





**Item
      3. Controls and Procedures.**




***Evaluation
      of Disclosure Controls and Procedures -*** We
      maintain a system of disclosure controls and procedures that are designed for
      the purposes of ensuring that information required to be disclosed in our
      Securities and Exchange Commission (“SEC”) reports 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 our management,
      including our Principal
      Executive Officer and Principal Financial Officer , as
      appropriate to allow timely decisions regarding required
      disclosures.




As
      of the
      end of the period covered by this report, we carried out an evaluation, under
      the supervision and with the participation of our Principal Executive Officer
      and Principal Financial Officer, of the effectiveness of our disclosure controls
      and procedures as defined in Rule 13a-15(e) of the Securities Exchange Act
      of
      1934, as amended. Based
      on
      that evaluation, our Principal Executive Officer and Principal Financial Officer
      concluded that our disclosure controls and procedures are
      effective.




***Changes
      in Internal Control Over Financial Reporting*** - There
      has been no change in our internal control over financial reporting during
      the
      quarter ended on September 30, 2006 that has materially affected, or is
      reasonably likely to materially affect, our internal control over financial
      reporting. On October 25, 2006 we established an Audit Committee. The Audit
      Committee’s responsibilities include assessing the independence of our
      independent auditor; overseeing the work of our independent auditor,
      including the receipt and thorough consideration of reports from the independent
      auditor; reviewing and discussing with management and our independent
      auditor our annual and quarterly financial statements and related disclosures;
      monitoring our internal control over financial reporting, disclosure controls
      and procedures and additional responsibilities as set forth in the charter
      of
      our Audit Committee. The financial reports that are included in this Form 10-QSB
      were reviewed by our Audit Committee.







PART
      II -
      OTHER INFORMATION




Item
      1.
      Legal Proceedings




Refer
      to
      our annual report on Form 10-KSB/A filed with the SEC on October 25, 2006.




Item
      6.
      Exhibits





**Exhibit**
              **Number**
            
            **Description**31.1
            
            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
                2002.31.2
            
            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
                2002.32.1
            
            Certification
                of Principal Financial Officer pursuant to 18 U.S.C. 1350, as adopted
                pursuant to Section 906 of the Sarbanes-Oxley Act of
                2002.32.2
            
            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.











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 14, 2006
            By:
            /s/
                Mark D. GoldsmithMark
                D. GoldsmithPresident,
                Chief Executive Officerand
                Principal Executive Officer




Date:
                November 14, 2006
            By:
            /s/ Barry
              C. KayeBarry
                C. KayeTreasurer,
                Chief Financial Officer and Principal Financial
                Officer