**UNITED
        STATES**
 **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 June 30, 2007o
                TRANSITION
                    REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACTFor
                    the transition period from _________________ to
                    _________________
   **Commission
                  file number 000-33155**
                
                **COATES
                  INTERNATIONAL, LTD.**
                (Exact
                  Name of Registrant as Specified in its
                  Charter)
 
 **Delaware**
                
                **22-2925432**(State
                    or other Jurisdiction of
                
                (I.R.S.
                    EmployerIncorporation
                    or Organization)
                
                Identification
                    No.)
  **Highway
        34 & Ridgewood Road, Wall Township, New Jersey 07719**
 (Address
        of Principal Executive Office) (Zip Code)
  **(732)
        449-7717**
 (Registrant's
        telephone number including area code)
  Indicate
          by check mark whether the Registrant (1) has filed all reports required
          to be
          filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
          the
          preceding 12 months (or for such shorter period that the Registrant was
          required
          to file such reports) and (2) has been subject to such filing requirements
          for
          the past 90 days.
  Yes x No o
  Indicate
          by check mark whether the registrant is a shell company (as defined in
          Rule
          12b-2 of the Exchange Act.)
  Yes o No x
  As
        of
        August 7, 2007, 270,926,174 shares of the Registrant’s common stock were issued
        and outstanding.
   
 
  **COATES
        INTERNATIONAL, LTD.**
 **QUARTERLY
        REPORT ON FORM 10-QSB**
  **CONTENTS**
  **JUNE
        30, 2007**
   **Financial
                  Statements (Unaudited):**
              
              
              **Page**Condensed
                  Balance Sheet
              
              
              3Condensed
                  Statements of Operations
              
              
              4Condensed
                  Statements of Cash Flows
              
              
              5Notes
                  to the Condensed Financial Statements
              
              
              6-12Item
                  2.Management's
                  Discussion and Analysis of Financial Condition and Results of
                  Operations
              
              
              13-16Item
                  3.Controls
                  and Procedures
              
              
              16**PART
                  II - OTHER INFORMATION**
              
              
              17Item
                  1. Legal Proceedings
              
              
              17Item
                  2. Unregistered Sales of Equity Securities and Use of
                  Proceeds
              
              
              17Item
                  3. Defaults Upon Senior Securities
              
              
              17Item
                  4. Submission of Matters to a Vote of Security Holders
              
              
              18Item
                  5. Other Information
              
              
              18Item
                  6. Exhibits
              
              
              18SIGNATURES
              
              
              19
 
  2
 
  **Coates
        International, Ltd.**
 **Condensed
        Balance Sheet**
 **June
        30, 2007**
 **(Unaudited)**
  **Assets**Current
                  AssetsCash
              
              $
              728,671Inventory,
                  net of reserve for obsolescence of $144,889
              
              
              380,951Total
                  Current Assets
              
              
              1,109,622
 Investment
                  in related party
              
              -Deferred
                offering costs
              
              67,955Property,
                  plant and equipment, net of accumulated depreciation of
                  $786,295
              
              1,475,841Deferred
                  licensing costs, net of accumulated amortization of $6,805
              
              78,858Security
                  deposits
              
              197,500**Total
                  Assets**
              
              $
              2,929,776**Liabilities
                  and Stockholders’ Deficiency**
 Current
                  LiabilitiesAccounts
                  payable and accrued liabilities
              
              $
              964,596Total
                  Current Liabilities
              
              
              964,596
 License
                  deposits
              
              
              375,000Finance
                  Obligation
              
              
              3,876,60710%
                  Convertible note, due March 2010
              
              
              20,000Total
                  Liabilities
              
              
              5,236,203Commitments
                and Contingencies
              
              
              -Stockholders'
                DeficiencyPreferred
                  stock, Series A, $0.001 par value, 14,000,000 authorized, no
                  shares
                issued
                  or outstanding
              
              
              -Common
                  stock, $.0001 par value, 1,000,000,000 shares
                  authorized,
 270,867,833
                  shares issued and outstanding
              
              
              27,087Additional
                  paid-in capital
              
              
              19,234,757Accumulated
                  deficit
              
              
              (21,568,271
              )Total
                  Stockholders' Deficiency
              
              
              (2,306,427
              )**Total
                  Liabilities and Stockholders' Deficiency**
              
              $
              2,929,776
 
  The
        accompanying notes are an integral part of this condensed balance
        sheet.
   3
 
  **Coates
        International, Ltd.**
 **Condensed
        Statements of Operations**
 **(Unaudited)**
  Three
                    Months Ended
                  June
                    30,
                
                
                Six
                    Months Ended
                  June
                    30,2007
                
                
                2006
                
                
                2007
                
                
                2006Revenue
                
                $
                -
                
                $
                -
                
                $
                -
                
                $
                -Operating
                    Expenses:Research
                    and development costs
                
                
                290,652
                
                
                -
                
                
                371,160
                
                
                -General
                    and administrative expenses
                
                
                365,721
                
                
                380,768
                
                
                791,532
                
                
                760,310Depreciation
                    and amortization expense
                
                
                12,453
                
                
                12,858
                
                
                26,622
                
                
                25,495Total
                    Operating Expenses
                
                
                668,826
                
                
                393,626
                
                
                1,189,314
                
                
                785,805Loss
                    From Operations
                
                
                (668,826
                )
                
                (393,626
                )
                
                (1,189,314
                )
                
                (785,805
                )Other
                    Income (Expense):Interest
                    income
                
                
                1,600
                
                
                25,864
                
                
                1,600
                
                
                25,864Interest
                    expense
                
                
                (101,100
                )
                
                (94,735
                )
                
                (197,000
                )
                
                (192,166
                )Total
                    Other (Expense)
                
                
                (99,500
                )
                
                (68,871
                )
                
                (195,400
                )
                
                (166,302
                )Loss
                    Before Income Taxes
                
                
                (768,326
                )
                
                (462,497
                )
                
                (1,384,714
                )
                
                (952,107
                )Income
                    Taxes
                
                
                -
                
                
                -
                
                
                -
                
                
                -Net
                    Loss
                
                $
                (768,326
                )
                $
                (462,497
                )
                $
                (1,384,714
                )
                $
                (952,107
                )Basic
                    and Diluted Net Loss per Share
                
                $
                -0-
                
                $
                -0-
                
                $
                (0.01
                )
                $
                -0-Basic
                    and Diluted Weighted Average Number of Shares
                
                
                268,028,151
                
                
                266,894,278
                
                
                267,463,352
                
                
                266,894,278
   The
        accompanying notes are an integral part of these condensed financial
        statements.
   4
 
  **Coates
        International, Ltd.**
 **Condensed
        Statements of Cash Flows**
 **(Unaudited)**
   Six
                  Months Ended
                June
                  30,2007
              
              
              2006Net
                  Cash Used in Operating Activities
              
              $
              (1,150,998
              )
              $
              (753,026
              )Cash
                  Flows From Investing Activities:Acquisition
                  of property, plant and equipment
              
              
              (4,281
              )
              
              (26,990
              )Deferred
                  licensing costs
              
              
              -
              
              
              (14,929
              )Net
                  Cash Used in Investing Activities
              
              
              (4,281
              )
              
              (41,919
              )Cash
                  Flows From Financing Activities:Proceeds
                  from issuance of common stock
              
              
              1,670,000
              
              
              -Proceeds
                  from issuance of 10% Convertible Note
              
              
              120,000
              
              
              -Proceeds
                  of promissory note from related party
              
              
              100,000
              
              
              -Repayment
                  of promissory note from related party
              
              
              (100,000
              )
              
              -Repayment
                  of demand loans due to related parties
              
              
              (92,337
              )
              
              (45,300
              )Deferred
                  offering costs paid
              
              
              (67,955
              )
              
              (75,185
              )Net
                  Cash Provided by (Used in) Financing Activities
              
              
              1,629,708
              
              
              (120,485
              )Net
                  Increase (Decrease) in Cash
              
              
              474,429
              
              
              (915,430
              )Cash
                  - Beginning of Period
              
              
              254,242
              
              
              1,928,123Cash
                  - End of Period
              
              $
              728,671
              
              $
              1,012,693Schedule
                of Supplemental Cash Flow
                Data:Cash
                paid for Interest
              
              $
              196,507
              
              $
              -
 
  The
        accompanying notes are an integral part of these condensed financial
        statements.
  5
 
  **Coates
        International, Ltd.**
 **Notes
        to the Condensed Financial Statements**
  **1.**  **BASIS
        OF PRESENTATION**
  The
        accompanying unaudited condensed financial statements of Coates International,
        Ltd. (the “Company”) have been prepared in accordance with 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
        notes 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. The results of operations for
        the
        three and six month periods ended June 30, 2007 and 2006 are not necessarily
        indicative of the results that may be expected for any other interim period
        or
        for the full year. The unaudited condensed financial statements should be
        read
        in conjunction with the financial statements and footnotes thereto included
        in
        the Company’s annual report on Form 10-KSB/A for the year ended December 31,
        2006, and its quarterly report on Form 10-QSB/A for the period ended
        March 31, 2007.
  **2.**  **ACCOUNTING
        POLICIES**
  **Share
        Based Compensation**
  Compensation
        expense relating to share-based payments is recognized as an expense using
        the
        fair-value measurement method. Under the fair value method, the estimated
        fair
        value of awards
        to
        employees is charged to income on a straight-line basis over the requisite
        service period, which is the earlier of the employee’s retirement eligibility
        date or the vesting period of
        the
        award.
  **Licensing
        Costs**
  Under
        the
        CSRV Licensing Agreement for the CSRV technology, the Company is responsible
        for
        all costs in connection with applying for, obtaining and maintenance of patents
        to protect
        the CSRV System intellectual technology. Such costs are expensed as
        incurred.
  For
        the
        years ended December 31, 2006 and 2005 only, the Company capitalized such
        licensing costs, which are being amortized on a straight-line basis over
        20
        years. The effect of capitalizing
        such costs for the years ended December 31, 2006 and 2005 was not material.
        Such
        amount is reflected in the accompanying balance sheet as Deferred Licensing
        Costs.
  **Uncertainty
        in Income Taxes**
  Effective
        January 1, 2007, the Company adopted Statement of Financial Accounting Standards
        (“SFAS”) Interpretation No. 48, "Accounting for Uncertainty in Income Taxes, an Interpretation
        of SFAS Statement No. 109" ("FIN 48"), which clarifies the accounting and
        disclosure for uncertain tax positions, as defined. Adoption of FIN 48 did
        not
        have a material impact on the financial position or results of operations
        of the
        Company.
  **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
        Pronouncements**
  In
        September 2006, the FASB issued SFAS Statement No. 157, “Fair Value
        Measurements,” (“SFAS No. 157”), which defines fair value, establishes a
        framework for measuring fair value and expands
        disclosures about fair value measurements. SFAS No. 157 does not require
        assets
        or liabilities to be measured at fair value, but is intended to apply to
        other
        accounting pronouncements
        that require or permit the use of fair value for recognition or disclosure.
        SFAS
        No. 157 is effective for fiscal years beginning after November 15, 2007.
        Management is currently evaluating the effect, if any, that SFAS No. 157
        may
        have on the Company’s future financial statements.
   6
 
  In
        February 2007, the FASB issued SFAS Statement No. 159, “The Fair Value Option
        for Financial Assets and Liabilities,” (“SFAS No. 159”), which provides entities
        an option to report certain
        types of assets and liabilities at fair value. The objective of permitting
        this
        option is to mitigate the volatility in reported earnings caused by measuring
        related assets and liabilities
        differently without having to apply complex hedge accounting provisions.
        SFAS
        No. 159 is effective for fiscal years beginning after November 15, 2007 and
        permits early adoption
        provided the reporting entity also elects to apply the provisions of SFAS
        No.
        157. Management is currently evaluating the effect, if any, that SFAS No.
        159
        may have on the Company’s
        future financial statements.
  **3.** **SETTLEMENT
        AGREEMENT WITH PRIOR ACCOUNTANTS**
  In
        February 2007, the Company entered into a settlement agreement with Rosenberg,
        Rich Baker Berman & Company (“RRBB”) which provided for a mutual release of
        any claims by the parties
        and that the balance of fees due RRBB would be converted to an approximately
        $50,000 principal amount, promissory note. Payment of this promissory note
        became accelerated and
        was
        paid in full in April 2007. RRBB served as the Company’s Independent Registered
        Public Accounting Firm for the year ended December 31, 2005.
  **4.** **COMMENCEMENT
        OF TRADING AND SALES OF COMMON STOCK**
  On
        February 26, 2007, the Company’s common stock commenced trading on the Over the
        Counter Bulletin Board market system under the ticker symbol COTE.
  The
        Company commenced a private placement offering in December 2006 (the “Offering”)
        of “Units” consisting of (i) one share of the Company’s 6% Series A Convertible
        Preferred Stock
        (the “Preferred Stock”) and (ii) a Warrant to purchase five thousand shares of
        the Company’s Common Stock at an initial exercise price of $1.10 per share (the
“Warrants”), and terminated
        the Offering in March 2007. Aggregate net proceeds from this Offering, which
        amounted to $420,000 is being used for working capital purposes. There were
        no
        expenses incurred
        related to this offering. All of the investors have accepted ten shares of
        our common stock in lieu of each share of Preferred Stock purchased through
        the private
        offering. No shares of Preferred Stock were issued. In June 2007, the
        Company issued in the aggregate 420,000 shares of its common stock and 42
        Warrants in connection with the Units sold. The amount received for the 420,000
        shares of common stock which was previously reported as subscribed stock,
        is now
        reflected in common stock and additional paid-in capital in the accompanying
        balance sheet as
        of
        June 30, 2007.
  In
        April
        2007, the Company sold 2,000,000 shares of its common stock to Stephen Evans,
        the son of a director of the Company and received aggregate gross proceeds
        of
        $500,000. In May 2007, the Company sold this shareholder an additional 1,333,333
        shares of its common stock and received aggregate gross proceeds of $750,000.
        These transactions were private sales
        of
        unregistered shares of common stock pursuant to stock purchase agreements.
        These
        shares were subsequently registered on Form SB-2 as more fully discussed
        in Note
        6.
  **5.ISSUANCE
        OF 10%
        CONVERTIBLE NOTES**
  In
        March
        2007, the Company issued $100,000 principal amount of 10% Convertible
        Subordinated Notes, due March 2010 (the “Convertible Notes”) to one of its
        outside directors and received
        cash proceeds of $100,000. In May 2007, $100,000 principal amount of these
        notes
        were converted into 222,222 shares of common stock. In April 2007, the Company
        issued an additional $20,000 principal amount of Convertible Notes to another
        outside director and received cash proceeds of $20,000. This remaining
        unconverted principal amount is included in non-current
        liabilities on the accompanying balance sheet. The proceeds from the Convertible
        Notes are being used for working capital purposes. The Convertible Notes
        are
        convertible at
        the
        option of the holder into shares of the Company’s common stock at an initial
        conversion rate that is determined by dividing the principal amount of notes
        being converted by $0.45.
        As
        the closing price of the Company’s common stock on the date of the transaction
        was $0.35 per share there was no beneficial conversion feature. Interest
        shall
        accrue at the rate
        of
        10% per annum and shall be payable in cash only at maturity. All interest
        shall
        be forfeited upon conversion, in which case the holder would be entitled
        to
        dividends declared, if any,
        on
        the Company’s common stock during the time the convertible note was outstanding.
        The Company has reserved 44,445 shares of its common stock for conversion
        of the balance
        of these notes.
  7
 **6.**  **INVESTMENT
        AGREEMENT WITH DUTCHESS PRIVATE EQUITIES FUND, LTD. AND REGISTRATION OF
        SECURITIES**
  On
        April
        26, 2007, we entered into an Investment Agreement with Dutchess Private Equities
        Fund, Ltd. (the “Investor”). Pursuant to this Agreement, the Investor shall
        commit to purchase
        up to $10,000,000 of our common stock over the course of thirty-six (36)
        months.
        The amount that we shall be entitled to request from each purchase (“Puts”)
        shall be equal to, at our election, either (i) up to $500,000 or (ii) 200%
        of
        the average daily volume (U.S. market only) of the common stock for the ten
        (10)
        trading days prior to the applicable put notice date, multiplied by the average
        of the three (3) daily closing bid prices immediately preceding the put date.
        The put date shall be the date that the Investor receives a put notice of
        a draw
        down by us. The purchase price shall be set at ninety-three percent (93%)
        of the
        lowest closing Best Bid price of the common stock during the pricing period.
        The
        pricing period shall be the
        five
        (5) consecutive trading days immediately after the put notice date. There
        are
        put restrictions applied on days between the put date and the closing date
        with
        respect to that particular
        Put. During this time, we shall not be entitled to deliver another put notice.
        Further, we shall reserve the right to withdraw that portion of the Put that
        is
        priced below seventy- five
        percent (75%) of the lowest closing bid prices for the 10-trading day period
        immediately preceding each put notice.
  In
        connection with this transaction we filed a registration statement on Form
        SB-2
        with the Securities and Exchange Commission (“SEC”) covering 15,000,000 shares
        of the common stock
        underlying the Investment Agreement. This registration statement was declared
        effective by the SEC on June 22, 2007. We shall have an ongoing obligation
        to
        register additional shares
        of
        our common stock as necessary underlying the draw downs. We also included
        in
        this registration statement the registration of approximately 4,230,000 shares
        of common stock
        representing the 266,667 shares reserved for conversion of the 10% convertible
        notes (222,222 of which were converted in May 2007), 630,000 shares of common
        stock related to the stock and warrants issued in connection with a completed
        private placement of securities and 3,333,333 shares of common stock sold
        in
        April and May 2007. Subsequent to June 30, 2007, the Company received net
        proceeds of $37,195 in connection with the sale of 58,341 shares of our common
        stock to Dutchess pursuant to this Investment Agreement.
  **7.**  **LOSS
        PER SHARE**
  Basic
        net
        loss per share is based on the weighted average number of common shares
        outstanding without consideration of potentially dilutive shares of common
        stock. There were no shares
        of
        preferred stock outstanding during the period. Diluted net loss per share
        is
        based on the weighted average number of common and potentially dilutive common
        shares outstanding.
        At June 30, 2007, the Company had 814,445 shares of common stock potentially
        issuable upon assumed conversion of (i) $20,000 principal amount of 10% convertible
        notes, (ii) 42 outstanding warrants to purchase 210,000 shares of
        common stock, and; (iii) 560,000 vested stock options, respectively,
        that were not included in the dilutive calculation because the Company incurred
        a net loss for the period and the
        effect of including them in the calculation would have been anti-dilutive.
        There
        were no potentially issuable shares of common stock at June 30,
        2006. There was no effect on net loss per share as a result of potential
        dilution.
  8
 
  **8.
        STOCK OPTIONS**
  In
        accordance with the Company’s 2006 Stock Option and Incentive Plan, the Company
        granted options to purchase 1,775,000 shares of common stock (1,750,000 shares
        to officers and
        directors) on April 18, 2007 at an exercise price of $0.44 per share. The
        options vest equitably over a 3-4 year vesting period. The fair value of
        shares
        vested during both the three and six month periods ended
        June 30, 2007 was approximately $220,000. No stock options were granted prior
        thereto.
  The
        Company also granted 25,000 five-year non-employee stock options to its
        corporate general counsel on April 18, 2007 at an exercise price of $0.44
        per
        share, which will be accounted
        for in accordance with the guidance in Emerging Issues Task Force Issue No.
        96-18, "Accounting for Equity Instruments that are Issued to Other than
        Employees for Equity or in Conjunction with Selling Goods or Services". The
        options vest equitably over a 4-year vesting period. In accordance therewith,
        the fair value
        of
        each option is estimated on the balance sheet date for non-vested options
        and on
        the vesting date for vested options. The fair value of shares vested during
        the
        three months ended
        June 30, 2007 was approximately $1,650. No other non-employee stock options
        were
        issued prior thereto.
  For
        both the three and six month periods ended June 30, 2007, the Company
        recorded non-cash stock based compensation expense amounting to approximately
        $289,000 relating to stock option grants. Approximately
        $204,000 of this amount is included in research and development expenses
        and
        approximately $85,000 of this amount is included in general and administrative
        expenses in the accompanying statements of operations for the three and six
        month periods ended June 30, 2007.
  A
        summary
        of the activity in the Company’s Stock Option Plan for employees and directors
        is as follows:
  **Exercise
                    Price Per Share**
                
                **Number
                    Outstanding**
                
                **Weighted
                    Average Remaining Contractual Life**
                
                **Number
                    Exercisable**
                
                **Exercise
                    Price**
                
                **Weighted
                    Average Fair Value at Date of Grant**Balance,
                    1/1/07
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -Granted
                
                $
                0.44
                
                
                1,625,000
                
                
                15
                
                
                525,000
                
                $
                0.44
                
                $
                0.40Granted
                
                $
                0.44
                
                
                150,000
                
                
                15
                
                
                30,000
                
                $
                0.44
                
                $
                0.33Balance,
                    6/30/07
                
                $
                0.44
                
                
                1,775,000
                
                
                15
                
                
                555,000
                
                $
                0.44
   The
        weighted average fair value of the Company's stock-based compensation expense
        of
        $0.40 per share was estimated using the Black-Scholes option pricing model
        which
        requires highly
        subjective assumptions including the expected stock price volatility. These
        assumptions were as follows:
  ·Historical
                    stock price volatility
                
                180%·Risk-free
                    interest rate
                
                4.56%-4.64%·Expected
                    life (in years)
                
                4·Dividend
                    yield
                
                0.00
 The
        valuation assumptions were determined as follows:
  ·
            Historical
                stock price volatility: The Company obtained the volatility factor
                of
                other publicly traded engine manufacturers that were also in the
                research
                and development stage.  ·
            Risk-free
                interest rate: The Company bases the risk-free interest rate on the
                interest rate payable on U.S. Treasury securities in effect at the
                time of
                the grant for aperiod
                that is commensurate with the assumed expected option
                life.  ·
            Expected
                life: The expected life of the options represents the period of time
                options are expected to be outstanding. The Company has no historical
                data
                on which to base
                this estimate. Accordingly, the Company estimated the expected life
                based
                on its expectation that the executives will be subject to frequent
                black
                out periodsand
                based on the Company’s expectation that it will complete its research and
                development phase and commence itsinitial
                production phase. The vesting period of these options was also considered
                in the determination of the expected life of each stock option
                grant.  ·
            No expected dividends.  The
        same
        methodology and assumptions were utilized in estimating the fair value of
        stock
        options granted to the Company’s general corporate counsel, which approximated
        $13,000 at June
        30,
        2007.
 
 9
  **9.**  **INCOME
        TAXES**
  Deferred
        income taxes are determined using the liability method for the temporary
        differences between the financial reporting basis and income tax basis of
        the
        Company’s assets and liabilities.
        Deferred income taxes are measured based on the tax rates expected to be
        in
        effect when the temporary differences are included in the Company’s tax return.
        Deferred tax assets and liabilities are recognized based on anticipated future
        tax consequences attributable to differences between financial statement
        carrying amounts of assets and liabilities and their
        respective tax bases.
  Deferred
        taxes increased by approximately $252,000 and $389,000 for the three and
        six
        months ended June 30, 2007, respectively. The balance of deferred taxes is
        fully
        offset by a tax valuation allowance.
  **10.**  **RELATED
        PARTY TRANSACTIONS**
  The
        Company owns approximately 30% of the outstanding shares of common stock
        of
        Coates Motorcycle Company, Ltd. (“Coates Motorcycle”), a company that researches
        and is developing
        a heavy cruiser motorcycle equipped with the Coates SRV engine.
  The
        Company’s investment in Coates Motorcycle is being accounted for under the
        equity method of accounting for investments. As such, the investment is being
        carried at cost, adjusted
        for the Company’s proportionate share of the undistributed earnings and losses
        of Coates Motorcycle. The Company stopped recording its proportionate share
        of
        additional losses
        of
        Coates Motorcycle at the point at which its investment equaled $-0- from
        the
        recording of such prior proportionate losses. Had the Company continued to
        record its proportionate
        share of undistributed earning and losses after its investment was written
        down
        to $ -0- in 2005, it would have recorded an additional share of undistributed
        losses aggregating
        approximately $427,000 through June 30, 2007.
  Summarized
        unaudited information for Coates Motorcycle is as follows:




For
                    the Three Months Ended June 30:
                
                For
                    the Six Months Ended June 30:2007
                
                2006
                
                2007
                
                2006Revenue
                
                $
                -
                
                $
                -
                
                $
                -
                
                $
                -Operating
                    expenses
                
                
                118,770
                
                
                239,426
                
                
                290,412
                
                
                491,297Net
                    loss
                
                
                (141,153
                )
                
                (256,637
                )
                
                (331,409
                )
                
                (524,364
                )
   As
                    of June 30,2007Current
                    assets
                
                $
                42,032Total
                    assets
                
                
                78,526Current
                    liabilities
                
                
                (546,460
                )Total
                    liabilities
                
                
                (1,442,588
                )Stockholders’
                    deficiency
                
                
                1,364,061
  The
        Coates Trust has made loans to the Company at various times to provide working
        capital. George J. Coates, Bernadette Coates, wife of George J. Coates and
        Gregory Coates are beneficiaries
        of the Coates Trust. In April 2007, the Coates Trust advanced an additional
        $100,000 in the form of a 6% promissory note. At the same time, the outstanding
        balance of the prior loans of $92,337 was converted to and included in this
        promissory note. No interest was imputed on these loans for the period prior
        to
        the time they were converted to the 6% promissory
        note. In May 2007, the entire $192,337 principal amount of the 6% promissory
        note was repaid, along with accrued interest of approximately
        $1,500.
  10
 
  The
        approximate amount of compensation and benefits paid to George J. Coates,
        Gregory Coates and Bernadette Coates, exclusive of non-cash stock based
        compensation expense for employee stock options granted to George J. Coates
        and Gregory Coates amounting to approximately $167,000 and $83,000,
        respectively, for both the three and six month periods ended June 30,
        2007, is summarized as follows:
  For
                the Three Months Ended June 30:
            
            For
                the Six Months Ended June 30:2007
            
            2006
            
            2007
            
            2006George
                J. Coates
            
            $
            68,000
            
            $
            51,000
            
            $
            122,000
            
            $
            95,000Gregory
                Coates
            
            
            31,000
            
            
            26,000
            
            
            55,000
            
            
            46,000Bernadette
                Coates
            
            
            10,000
            
            
            10,000
            
            
            21,000
            
            
            21,000   Mark
        Goldsmith, former Chief Executive Officer and President also previously served
        as the Chief Executive Officer, President and Interim Chief Financial Officer
        of
        Coates Motorcycle pursuant to an employment agreement. During the three month
        periods ended June 30, 2007 and 2006, Mr. Goldsmith received salary payments
        of
        $25,000 and $50,000, respectively, from Coates
        Motorcycle and was provided with a leased automobile and medical and dental
        benefits. During the six month periods ended June 30, 2007 and 2006, Mr.
        Goldsmith received salary
        payments of $25,000 and $122,500, respectively, from Coates Motorcycle and
        was
        provided with a leased automobile and medical and dental benefits.
  Barry
        C.
        Kaye, Treasurer and Chief Financial Officer was paid consulting fees of
        approximately $34,500 and $2,000 during the three months ended June 30, 2007
        and
        2006, respectively and
        approximately $42,000 and $7,000 during the six months ended June 30, 2007
        and
        2006, respectively.
  The
        Company paid approximately $5,000 and $11,000 during the three months ended
        June
        30, 2007 and 2006, respectively and approximately $5,000 and $22,000 during
        the
        six months ended June 30, 2007 and 2006, 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.
  **11.
        LITIGATION AND CONTINGENCIES**
  The
        Company, certain of its officers and directors and other related and unrelated
        parties were named as defendants in a lawsuit brought in the Superior Court
        of
        New Jersey captioned H.
        Alton
        Neff v. George Coates, Coates International, Ltd. et al. Plaintiff contends
        that
        he is the assignee of 1107 North West Central Avenue Inc. ("1107"). Preliminary
        agreements and an amendment thereto relating to purchase of a certain license
        by
        1107 from the Company provided, inter alia, that a $500,000 deposit made
        by 1107
        to the Company would convert to stock of the Company if certain conditions
        were
        not met by 1107. The Company maintains that 1107 did not fulfill such
        conditions, and failed to make a certain payment, and therefore, the
        deposit converted into shares of the Company's restricted Common Stock. On
        February 13, 2007, the Superior Court of New Jersey dismissed the complaint
        “with prejudice.” The plaintiff
        and a third party defendant have since filed motions for reconsideration
        which
        were denied on March 30, 2007. It is anticipated that the plaintiffs and
        the
        third party defendant will appeal. The Company has dismissed, without prejudice,
        its counterclaim and third party complaint in order to avoid the costs
        associated with a proof hearing. The plaintiffs and the third
        party defendant filed notices of appeal on June 12, 2007 and June 13, 2007.
        The
        Company intends to vigorously contest those appeals.
  In
        April
        2007, the Company received a demand letter from a law firm requesting payment
        of
        approximately $77,000 in connection with a promissory note issued to the
        law
        firm as security for
        the
        payment of future services to the Company. The Company has notified the holder
        of this note that it does not intend to honor the promissory note because
        the
        law firm did not provide
        the services contemplated to be performed as consideration for the promissory
        note. No further action to pursue collection of this promissory note has
        been
        taken to date by the
        holder. At this time, it is not possible to reasonably estimate the outcome
        of
        this matter, and, accordingly, no amount has been accrued.
   11
  In
          late
          March 2007, at the request of the Company, Mark D. Goldsmith stepped down
          from
          his positions as Chief Executive Officer and President. Despite his resignation,
          Mr. Goldsmith contended that he was entitled to certain rights under an
          employment agreement with the company. Therefore, on April 17, 2007, the
          Company
          notified Mr. Goldsmith in writing that he was being terminated as a director,
          officer and employee with “Cause”, as defined in his employment agreement. On
          May 11, through an attorney, Mr. Goldsmith notified the Company that he
          disputed
          the Company’s position that his termination was with Cause and asserted the
          position that he resigned for “Good Reason”, as defined in his employment
          agreement. On July 10, through an attorney, Mr. Goldsmith notified the
          Company
          that he is claiming that the Company breached his employment agreement
          and is
          seeking recovery of damages resulting therefrom, consisting of compensation,
          benefits and stock options. In the opinion of management, his claims are
          completely without merit. The Company also intends to assert counterclaims
          should Mr. Goldsmith decide to undertake any legal action. At this time,
          it is
          too early to estimate the likely outcome of this matter. If the Company’s
          position is upheld, then Mr. Goldsmith would not be entitled to any
          compensation, benefits or stock options under his employment
          agreement.
  Although
          the Company disputes and intends to vigorously defend against any potential
          claims that might be asserted by Mr. Goldsmith, it has without prejudice
          to its
          position, accrued for accounting purposes only, approximately $96,000 through
          April 13, 2007, the date the Company believes that Mr. Goldsmith was terminated
          with Cause. This amount has been included in accounts payable and accrued
          liabilities in the accompanying balance sheet.
  
 12
  **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 periodic reports
        filed with the SEC. Readers are also urged to carefully
        review and consider the various disclosures we have made in this and such
        previously filed reports.
  **Background**
  We
        have
        completed the development of the Coates spherical rotary valve engine. We
        are
        now engaged in adapting our technology to manufacturing industrial engines
        to
        power electric generators
        with output of up to 300kw, depending on the primary fuel. Thereafter, we
        intend
        to manufacture engines for multiple other applications and uses.
  **Significant
        Estimates**
  The
        Company utilizes significant estimates in the preparation of its financial
        statements. These significant estimates include assigning useful lives to
        our
        property, plant and equipment, determining
        an appropriate amount to reserve for obsolete and slow moving inventory,
        assigning expected lives to our stock options granted and selecting a volatility
        factor for our stock
        options in order to estimate the fair value of our stock options on the date
        of
        grant.
  **Agreements
        with Well to Wire Energy, Inc.**
  On
        September 29, 1999, the Company signed an agreement (the "WWE
        Agreement") with Well to Wire Energy, Inc. ("WWE"), a Canada-based oil and
        gas company, 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 in consideration for future
        payments, of which a deposit
        payment in the amount of $300,000 was made. A separate research and development
        agreement between the Company 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 Company’s generator with output of up to 300 kw depending on the fuel
                used (the 855 cubicinch,
                6 cylinder industrial electric power generator, incorporating the
                CSRV
                engine, the “Generator”). Upon receipt of the Generator, and pending test
                results meeting WWE’sexpectations,
                the balance of US $3,800,000 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 quarterlyinstallments.  ·
            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 agreedbetween
                the parties, the price per Generator shall be US
                $150,000.  ·
            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 the Company.   13
 
  **Results
        of Operations - Three Months Ended June 30, 2007 Compared to Three Months
        Ended
        June 30, 2006**
  No
        revenues were generated for the three month periods ended June 30, 2007 and
        2006.
  Research
        and development expenses were approximately $291,000 and $ -0- for the three
        month periods ended June 30, 2007 and 2006, respectively. This increase in
        research and development costs was attributable to the Company's resumption
        of
        its efforts towards making the final refinements to our prototype CSRV engine
        generator. Included in the amount for the
        three
        months ended June 30, 2007, is approximately $204,000 of stock based
        compensation expense.
  General
        and administrative expenses decreased to approximately $366,000 for the three
        months ended June 30, 2007 from approximately $381,000 in the corresponding
        period in 2006. This net decrease of approximately $15,000 primarily resulted
        from non-cash stock based compensation expense of $85,000 for stock options
        granted in 2007, an increase in testing expenses of approximately $40,000,
        increased licensing costs of approximately $29,000, increased compensation
        costs
        of approximately $17,000
        and increased marketing and printing expenses of approximately $12,000, offset
        by decreased legal and professional fees of approximately $(104,000),
        an increase in labor costs included in research and development expenses
        in the
        2007 period of approximately $(87,000) and a decrease in scrapped inventory
        of
        approximately $(19,000).
  Interest
        expense increased to approximately $101,000 for the 2007 period from
        approximately $95,000 in the 2006 period, primarily due to interest on the
        promissory note from the Coates Trust
        and
        interest accrued on the 10% convertible notes.
  The
        change in deferred taxes for the three months ended June 30, 2007 and 2006
        was
        fully offset by a valuation allowance, resulting in a $-0- net income tax
        provision. The Company experienced
        a net loss for the three month periods ended June 30, 2007 and 2006, of
        approximately $768,000 and $462,000, respectively.
  **Results
        of Operations - Six Months Ended June 30, 2007 Compared to Six Months Ended
        June
        30, 2006**
  No
        revenues were generated for the six month periods ended June 30, 2007 and
        2006.
  Research
        and development expenses were approximately $371,000 and $ -0- for the six
        month
        periods ended June 30, 2007 and 2006, respectively. This increase in research
        and development costs was attributable to the Company's resumption of its
        efforts towards making the final refinements to our prototype CSRV engine
        generator. Included in the amount for the
        six
        months ended June 30, 2007, is approximately $204,000 of stock based
        compensation expense.
  General
        and administrative expenses increased to approximately $792,000 for the six
        months ended June 30, 2007 from approximately $760,000 in the corresponding
        period in 2006. This $32,000, or 4.2% increase primarily resulted from non-cash
        stock based compensation expense of $85,000 for stock options granted in
        2007, increased
        accrued compensation for a departed executive of approximately $55,000, an
        increase in testing expenses of approximately $50,000, increased licensing
        costs
        of approximately
        $24,000, increased compensation costs of approximately $17,000, an increase
        in
        offering costs of approximately $15,000 and an increase in marketing and
        printing expenses of
        approximately $11,000, offset by decreased legal and professional fees of
        approximately $(46,000), an increase in labor costs included in research
        and
        development expenses in the 2007 period of approximately $(151,000), a decrease
        in scrapped inventory of ($19,000) and a decrease in miscellaneous taxes
        of
        ($15,000).
  Interest
        expense increased to approximately $197,000 for the six months ended June
        30,
        2007 from approximately $192,000 in the corresponding 2006 period, primarily
        due
        to interest on the
        promissory note from the Coates Trust and interest accrued on the 10%
        convertible notes.
  The
        change in deferred taxes for the six months ended June 30, 2007 and 2006
        was
        fully offset by a valuation allowance, resulting in a $-0- net income tax
        provision. The Company experienced
        a net loss for the six month periods ended June 30, 2007 and 2006, of
        approximately $1,385,000 and $952,000, respectively.
  14
  **Liquidity
        and Capital Resources**
  The
        Company’s cash position at June 30, 2007 was approximately $729,000, an increase
        of approximately $475,000 from the cash position of approximately $254,000
        at
        December 31, 2006. We had working capital of approximately $145,000 at June
        30,
        2007 which represents an approximately $664,000 improvement from the
        approximately $(519,000) working capital deficiency at December 31,
        2006. The Company's current liabilities of approximately $965,000 at
        June 30, 2007 decreased by approximately $160,000 from approximately $1,125,000
        at December 31, 2006.
  Operating
        activities utilized cash of approximately $(1,151,000) in the six months
        ended
        June 30, 2007. Cash utilized by operating activities in the six months ended
        June 30, 2007 resulted primarily from a net loss of approximately $(1,385,000),
        an increase in inventory of approximately $(30,000) and a decrease in accounts
        payable and accrued liabilities of approximately $(68,000),
        offset by non-cash expenses for stock based compensation expense of $289,000,
        depreciation and amortization of approximately $27,000 and offering costs
        of
        approximately $15,000.
  Investing
        activities utilized cash of approximately $(4,000) for the acquisition of
        property, plant and equipment during the six months ended June 30,
        2007.
  Financing
        activities generated cash of approximately $1,630,000 for the six months
        ended
        June 30, 2007 and utilized cash of approximately $(120,000) for the six months
        ended June 30, 2006.
        Cash generated from financing activities for the six months ended June 30,
        2007
        consisted of cash proceeds of $1,670,000 from the sale of common stock, cash
        proceeds of $120,000
        from the issuance of 10% convertible notes and cash proceeds of
        $100,000 from the issuance of a promissory note to the Coates Trust, offset
        by repayment of a note payable to the Coates Trust of approximately $192,000
        and
        payments for deferred offering costs of approximately $68,000 in connection
        with
        the Dutchess equity line of credit. Cash utilized for financing activities
        in the 2006 corresponding period consisted of deferred offering costs of
        approximately $(75,000) and repayment of a related party loan of approximately
        $(45,000).
  In
        connection with our agreements with WWE, we are continuing with making
        refinements and testing of the performance of the CSRV technology incorporated
        into the last of the three prototype CSRV generators (the “Production Model”).
        Although we have already demonstrated the viability of this technology for
        internal combustion engines fueled by gasoline, the Production
        Model is designed to be powered by raw natural gas. Raw natural gas does
        not
        generate the same level of BTU’s or volumetric density as other fuels more
        commonly used for
        engines such as diesel or gasoline. Additionally, filtering systems have
        to be
        incorporated into the design to counteract the acidic components present
        in raw
        natural gas. Our efforts
        continue to be highly focused on successfully completing this Production
        Model.
  Upon
        delivery of this third Production Model, WWE will commence a testing and
        acceptance period to ensure compliance with their specifications. Once accepted,
        the balance of $3,800,000
        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 the $10 million equity line
        established with Dutchess Private Equities Fund, Ltd. (“Dutchess”). We are
        actively pursuing additional working capital from both of these sources.
        The
        Company is carefully managing the pace at which it draws working capital
        from
        the equity line with Dutchess. There can be no assurance
        that we will be able to obtain the necessary working capital for our production
        phase on a time frame that will enable us to optimize our production capacity.
        We continue to seek
        out
        additional sources of new working capital.
  **Contractual
        Obligations and Commitments**
  The
        following table summarizes our contractual obligations and commitments at
        June
        30, 2007:
  Amount
                    Due WithinTotal
                
                2007
                
                2008
                
                2009
                
                2010
                
                2011Contractual
                    Obligations:Sale/Leaseback
                    Arrangement(1)
                
                $
                1,722,500
                
                $
                195,000
                
                $
                390,000
                
                $
                390,000
                
                $
                390,000
                
                $
                357,500Employment
                    Agreements(2)
                
                
                1,134,500
                
                
                131,500
                
                
                263,000
                
                
                263,000
                
                
                263,000
                
                
                214,000Total
                
                $
                2,857,000
                
                $
                326,500
                
                $
                653,000
                
                $
                653,000
                
                $
                653,000
                
                $
                571,500
  (1)
            Although
                the total finance obligation reflected in the Company’s balance sheet at
                June 2007 amounts to approximately $3,877,000, only the amounts reflected
                in the above table constitute a contractual commitment. This is a
                result
                of the required finance method of accounting treatment for the underlying
                sale/leaseback transaction.This
                accounting treatment is being applied because the Company’s option to
                repurchase this property through November 2008, represents a continuing
                interest in the property. Under this method, the property and the
                finance
                obligation continue to be reported on the Company’s balance sheet until
                the exercise or expiration of therepurchase
                option. The above payments, which will be charged to interest expense
                under this finance method of accounting equate to an annual interest
                rate
                of 10.06%.  (2)
            Our
                obligation under employment agreements would increase to $675,000
                per year
                through October 17, 2009 and to $550,000 per year from October 18,
                2009
                through October 23, 2011, upon the Company achieving an adequate
                level of
                working capital, as defined. 
 15
  **Plan
        of Operation**
  Currently,
        the prototypes of the CSRV System-based generator engine are undergoing
        performance and other tests. Initially, the Company intends to sell the
        engine/generators to a party that has expressed indications of interest to
        purchase Coates Engines upon the successful completion of the above tests.
        If
        these indications of interest become firm orders, the
        fulfillment of these orders may occur over a three to five year period. 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 a significant number of newemployees
                within the first 12 to 24 months after production
                commences.  **·**
            Licensing the technology to Original Equipment
              Manufacturers (“OEM”) - to take advantage of third party manufacturers’
              production ability by entering into OEM
              agreements.  **Going
        Concern**
  As
        shown
        in the accompanying financial statements, the Company has incurred recurring
        losses from operations, and as of June 30, 2007, had a Stockholders’ Deficiency
        of approximately
        $2,306,000. These factors raise substantial doubt about the Company’s ability to
        continue as a going concern. Our independent registered public accounting
        firm
        has stated
        in
        their Auditor’s Report as of December 31, 2006 and for the year then ended that
        this raises substantial doubt about our ability to continue as a going
        concern.
  Management
        is continuing to carefully monitor its costs and is restricting variable
        costs to only those expenses that are necessary to complete its activities
        related to making engineering
        refinements to the Coates Engine, identifying additional sources of working
        capital and general administrative costs in support of such activity. The
        Company has also been
        actively undertaking efforts to identify new sources of working capital.
        The
        Company continues to actively seek out new sources of working capital, however,
        there can be no assurance that it will be successful in these efforts. In
        July
        and early August 2007, the Company received net proceeds of approximately
        $37,000 in connection with the sale of 58,341 shares
        of
        our common stock to Dutchess pursuant to the Investment Agreement. We may
        utilize this equity line with Dutchess from time to time to further supplement
        our working capital.
        However, it is our intention to minimize the impact of such transactions on
        the trading price of our common stock.
  The
        accompanying financial statements do not include any adjustments that might
        be
        necessary if the Company is unable to continue as a going concern.
  **Item
        3. 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 June 30, 2007 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 registered public accounting firm; overseeing the work
        of our
        independent registered public accounting firm, including the receipt and
        thorough consideration
        of reports from the independent registered public accounting firm; reviewing
        and
        discussing with management and our independent registered public accounting
        firm
        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.
 
 16
  **PART
        II - OTHER INFORMATION**
  **Item
        1. LEGAL PROCEEDINGS**
  The
        Company, certain of its officers and directors and other related and unrelated
        parties were named as defendants in a lawsuit brought in the Superior Court
        of
        New Jersey captioned H.
        Alton
        Neff v. George Coates, Coates International, Ltd. et al. Plaintiff contends
        that
        he is the assignee of 1107 North West Central Avenue Inc. ("1107"). Preliminary
        agreements and an amendment thereto relating to purchase of a certain license
        by
        1107 from the Company provided, inter alia, that a $500,000 deposit made
        by 1107
        to the Company would convert to stock of the Company if certain conditions
        were
        not met by 1107. The Company maintains that 1107 did not fulfill such
        conditions, and failed to make a certain payment, and therefore, the
        deposit converted into shares of the Company's restricted Common Stock. On
        February 13, 2007, the Superior Court of New Jersey dismissed the complaint
        “with prejudice.” The plaintiff
        and a third party defendant have since filed motions for reconsideration
        which
        were denied on March 30, 2007. It is anticipated that the plaintiffs and
        the
        third party defendant will appeal. The Company has dismissed, without prejudice,
        its counterclaim and third party complaint in order to avoid the costs
        associated with a proof hearing. The plaintiffs and the third
        party defendant filed notices of appeal on June 12, 2007 and June 13, 2007.
        The
        Company intends to vigorously contest those appeals.
  In
        April
        2007, the Company received a demand letter from a law firm requesting payment
        of
        approximately $77,000 in connection with a promissory note issued to the
        law
        firm as security for
        the
        payment of future services to the Company. The Company has notified the holder
        of this note that it does not intend to honor the promissory note because
        the
        law firm did not provide
        the services contemplated to be performed as consideration for the promissory
        note. No further action to pursue collection of this promissory note has
        been
        taken to date by the
        holder. At this time, it is not possible to reasonably estimate the outcome
        of
        this matter, and, accordingly, no amount has been accrued.
 In
          late
          March 2007, at the request of the Company, Mark D. Goldsmith stepped down
          from
          his positions as Chief Executive Officer and President. Despite his resignation,
          Mr. Goldsmith contended that he was entitled to certain rights under an
          employment agreement with the company. Therefore, on April 17, 2007, the
          Company
          notified Mr. Goldsmith in writing that he was being terminated as a director,
          officer and employee with “Cause”, as defined in his employment agreement. On
          May 11, through an attorney, Mr. Goldsmith notified the Company that he
          disputed
          the Company’s position that his termination was with Cause and asserted the
          position that he resigned for “Good Reason”, as defined in his employment
          agreement. On July 10, through an attorney, Mr. Goldsmith notified the
          Company
          that he is claiming that the Company breached his employment agreement
          and is
          seeking recovery of damages resulting therefrom, consisting of compensation,
          benefits and stock options. In the opinion of management, his claims are
          completely without merit. The Company also intends to assert counterclaims
          should Mr. Goldsmith decide to undertake any legal action. At this time,
          it is
          too early to estimate the likely outcome of this matter. If the Company’s
          position is upheld, then Mr. Goldsmith would not be entitled to any
          compensation, benefits or stock options under his employment
          agreement.
  Although
          the Company disputes and intends to vigorously defend against any potential
          claims that might be asserted by Mr. Goldsmith, it has without prejudice
          to its
          position, accrued for accounting purposes only, approximately $96,000 through
          April 13, 2007, the date the Company believes that Mr. Goldsmith was terminated
          with Cause. This amount has been included in accounts payable and accrued
          liabilities in the accompanying balance sheet.
  **Item
        2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
        PROCEEDS**
  In
          April
          2007, we sold 2,000,000 shares of our common stock to Stephen Evans, the
          son of
          one of our directors and received aggregate gross proceeds of $500,000.
          In May
          2007, we sold this shareholder an additional 1,333,333 shares of our common
          stock and received aggregate gross proceeds of $750,000. The shares of
          common
          stock were issued pursuant to an exemption from registration under Section
          4(2)
          of the Securities Act of 1933.
 
 In
          March
          and April 2007, we issued $120,000 aggregate principal amount of 10% Convertible
          Subordinated Notes at an initial conversation rate of $.45 per share, due
          March
          2010 to two of our outside directors and received proceeds of $120,000.
          On May
          16, 2007, $100,000 principal amount of 10% convertible notes were converted
          into
          222,222 shares of our common stock. The shares of common stock were issued
          pursuant to an exemption from registration under Section 4(2) of the Securities
          Act of 1933.
 
 In
          March
          2007, we completed the sale to 14 accredited investors of an aggregate
          of
          420,000 shares of 6% Series A Convertible Preferred Stock and 42 Warrants
          to
          purchase an aggregate of 210,000 shares of our Common Stock at $1.10 per
          share
          and received total gross proceeds of $420,000. All of these investors accepted
          ten shares of our common stock in lieu of each share of Preferred Stock
          purchased through the private offering. No shares of Preferred Stock were
          issued. On June 5, 2007 we issued in the aggregate 420,000 shares of our
          common
          stock and 42 Warrants for the Units sold. The shares of common stock and
          warrants were issued pursuant to an exemption from registration under Section
          4(2) of the Securities Act of 1933.
 
 All
          of
          the above shares were subsequently registered on Form SB-2 filed with the
          Securities and Exchange Commission, which became effective on June 22,
          2007.
  **Item
        3. DEFAULTS UPON SENIOR SECURITIES**
  None
 
 17
  **Item
        4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS**
  No
        matter
        was submitted during the quarter ending June 30, 2007, covered by this report
        to
        a vote of the Company’s shareholders, through the solicitation of proxies or
        otherwise.
  **Item
        5. OTHER INFORMATION**
  None
  **Item
        6. EXHIBITS AND REPORTS ON FORM 8-K.**
  (a)  Reports
        on Form 8-K and Form 8K-A
  On
        April
        3, 2007, the Company filed Form 8-K with the SEC based upon the appointment
        of
        George Coates as President and Chief Executive Officer of the
        Company.
  On
        April
        11, 2007, the Company filed Form 8-K with the SEC based upon an amended license
        agreement.
  On
        May 1,
        2007, the Company filed Form 8-K with the SEC based upon entering into an
        investment agreement with Dutchess Private Equities Fund, Ltd.
  On
        May 8,
        2007, the Company filed Form 8-K with the SEC based upon the issuance of a
        press release regarding a company patent.
  (b)  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
                  adoptedpursuant
                  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 pursuantto
                  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.
  *
        Filed
        herewith.
  18
 
 **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: August
                14, 2007
              By:
              /s/ George
                J.
                CoatesGeorge
                J. CoatesPresident,
                Chief
                Executive Officer and Principal Executive
                Officer
  Date: August
                14, 2007
              By:
              /s/ Barry
                C.
                KayeBarry
                C. KayeTreasurer,
                  Chief Financial Officerand
                  Principal Financial Officer
     19