SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549


                                   FORM 10-KSB

            |X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                 SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]

                   For the fiscal year ended December 31, 1998

                                       OR

          |_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]

           For the Transition period from____________to______________

                         Commission File Number 33-94884

                            COATES INTERNATIONAL LTD.
        (Exact name of small business issuer as specified in its charter)

                               Delaware 22-2925432
                  (State or other jurisdiction of (IRS Employer
               incorporation or organization) Identification No.)

          Highway 34 & Ridgewood Road, Wall Township, New Jersey 07719
               (Address of principal executive offices) (Zip Code)

          Issuer's telephone number, including area code (732) 449-7717

                    Securities registered pursuant to Section
                               12(b) of the Act:

                                 Title of Class
                                      None

                    Securities registered pursuant to Section
                               12(g) of the Act:

                                 Title of Class
                                      None

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 if disclosure of delinquent  filers  pursuant to Item 405
of Regulation  S-B is not contained  herein,  and will not be contained,  to the
best of the issuer's  knowledge,  in definitive proxy or information  statements
incorporated by reference in Part III of this Form 10-KSB or in any amendment to
this Form 10-KSB. [ ]

Issuer did not generate any revenues for the year ended December 31, 1998.

During the year ended December 31, 1998, there was no established public trading
market for the issuer's Series A Preferred  Stock.  On December 31, 1998,  there
were  6,572,424  shares of Series A  Preferred  Stock of the  Issuer  issued and
outstanding.



<PAGE>



                            COATES INTERNATIONAL LTD.

                                     PART I

Item 1.           Description of Business

Background

      Coates International Ltd. ("CIL") has completed the basic development of a
spherical  rotary valve system (the  "Coates  System") for use in piston  driven
internal  combustion engines of all types.  Development of the Coates System was
initiated by CIL's founder,  George J. Coates, in Ireland in the late 1970's. In
1982,  Mr. Coates  obtained a patent from the Republic of Ireland for the Mark I
version of the Coates  spherical  rotary valve  system for use in piston  driven
engines.  In 1986,  George J. Coates  emigrated  to the United  States  where he
commenced  development  of the Mark II version  and  subsequently,  the Mark III
version of his spherical rotary valve system.  Between 1990 and 1994,  George J.
Coates was issued  seven United  States  patents  (the  "Coates  Patents")  with
respect to various  aspects of the Coates  System  including the Mark II and the
Mark III  version.  Mr Coates has also been  issued a number of foreign  patents
with respect to various aspects of the Coates System and has patent applications
pending in several foreign jurisdictions. See "Patents and Licenses."

      CIL holds an  exclusive  license from George J. Coates and his son Gregory
Coates,  to  manufacture,  sell and grant  sublicenses  with respect to products
based on the Coates Patents, within all of the countries,  their territories and
possessions,  comprising  North America,  Central America and South America (the
"Licensed Areas"). George J. Coates and Gregory Coates have also agreed, as long
as  CIL  remains  independent  and  viable,  not  to  compete  with  CIL  in the
manufacture,  assembly, use or sale of internal combustion engines utilizing the
technology falling within the scope of the Coates Patents in the Licensed Areas,
or to grant any other exclusive or  non-exclusive  license in the Licensed Areas
except  through  CIL. In  addition,  George J.  Coates and  Gregory  Coates have
executed  an  agreement  granting  CIL the right to retain any monies  including
royalties   received   from   Nicholson   McLaren  or  from  Noble  Motor  Sport
(manufacturer of Ascari racing cars) for  manufacture,  sale, use or assembly of
internal  combustion  engines anywhere in the world using the technology falling
within the scope of the Coates Patents. See "Patents and Licenses."

      CIL and its Predecessor Entity have realized  insignificant  revenues from
the inception of the Predecessor  Entity in August 1988 through the present date
and is a company in the development  stage.  In 1996, CIL recognized  $37,375 in
revenues paid by Nicholson  McLaren in partial payment for two high  performance
racing car engines modified with the Coates System shipped to Nicholson  McLaren
by CIL. In April and July 1996,  CIL  executed a License  Agreement  and a Sales
Representative Agreement with Nicholson McLaren. See "Patents and Licenses."

      Since  its  inception,  the  bulk of the  development  costs  and  related
operational  costs of CIL have been funded primarily through cash generated from
the sale of stock, through capital contributions made by Gregory Coates and from
several entities for prototype  models and license fees. As a development  stage
company, CIL has incurred losses from the inception of the Predecessor Entity in
August 1988 through  December 31, 1998 of $10,845,470  and at December 31, 1998,
had a  net  worth  (deficit)  of  ($18,816)  and  negative  working  capital  of
($1,101,056).


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         CIL's  auditors have included in its report,  dated April 8, 1999,  and
filed as an exhibit to the Form 10-KSB, prepared in connection with its audit of
CIL's  financial  statements  for the fiscal year ended  December 31, 1998,  its
observations  that (1) CIL has suffered  recurring losses during its development
stage and has accumulated a deficit since its inception to December 31, 1998, of
$10,845,470;  (2) that CIL has minimal liquid assets,  while reporting 
$1,253,729  in  current  liabilities  and;  (3) that CIL's  ability to  generate
revenues and achieve  profitable  operations is  principally  dependent upon the
execution and funding of sub-license  agreements  with engine  manufacturers  or
retrofitters  and upon the  manufacture  and sale of high  performance  engines.
These  observations have led the auditors to opine that there exists substantial
doubts about CIL's ability to continue as a going concern.

Business Plan

      CIL's ability to generate  revenues and achieve  profitable  operations is
principally  dependent upon the execution and funding of sub-license  agreements
with engine manufacturers or retrofitters, and upon the manufacture and sale, by
CIL, of high performance  automotive,  motorcycle and marine racing engines. CIL
is actively  attempting to market its  technology and is in  communication  with
various persons and entities who may be interested in acquiring  sub-licenses to
use the technology.

     CIL is currently manufacturing  components for the assembly of several high
performance  automotive  engines  modified  with the Coates  System on a limited
basis at its Wall Township, New Jersey manufacturing facility.  These components
include  automotive  seals,  casings,  shafts and spheres  comprising the Coates
System.  During  CIL's  fiscal  year  ended  December  31,  1997,  CIL  built or
retrofitted ten (10) V8 302 automobile  engines,  3 of which were installed in a
Bronco truck, 1996 Ford Mustang and in a 1988 Ford Mustang, respectively. Except
as set forth  herein,  none of the  engines  have been  sold.  CIL has  received
numerous oral and written  inquiries  from  potential  customers,  expressing an
interest in acquiring high performance  automotive  racing engines modified with
the Coates System.  After it completes  manufacture  of a sufficient  backlog of
such  engines,  CIL intends to attempt to convert these  inquiries  into binding
sales orders,  to fill such orders from its limited  inventory of engines and to
continue  to  manufacture  on  a  limited  basis  and  market  high  performance
automotive,  motorcycle  and  marine  racing  engines  using the  Coates  System
technology. Assuming CIL obtains sufficient financing and a sufficient number of
orders,  CIL management  believes that it will be able to produce racing engines
using the Coates System  technology  at its Wall Township  facility on a limited
basis at the rate of  approximately  30 engines per month.  CIL expects that the
bulk of its  initial  sales of engines,  to the extent it is able to  effectuate
same,  will be at a base sales  price in the range of  $25,000  to  $30,000  per
engine although depending on type and size, some of the engines may be priced as
high as $75,000.  To achieve  such  production  levels,  CIL will be required to
expand its production work force to approximately 15-20 production workers.

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<PAGE>



      It is the intention of CIL to fund its business plan by borrowings and the
sale of equity and/or debt  instruments,  and through the sale of  sub-licenses.
All of  these  financing  vehicles  will be  pursued  simultaneously.  It is not
presently known which, if any, of these  alternatives will be utilized,  whether
they are available to CIL, and if available, in what mixture or in what amounts.

The Coates System

      The Coates System  differs from the  conventional  poppet valve  currently
used in almost all piston driven automotive,  motorcycle and marine engines,  by
changing the method by which the air and fuel mixture is delivered to the engine
cylinder as well as the method of expelling  the exhaust gases after the mixture
is ignited.  Unlike the poppet valve which  protrudes into the engine  cylinder,
the Coates  System  utilizes  spherical  valves which do not  protrude  into the
cylinder but rotate in a cavity formed  between a two piece  cylinder head. As a
result of  employing  fewer moving parts as compared to the poppet valve and not
protruding into the engine cylinder,  management believes that the Coates System
will promote less engine wear and will require less lubrication over the life of
the engine.  In addition,  because the Coates System does not employ parts which
protrude into the engine cylinder,  it is designed with larger openings into the
cylinder than  conventional  poppet valves so that more fuel and air mixture can
be inducted  into and expelled from the engine  cylinder in a shorter  period of
time using the Coates System, leading to an ability to operate the engine faster
and an  ability to  utilize  higher  compression  ratios  with lower  combustion
chamber  temperatures.  Management  believes that as a result,  engines modified
with the Coates  System will produce more power than similar  engines  utilizing
the poppet valve system.

Patents and Licenses

      In 1982,  George J. Coates  obtained a patent from the Republic of Ireland
for the Mark I version of the Coates  spherical  rotary  valve system for use in
piston driven internal  combustion  engines. In 1986, George J. Coates emigrated
to the United States where he commenced  development  of the Mark II version and
subsequently the Mark III version of his spherical rotary valve system.  Between
1990 and 1994,  George J. Coates was issued  seven  United  States  patents (the
"Coates Patents") with respect to various aspects of the Coates System including
the Mark II and Mark III version. The Coates Patents are as follows:

                           Date                            Date
U.S. Patent No.        Application Filed                 of  Patent

4,989,576 (Mark I)        July 26, 1982              February 5, 1991
4,953,527 (Mark II)       November 14, 1988          September 4, 1990
4,989,558                 September 14, 1989         February 5, 1991
4,944,261 (Mark IIB)      October 16, 1989           July 31, 1990
4,976,232                 December 6, 1989           December 11, 1990
5,109,814                 May 10, 1991               May 5, 1992
5,361,739 (Mark III)      May 12, 1993               November 8, 1994


                                       3

<PAGE>

         The Mark I,  Mark II,  Mark IIB and  Mark  III  patents  were  also the
subject of foreign  filings by Mr.  Coates who has been issued  foreign  patents
with  respect to some of these  filings by Austria,  Belgium,  Denmark,  France,
Germany,  Great Britain,  Greece,  Italy,  Luxembourg,  The Netherlands,  Spain,
Sweden and  Switzerland  as well as by  Australia,  Brazil,  Canada,  Hong Kong,
Japan, Korea, Mexico,  Singapore,  South Africa and Taiwan. Mr. Coates continues
to have patent  applications  pending in some of these as well as other  foreign
jurisdictions.

     In February 1995,  George J. Coates and his son Gregory Coates each granted
CIL a non-exclusive  license to  manufacture,  sell and grant  sublicenses  with
respect to products based on the Coates  Patents  within the United States,  its
territories and possessions.  On December 22, 1997, George J. Coates and his son
Gregory Coates amended the existing  license  agreement and previous  amendments
thereto,  modifying them from a  non-exclusive  license to an exclusive one. The
licenses expire in the event of bankruptcy or similar  insolvency of CIL. George
J.  Coates  and  Gregory  Coates  have  also  agreed,  as  long  as CIL  remains
independent and viable,  not to compete with CIL in the  manufacture,  assembly,
use or sale of internal  combustion  engines  utilizing the  technology  falling
within the scope of the Coates  Patents in the Licensed  Areas,  or to grant any
other  exclusive or  non-exclusive  license in the Licensed Areas except through
CIL. In addition, George J. Coates and Gregory Coates have executed an agreement
granting CIL the right to retain any monies  including  royalties  received from
Nicholson McLaren or from Noble Motor Sport (manufacturer of Ascari racing cars)
for manufacture,  sale, use or assembly of internal  combustion engines anywhere
in the world  using  the  technology  falling  within  the  scope of the  Coates
Patents.  CIL  agreed to pay a  $5,500,000  license  fee to George J.  Coates in
consideration  for his  grant to CIL of the  non-exclusive  license  payable  at
management's  discretion  but in no event  later  than  February  17,  1998.  In
September 1995, this  arrangement was modified.  CIL and George J. Coates agreed
that instead of the $5,500,000 payment, CIL would issue 275,000 shares of Series
A Stock to Mr.  Coates as the license fee. The shares were issued to Mr.  Coates
in November 1995.

      His  appearance at the  Birmingham  (U.K.)  Autosport Show in January 1996
resulted in George J. Coates receiving a letter of intent from Nicholson McLaren
to acquire a license to distribute the racing  engines  modified with the Coates
System within the European  Patent  Community upon a commission or royalty basis
to be negotiated.  Also, as a result of George J. Coates' appearance at the same
show, CIL received a $1,000 check from Noble Motorsport  U.S.A., a subsidiary of
Ascari Cars Ltd. (U.K.) (formerly Noble Motor Sport Ltd.) and a $28,000 order to
install a high performance  racing car engine modified with the Coates System in
an Ascari  racing car.  The car was  delivered in March 1996 to the CIL plant in
Wall  Township,  New Jersey,  but to date,  an engine  modified  with the Coates
System has not been installed in the car.

      In April 1996, CIL executed a license  agreement  with  Nicholson  McLaren
granting  Nicholson McLaren a non-exclusive  license to assemble,  sell, use and
lease internal  combustion  engines  incorporating  the Coates  Spherical Rotary
Valve System within the European  Patent  Community,  which  includes but is not
limited to Austria,  Belgium,  Denmark, France, Germany, Greece, Ireland, Italy,
Portugal, Spain, Sweden,  Switzerland,  and the United Kingdom. In consideration
of the rights granted under the license  agreement,  Nicholson McLaren agreed to
pay CIL a licensing fee of $5 million  payable $37,375 upon receipt of the first
demonstration  model by Nicholson McLaren from CIL; another $37,375 upon receipt
of the  second;  with the  balance to be paid out of sales (if any) of  internal
combustion  engines  modified  with the Coates  Spherical  Rotary  Valve  System
assembled by Nicholson  McLaren with components  purchased from CIL. The balance
is payable  pursuant to a payment  schedule to be mutually  agreed  between both
parties.  The license agreement also gives Nicholson McLaren the right to obtain


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a manufacturing license from CIL against payment of royalties on the manufacture
of components at a rate to be established.  CIL recognized revenue of $37,375 in
1996 upon receipt of cash from  Nicholson  McLaren  after  delivery of the first
demonstration  model  in April  1996.  CIL has  waived  payment  for the  second
demonstration model which was delivered in July 1996. CIL has retained ownership
to this  second  model  which is being  demonstrated  by  Nicholson  McLaren for
potential  customers on behalf of CIL. The payment  schedule with respect to the
balance of the  licensing  fee has not yet been  finalized  by the  parties.  No
assurances  can be  given  that CIL will be paid a  substantial  portion  of the
balance of the licensing fee by Nicholson  McLaren as such balance is contingent
upon future sales by Nicholson McLaren of internal  combustion  engines modified
with the Coates Spherical Rotary Valve System. During 1996, John Nicholson,  the
president of Nicholson  McLaren  purchased 4,000 shares of CIL Series A Stock at
$20 per share.

      In June 1996, CIL executed a Sales  Representative  Agreement retaining an
affiliate of Nicholson  McLaren as its  exclusive  sales  representative  in the
United Kingdom and Europe for the sale of the Coates  Technology for a four-year
term. The agreement  provides for a sliding scale commission  varying from 5% of
the first $1 million in Net  Product  Billings  to 1% of the fifth $1 million in
Net Product  Billings and all amounts in excess thereof.  No assurances can be
given that the sales representative will produce significant billings for CIL 
products pursuant to the agreement.

Employees

      At December 31, 1998, CIL employed five (5) full-time employees, including
George J. Coates and his son Gregory who perform both  management,  assembly and
research and  development  functions;  George J. Coates' wife  Bernadette who is
involved in administration functions and a bookkeeper.

Item 2.           Description of Property

      CIL's   executive   offices  and  testing   facility  are  located  in  an
approximately 25,000 square foot one and one-half story building of concrete and
steel  construction  on a 6 1/2 acre  site in Wall  Township,  New  Jersey.  CIL
acquired this property from The George J. Coates 1991 Family  Partnership,  L.P.
in 1995.  On March  22,  1999,  CIL  refinanced  its  property  and gave a first
mortgage  in the amount of $900,000 to Eastern  Savings  Bank,  FSB of New York.
This first mortgage  requires monthly  payments of $12,521,  accrued interest at
the rate of 15.99%, per annum, and its outstanding principal balance and accrued
interest become due and payable in March, 2004.

      In its development  operations,  CIL owns and utilizes  milling  machines,
lathes,  grinders,  hydraulic  lifts  and  presses,  tooling,  dynamometers  and
emission testing machines and computerized drafting and printing equipment.  All
of such equipment is in good condition, reasonable wear and tear excepted.

Item 3.           Legal Proceedings

SEC Complaint

      In July 1994,  the SEC filed a  complaint  in the United  States  District
Court for the Southern  District of New York (94 Civ.  5361)  against  George J.
Coates,  CIL and  certain  affiliated  companies  seeking  injunctive  and other
relief.  In its complaint,  the SEC alleged that CIL and George J. Coates

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raised  "...almost  $6.5  million  from  almost 400  investors..."  through
offers,  purchases  and  sales of CIL  securities  which  the SEC  alleged  were
fraudulent.  The SEC alleged  that CIL and George J. Coates  misrepresented  the
capabilities  of the Coates  engine;  omitted to  disclose  negative  results of
independent tests on the engine;  falsely claimed that CIL had sold licenses and
received orders and other  commercial  opportunities;  and  misrepresented  that
George J. Coates had assigned all patents  related to the Coates  engine to CIL.
The SEC also  alleged  that CIL and George J.  Coates had failed to  disclose to
shareholders  that certain of the shares sold by Mr. Coates were not  authorized
by CIL;  that  George J.  Coates  misappropriated  or misused  approximately  $2
million of investor funds for his personal benefit;  and that CIL had engaged in
several related party  transactions with other entities  controlled by George J.
Coates.

      At the time of the filing of the SEC complaint,  the Court issued an order
freezing the assets of CIL and George J. Coates  (although  George J. Coates was
permitted to use future income for living expenses).  The Court appointed Donald
H.  Steckroth,  Esq.,  a New Jersey  attorney,  as Temporary  Receiver,  to take
possession  and control of CIL's assets and  properties,  to preserve the status
quo and to prevent  any  misuse,  encumbrance  or  disposal  of CIL's  corporate
property and assets. At the same time as the SEC complaint was filed in July
1994, an inspector for the  United  States  Postal  Inspection  Service  swore 
out a  criminal complaint against  George J. Coates in the United States 
District  Court for the Southern District of New York, based on allegations
similar to those contained in the SEC complaint.  As a result,  Mr. Coates was
arrested but he was released after four days of incarceration.  On May 30, 1995,
a United States Magistrate Judge of the United  States  District  Court for the
Southern  District of New York signed an order in response to a request by the
office of the United  States  Attorney for the Southern  District of New York
dismissing  without prejudice, the criminal complaint against George J. Coates.

Settlement of the SEC Complaint

      On  February  6, 1995,  CIL and George J.  Coates,  without  admitting  or
denying the allegations  contained in the SEC complaint,  consented to the entry
of final consent  judgments  enjoining them from effecting sales of any security
unless  a  registration  statement  is in  effect  as  to  such  security  or an
applicable  exemption  from  registration  is  available  and from  engaging  in
fraudulent activities in connection with the offer or sale of any security.  CIL
was also ordered to provide an  accounting  of its assets and  liabilities;  its
financial  statements and a list of all purchasers of CIL stock from CIL, George
J. Coates or any other source during the period commencing April 24, 1990 to the
date of the consent  judgment  including the number of shares  purchased and the
purchase price.  George J. Coates was ordered to provide an accounting as to his
assets and  liabilities;  as to any  money,  property,  assets or other  revenue
received  by him or for his  benefit  from  January  1,  1990 to the date of the
accounting; and as to all assets, funds, securities or real or personal property
of investors in CIL which were  transferred to or for George J. Coates'  benefit
during such period.

      George J. Coates was also  ordered to cause the  transfer by The George J.
Coates 1991 Family  Partnership,  L.P. to CIL of the real  property and building
used by CIL as its principal  facility  located at Highway 34 and Ridgewood Road
in Wall Township,  New Jersey.  This transfer was effected on February 21, 1995.
George J. Coates has guaranteed  repayment of the mortgage loan on this property
and CIL is obligated to indemnify  George J. Coates from any liability  based on
the mortgage  loan on the property.  The consent  judgment  permitted  George J.
Coates to retain title to the Coates Patents provided that he reimbursed CIL for
all of the monies it expended in the preparation, application and
 
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prosecution  of the  Patents.  Such  sums in the  aggregate  amount of
$335,805 were paid to CIL by February 15, 1995 so that George J. Coates retained
title to the Patents.  Mr.  Coates was also ordered to cause the transfer to CIL
of all licensing fees and other funds paid to persons or entities other than CIL
in connection with the acquisition by the payor of an interest in the Patents or
in the technology embodied in the Patents,  including the $500,000 licensing fee
paid by  Millwest  Corporation  and  held  in a bank  account  entitled  "Coates
International  Licensing."  On February 24, 1995,  the $500,000  license fee and
$12,144 of interest thereon was paid to CIL.

Rescission and Exchange Offer

      The consent  judgment also required CIL to file a  registration  statement
with the SEC to effect a Rescission and Exchange Offer, as follows:

      Purchasers of Series A Stock who  purchased  such stock from CIL or George
J. Coates during the period  commencing April 24, 1990 through November 13, 1995
and who  continued to own their shares at such date were  afforded the option to
choose one of the  following two forms of  consideration  in exchange for his or
her shares of Series A Stock.

      Option One - Subject  to the  availability  of same,  the right to receive
cash or assets equal in amount to the consideration  such Purchaser paid for his
or her shares of Series A Stock,  in exchange  therefore,  plus simple  interest
calculated  at an annual rate of five (5%)  percent from the date of payment for
the Series A Preferred Stock; or

      Option Two - the right to receive one share of newly issued Series A Stock
identical to the previously  purchased Series A Stock in exchange for each share
of Series A Stock held by such Purchaser.

      Pursuant to the consent  judgment,  CIL filed a registration  statement on
Form S-1 with the SEC (File No.  33-94884) to effect the Rescission and Exchange
Offer. The registration  statement was declared effective by the SEC on November
13, 1995.

      Pursuant to the consent judgment, Donald H. Steckroth, Esq., the Temporary
Receiver, was appointed Special Master, to continue in possession and control of
any and all  assets  of CIL  until  a  distribution  was  made  pursuant  to the
Rescission and Exchange Order and until he was discharged by order of the Court.
The  consent  judgment  required  CIL to mail a copy of the  November  13,  1995
Prospectus  together with a cover letter prepared by the Special Master advising
the Purchasers of the allegations  contained in the SEC complaint,  the terms of
the final CIL consent judgment,  the fact that the Prospectus contained detailed
information  concerning  the status of CIL's business and efforts to develop and
commercially exploit the Coates engine technology,  and explaining the above two
options,  and an Election Form, by certified mail return receipt  requested,  to
each Purchaser.

      After the  November  13,  1995  effectiveness  of the  above  registration
statement,  the  Prospectus and the required cover letter and Election Form were
mailed to each of the Purchasers.  Of the 328 persons to whom the Rescission and
Exchange Offer was directed (who had invested approximately  $6,500,000 in CIL),
an  aggregate  32  Purchasers  elected to rescind  their prior  purchases  of an
aggregate 48,500 shares of Series A Preferred Stock entitling them to be paid an
aggregate  $1,270,000 plus interest.  Two of the 32 Purchasers invested $900,000
of the $1,270,000 in CIL with respect to which  rescission  was elected.

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In the second quarter of calendar year 1996, a group of investors  advanced
funds in order to purchase  Series A Preferred  Stock.  These funds were used by
CIL to repurchase Series A Preferred Stock owned by the persons who accepted the
1995  Rescission and Exchange  Offer.  An aggregate  $1,260,000 of the funds and
$65,000 of interest  was paid to 31 of the 32  Purchasers  who elected to accept
Option One of the  Rescission  and  Exchange  Offer and their  48,000  shares of
Series A Preferred  Stock were canceled.  No shares were issued to the investors
who advanced said funds at such time.

      By letter dated July 31, 1996,  the Special Master filed a report with the
United States District Court  recommending  that CIL be permitted to undertake a
private offering.  A successful private offering would generate sufficient funds
to permit  reimbursement  of those  investors (the  "Potential  Investors")  who
advanced  funds in the second  quarter  of  calendar  1996 in order to  purchase
Series A Preferred  Stock,  which funds were used by CIL to repurchase  Series A
Preferred  Stock  owned by persons who elected  pursuant to the  Rescission  and
Exchange Offer to rescind their prior purchases of Series A Preferred  Stock. On
August 19, 1996,  United States  District Court Judge Kimba Wood signed an order
permitting a Private Offering to proceed and ordered CIL and George J. Coates to
reimburse the Potential Investors for the amounts advanced by them.

         George J. Coates had  consented to pay up to the first  $773,500 of the
amounts  payable  pursuant  to  the  Rescission  and  Exchange  Offer  to  those
Purchasers  who elected  Option One using all of his personal  assets other than
his  personal  residence.  To the  extent  that he was  unable  to pay any  such
amounts,  CIL was  required  to pay same and would  retain  its rights to assert
claims  against  George J. Coates  personally to recover its payment of any such
shortages. CIL also consented to pay any additional amounts required to fund the
Rescission and Exchange Offer.

      The  Private  Offering  permitted  by Judge  Wood's  August 1996 order was
completed in July 1997.  Pursuant to the terms of the Private Offering,  each of
the  Potential  Investors  was offered  the right to elect to receive  shares of
Series A Preferred Stock at a value of $20 per share for the amounts he advanced
in the second quarter of calendar year 1996 or to have the amount of his advance
refunded. Of the $1,270,000 advanced, one Potential Investor elected to have his
advance of $10,000  refunded and the remaining  Potential  Investors  elected to
receive Series A Preferred Stock. George J. Coates made the $10,000 cash payment
to the Potential  Investor who elected the refund and transferred  38,175 shares
of his Series A Preferred Stock to the remaining Potential Investors. CIL issued
the  balance  of  24,825  shares of Series A  Preferred  Stock to the  Potential
Investors. CIL also received $960,000 in cash proceeds from the Private Offering
(paid to purchase  shares of Series A Preferred Stock at $20 per share) which it
applied to the payment of outstanding  payables  including the final bill of the
Special Master who was then discharged by Judge Wood.

      CIL is a defendant in various lawsuits. In the opinion of management, none
of these  lawsuits will have a material  adverse  effect on CIL, its business or
its financial condition.

Item 4.           Submission of Matters to a Vote of Security Holders

      CIL did not  submit any  matter to a vote of its  stockholders  during the
fourth quarter of calendar year 1998.

                                       8

<PAGE>




                            COATES INTERNATIONAL LTD.

                                     PART II


Item 5.           Market for Common Equity and Related Stockholder Matters

      There is no established  public trading market for CIL's only  outstanding
class of capital stock,  its Series A Preferred Stock. At December 31, 1998, the
approximate number of holders of record of the Series A Preferred Stock was 510.
CIL has not paid any dividends with respect to its Series A Preferred  Stock and
anticipated capital requirements make it highly unlikely that any dividends will
be paid by CIL in the foreseeable future.

Item 6.           Management's Discussion and Analysis or Plan of Operation

     Coates   International   Ltd.  ("CIL"  or  the  "Company")  is  a  Delaware
corporation  organized in October 1991 by George J. Coates,  as the successor in
interest to a Delaware corporation of the same name incorporated in August 1988.

CIL has completed the basic  development of a spherical rotary valve system (the
"Coates System"), the development of which was initiated by its founder,  George
J. Coates, for use in internal  combustion engines of all types. With respect to
the Coates System, seven applicable Unites States patents (the "Coates Patents")
have been issued to George J. Coates. CIL holds an exclusive license from George
J.  Coates  and  his  son  Gregory  Coates,  to  manufacture,   sell  and  grant
sub-licenses with respect to products based on the Coates Patents, within all of
the countries,  their  territories and  possessions,  comprising  North America,
South America and Central  America (the "License  Areas").  George J. Coates and
Gregory Coates have also agreed, as long as CIL remains  independent and viable,
not to compete with CIL in the  manufacture,  assembly,  use or sale of internal
combustion  engines  utilizing the  technology  falling  within the scope of the
Coates  Patents  in the  Licensed  Areas,  or to grant  any other  exclusive  or
non-exclusive  license in the Licensed  Areas  except  through CIL. In addition,
George J. Coates and Gregory Coates have executed an agreement  granting CIL the
right to retain any moneys including  royalties  received from Nicholson McLaren
or from Noble Motor Sport  (manufacturer of Ascari racing cars) for manufacture,
sale, use or assembly of internal combustion engines anywhere in the world using
the  technology  falling within the scope of the Coates  Patents.  See "Item 1 -
Patents and Licensees."


                                       9

<PAGE>



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

CIL is currently manufacturing high performance automotive engines modified with
the  Coates  System  on a  limited  basis  at its  Wall  Township,  New  Jersey,
manufacturing facility. Except as set forth herein, none of the engines has been
sold.  CIL has  received  numerous  oral and written  inquiries  from  potential
customers,  expressing  an interest in  acquiring  high  performance  automotive
racing engines modified with the Coates System.  No assurances can be given that
these inquiries will result in binding sales orders. CIL intends to aggressively
pursue all inquiries  with the goal of obtaining  firm orders.  CIL's ability to
generate  revenues and achieve  profitable  operations is principally  dependent
upon the  execution of  sub-license  agreements  with engine  manufacturers  and
retrofitters and upon CIL's  successful  marketing and sales of high performance
automotive,  motorcycle  and marine  racing  engines.  Despite  limited  success
to-date  Coates will continue  manufacturing  a limited  inventory of automotive
engines, and pursue the marketing of Coates System technology. Such efforts will
especially be directed towards sub-licensing of the technology.

Results of Operations from Inception August 31, 1988, through December 31, 1998

Virtually no revenues were  realized  from the  inception of operations  through
December 31, 1998, as the principal operations were those of a development stage
company.  See "The Coates System".  No revenues were recognized  during the last
quarter and year ended December 31, 1998.

Operating  expenses incurred during the last quarter and the year ended December
31, 1998, amounted to $371,707 and $1,043,538 respectively, compared to $426,699
and $1,427,798 for the same periods in 1997. General and administrative expenses
net of R&D declined from $721,829 in 1997 to $619,320 in 1998,  due  principally
to inactivity,  lay-offs of CIL's production staff because of lack of funding as
well as the  result of  ongoing  efforts  to  streamline  operations  and reduce
overhead.

Including the above mentioned, total aggregate operating expenses incurred since
August 31, 1988, amounted to $11,360,500, of which the largest portion pertained
to general and administrative expenses which total $7563,390.

After recognizing $58,215 interest expenses, CIL's operations show a net loss of
$1,101,753 or $.17 per share for the year ended December 31, 1998, compared to a
net loss of $1,432,186 or $.24 per share for the preceding year.

Total net losses since inception in August 1988 through December 31, 1998 amount
to $10,845,470.

Liquidity and Capital Resources

Since its inception,  all of the development costs and operating expenses of CIL
have  primarily  been financed  through the cash  generated  through the sale of
stock,  through  capital  contributions  made by George J. Coates' son,  Gregory
Coates,  and through several payments for prototype and license fees made by two
entities..  Capital  contributions  of $384,961  were advanced to CIL by Gregory
Coates in 1998 as compared  to $953,834  advanced  during  1997.  Certain of the
aforesaid funds generated income from bank accounts in a depository institution;
that interest income was also expended by CIL.

                                       10

<PAGE>



At December  31,  1998,  CIL had a net worth  (deficit)  of $18,816  compared to
$547,976  for the prior year.  The working  capital  deficiency  which  showed a
negative  balance of $(1,036,578)  at December 31, 1997,  declined to a negative
$(1,101,056) at December 31, 1998. This decline of net worth was due principally
to a lack of both revenues and capital contributions in 1998..

In order to improve CIL's financial  situation and provide funds to meet current
obligations and finance the ongoing efforts to market CIL's products, management
plans to raise  additional  capital through a combination of private  placements
and debt  issues.  While the  successful  realization  of such  plans  cannot be
assured,  management  continues  to be  confident  that  CIL's  unique  patented
technology will attract investments, which shall provide the means for continued
efforts  to  obtain  firm  orders  and   sub-license   agreements   with  engine
manufacturers and refitters, which ultimately will yield positive cash flows.

Note Regarding Forward-Looking Statements

      This  Annual   Report   contains   historical   information   as  well  as
forward-looking  statements.  Statements looking forward in time are included in
this Annual  Report  pursuant  to the "safe  harbor"  provisions  of the Private
Securities  Litigation  Reform Act of 1995.  Such  statements  involve known and
unknown risks and  uncertainties  that may cause CIL's actual  results in future
periods to be materially different from any future performance suggested herein.

                                       11

<PAGE>



Item 7.  Financial Statements

         The information called for by this item appears at the end of this Form
10-KSB.

     Item 8. Changes in and  Disagreements  with  Accountants  on Accounting and
Financial Disclosure

         On March 27, 1998, CIL dismissed the firm of Moore Stephens, P.C. which
firm was its principal  independent  accounting firm previously engaged to audit
CIL's financial statements.

         Moore  Stephens,  P.C.  audit  report with  respect to CIL's  financial
statements for the fiscal years ended December 31, 1996 and 1995,  dated January
24, 1997,  contained a qualified opinion,  expressing  uncertainty as to whether
CIL would be able to continue its operations and business as a going concern.

         The decision to dismiss  Moore  Stephens and to retain a new  principal
independent accounting firm was approved by CIL's board of directors.

         During the two fiscal  years ended  December  31, 1996 and 1995,  there
were no  disagreements  between  CIL and Moore  Stephens,  P.C. on any matter of
accounting principles or practices,  financial statement disclosure, or auditing
scope or procedure,  which disagreement,  if not resolved to the satisfaction of
Moore  Stephens,  P.C.,  would have caused it to make a reference to the subject
matter of the disagreement in connection with its report.

         During 1998,  CIL engaged the  accounting  firm of Rosenberg Rich Baker
Berman & Company ("RRBB") to serve as its principal independent  accounting firm
and to audit its finaicial  statements  for the year ended December 31, 1997 and
December 31, 1996.

         RRBB's report issued in connection with CIL's financial  statements for
the years ended December 31, 1997 and 1996 did not contain an adverse opinion or
disclaimer of opinion.  However,  such report did include a modification  of the
auditor's standard report, stating that:

         ...CIL has insignificant  revenues to date, has incurred losses and has
         accumulated a deficit since its inception to December 31, 1998, of over
         $9,743,717 in research and development activities. CIL also has minimal
         liquid assets, while reporting $1,183,827 in current liabilities. These
         conditions raise substantial doubt about CIL's ability to continue as a
         going concern.  Management's  plans in regard to these matters are also
         discussed  in the  notes to the  financial  statements.  The  financial
         statements  do not include any  adjustments  that might result from the
         outcome of these uncertainties.

 CIL is unaware of the  occurrence  of any of the kinds of events  described  in
subparagraphs  (A)  through  (D)  of  Item  304(a)(1)(v)  of  Regulation  S-B as
promulgated by the SEC.

                                       12

<PAGE>





                            COATES INTERNATIONAL LTD.

                                    PART III


     Item 9. Directors and Executive  Officers,  Promoters and Control  Persons,
             Compliance with Section 16(a) of the Exchange Act 

             At December 31, 1998, the executive  officers and directors of
CIL were as follows:

    Name                      Age                   Position

George J. Coates               58       President, Treasurer, Chief Executive
                                        Officer, Chief Financial Officer and
                                        Director

Richard W. Evans               67       Secretary and Director

Michael J. Suchar D.D.S.       43       Director

         George J.  Coates  has been  employed  by CIL since  its  inception  as
president and chief  executive  officer.  Mr. Coates is an Irish citizen but has
been granted  resident alien status in the United States.  See"Item 3" herein as
to the final consent judgment executed by George J. Coates in connection with an
SEC complaint.

     Richard W. Evans became a director of CIL in May 1996. Dr. Evans, who holds
an Ed.D. degree from Rutgers  University,  was a Supervisor a Highland Park High
School in Highland Park, New Jersey,  a post he held for more than the preceding
five  years  until his  retirement  in June  1996.  Dr.  Evans will not devote a
substantial portion of his working time to the business of CIL

     Michael J. Suchar  became a director of CIL in May 1996.  Dr.  Suchar,  who
holds a Doctor  of Dental  Surgery  degree  from the  Temple  University  Dental
School, has been a practicing pediatric dentist for more than the preceding five
years.  Dr. Suchar will not devote a substantial  portion of his working time to
the business of CIL.

Compliance with Section 16(a) of the Exchange Act

         CIL's only class of outstanding  capital stock,  its Series A Preferred
Stock,  is not registered  pursuant to Section 16(a) of the Exchange Act so that
filings of Forms 3, 4 and 5 in compliance with such Section are not required.







                                       13

<PAGE>



Item 10. Executive Compensation

         None of CIL's executive  officers has an employment  contract with CIL.
With respect to each of calendar years 1996, 1997 and 1998, no executive officer
had compensation  paid or accrued in excess of $100,000 for any such year except
for George J. Coates,  CIL's chief executive officer,  whose compensation was as
follows:

                           SUMMARY COMPENSATION TABLE
                               Annual Compensation
                               Year Ended
         Name                  December 31                Salary

George J. Coates,                 1998                    $186,947
Chief Executive Officer           1997                    $183,550
                                  1996                    $184,908

* CIL had  agreed  to pay a  $5,500,000  license  fee to  George  J.  Coates  in
consideration  for  his  grant  to CIL of a  non-exclusive  license.  See  "Item
1-Business-Patents and Licenses." The fee was payable at management's discretion
but  in no  event  later  than  February  17,  1998.  In  September  1998,  this
arrangement  was  modified.  CIL and George J. Coates agreed that instead of the
$5,500,000  payment,  CIL would issue 275,000 shares of Series A Preferred Stock
to Mr.  Coates as the  license  fee.  The shares  were  issued to Mr.  Coates in
November 1998.

         To date, no employee stock options have been granted by CIL.

Item 11. Security Ownership of Certain Beneficial Owners and Management

         The following table sets forth as of December 31, 1998 the ownership of
CIL  Series  A  Preferred  Stock  by  (i)  each  person  known  by CIL to be the
beneficial  owner of more than 5% of the outstanding  Series A Preferred  Stock,
(ii) each director and executive officer of CIL who owned shares,  and (iii) all
directors and executive officers as a group.


                                       Shares of Series A
Name of                             Stock Beneficially Owned
Beneficial Owner                      Number        Percent

George J. Coates*                4,994,000 shs        76%
Gregory Coates*                    318,150 shs         5%
Richard W. Evans                    16,500 shs         .003%
Michael J. Suchar                    6,000 shs         .001%

All directors and executive
officers as a Group (four persons)   5,334,650 shs        81%

        * c/o CIL, Highway 34 & Ridgewood Road, Wall Township, New Jersey 07719.



                                       14

<PAGE>




Item 12. Certain Relationships and Related Transactions

         Through  the first half of calendar  1997,  CIL  subcontracted  for its
project  labor  expense  with  Coates  Precision  Engineering,  Inc.,  an entity
controlled  by George J.  Coates.  The amounts paid to such  subcontractor  with
respect  to  1995,   1996  and  1997  were  $187,889,   $181,500  and  $212,626,
respectively.   These   payments   constitute  a  direct  pass  through  to  the
subcontractor of payroll,  workers'  compensation and hospitalization  insurance
expense and management believes the arrangement was in CIL's best interests. For
the fiscal year ended  December 31, 1998,  CIL did not pay for any project labor
expense through Coates Precision Engineering, Inc.

         In the second half of calendar  1995,  and during  calendar years 1996,
1997 and 1998,  CIL was primarily  dependent for its working  capital on capital
contributions  made by Gregory Coates,  the son of George J. Coates, a principal
(5% or greater)  stockholder and until January 1996, an executive  officer and a
director of CIL. Such capital contributions  advanced by Gregory Coates in 1995,
1996, 1997 and 1998,  aggregated  $404,549,  $1,132,523,  $953,834 and $384,961,
respectively.  The funds for such  advances  were obtained from sales of Gregory
Coates' shares of CIL Series A Preferred Stock at a price of $20 per share.

         On October 9, 1998,  George J. Coates and his son Gregory  executed and
delivered a certain Exclusive  Conditional Worldwide License Agreement to CIL in
connection  with an arrangement to raise private equity with a placement  agent.
Pursuant to the terms of the license,  it would  automatically  terminate in the
event the  placement  agent did not  arrange for  certain  equity  funding on or
before January 17, 1999. The placement  agent failed to perform and this license
automatically terminated on January 17, 1999.

Item 13. Exhibits and Reports on Form 8-K

         (a)   Exhibits

Exhibit No.                        Description of Exhibit

         The following listed Exhibits are hereby incorporated by reference into
         this Form 10-KSB for the fiscal year ended December 31, 1998 from CIL's
         Registration  Statement,  filed on Form S-1  with  the  Securities  and
         Exchange Commission on November 1, 1995, File No. 33-94884:

 3.1           CIL's Restated Certificate of Incorporation.
 3.2           CIL's By-Laws.
 4.1           Form of Certificate for CIL's Series A Non-Cumulative
               Convertible Preferred Stock.
 10.1          Deed dated February 21, 1995 transferring title to CIL's
               Principal Facility at Route 34
               and Ridgewood Road, Wall Township, N.J. from The George J.
               Coates 1991 Family
               Partnership, L.P. (the "Partnership") to CIL.
 10.2          Assumption and Indemnification  Agreement dated February 21,
               1995 between the partnership and CIL.


                                       15

<PAGE>



Exhibit No.                        Description of Exhibit

10.4       License Agreement dated February 17, 1995, between George J. Coates
           and CIL and First  and Second Amendments thereto dated July 17, 1995.
10.4(a)    Third  Amendment  dated  September 21, 1995 to License  Agreement
           dated February 17, 1995 between George J. Coates and CIL.
10.5       License  Agreement  dated February 22, 1993 between  Gregory
           Coates and CIL and First  Amendment  thereto  dated July 17, 1995.
10.6       Prototype Manufacturing Agreement dated July 16, 1991 between  
           CIL, George  J. Coates and Harley-Davidson, Inc.
10.7       License  Agreement  dated  February 4, 1994 by and  between  CIL,
           Coates International Licensing Partnership, L.P., George J.
           Coates and Millwest Corporation.
10.8       Securities and Exchange  Commission  Complaint  filed on July 22,
           1994  in the  United  States  District  Court  for  the  Southern
           District of New York (94 Civ. 5361) against George J. Coates, CIL
           and related entities.
10.9       Final Consent Judgment of CIL in the above action initiated by the
           Commission (94 Civ. 5361).
10.10      Final Consent Judgment of George J. Coates in the above action 
           initiated by the Commission (94 Civ. 5361).

     The following Exhibit is hereby  incorporated into this Form 10-KSB for the
fiscal year ended  December  31, 1998 from CIL's Form 10-KSB for the fiscal year
ended December 31, 1997,  filed with the  Securities and Exchange  Commission on
June 17, 1998:

10.3           License Agreement dated December 22, 1997 between George
                J. Coates, Gregory Coates and CIL.
                                   __________

 (27)           Financial Data Schedule - attached to Exhibit A

                 (b)   Reports on Form 8-K

               (1) CIL  filed a Current  Report on Form 8-K with the  Securities
and Exchange  Commission  disclosing  the facts  surrounding  the  execution and
delivery of a certain Exclusive Conditional  Worldwide License Agreement,  dated
October 9, 1998, by and between Coates International, Ltd., George J. Coates and
Gregory Coates.










                                       16

<PAGE>



                                   Signatures

         Pursuant to the  requirements  of Section 13 or 15(d) of the Securities
and  Exchange  Act of 1934,  the  Registrant  has duly  caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.



Date                                   COATES INTERNATIONAL LTD.

April 14, 1999                         By: /s/George J. Coates
                                          George J. Coates, President
                                          Chief Executive Officer and
                                          Chief Financial Officer

         Pursuant to the  requirements  of the Securities  Exchange Act of 1934,
this  report has been  signed  below by the  following  persons on behalf of the
Registrant and in the capacities and on the date indicated.

Signature                         Title                                Date

/s/George J. Coates
George J. Coates         Director (Principal Executive           April 14, 1999
                         Principal Financial Officer, Principal
                         Accounting Officer

/s/Richard W. Evans
Richard W. Evans         Director                                April 14, 1999



Michael J. Suchar        Director                                April __, 1999





coat10k.98


                                       17

<PAGE>

                     
  
                           Coates International, Ltd.
                          (A Development Stage Company)

                              Financial Statements

                           December 31, 1998 and 1997



<PAGE>



                           Coates International, Ltd.
                          (A Development Stage Company)
                        Index to the Financial Statements
                           December 31, 1998 and 1997





                                                                        Page

Auditors' Report  ..............................................         1

Financial Statements

     Balance Sheet..............................................         2

     Statements of Operations...................................         3

     Statement of Stockholders' Equity..........................         4

     Statements of Cash Flows...................................        5-6

     Notes to the Financial Statements..........................       7-10


                                       

<PAGE>

                          Independent Auditors' Report


To the Board of Directors and Shareholders of
Coates International, Ltd.

We have audited the balance sheet of Coates  International,  Ltd. (A Development
Stage Company) as of December 31, 1998 and the related statements of operations,
stockholders'  equity and cash flows for the years ended  December  31, 1998 and
1997.  These  financial  statements  are  the  responsibility  of the  Company's
management.  Our  responsibility  is to express  an  opinion on these  financial
statements based on our audits.

We  conducted  our  audits  in  accordance  with  generally   accepted  auditing
standards.  Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement.  An audit includes examining on a test basis,  evidence supporting
the amounts and disclosures in the financial statements.  An audit also includes
assessing the  accounting  principles  used and  significant  estimates  made by
management,  as well as evaluating the overall financial statement presentation.
We believe that our audit provide a reasonable basis for our opinion.

In our opinion,  the financial  statements  referred to above present fairly, in
all material respects,  the financial position of Coates International,  ltd. (A
Development  Stage  Company) as of December 31,  1998,  and the results of their
operations,  and cash flows for the years  ended  December  31, 1998 and 1997 in
conformity with generally accepted accounting principles.  We express no opinion
on the cumulative  period from inception  (August 31, 1988) through December 31,
1998 as  shown  in the  cumulative  columns  on the  statements  of  operations,
stockholders' equity and cash flows.

The accompanying  financial  statements have been prepared  assuming the Company
will  continue as a going  concern.  As discussed in the notes to the  financial
statements,  the Company has insignificant revenues to date, has incurred losses
and has  accumulated  a deficit  since its  inception to December  31, 1998,  of
$10,845,470 in research and development activities. The Company also has minimal
liquid  assets,  while  reporting  $1,253,729  in  current  liabilities.   These
conditions raise  substantial doubt about the Company's ability to continue as a
going concern.  Management's plans in regard to these matters are also discussed
in the  notes to the  financial  statements.  The  financial  statements  do not
include  any   adjustments   that  might   result  from  the  outcome  of  these
uncertainties.

Bridgewater, New Jersey
April 8, 1999

                                   

<PAGE>



                           Coates International, Ltd.
                          (A Development Stage Company)
                                  Balance Sheet
                                December 31, 1998



<TABLE>
<CAPTION>
      Assets                                                         
Current Assets
<S>                                                                                                   <C>             
   Cash                                                                                               $         14,575
   Restricted cash                                                                                             112,000
   Prepaid insurance                                                                                             6,555
    Due from related parties                                                                                    19,543
                                                                                                        --------------

      Total Current Assets                                                                                     152,673
                                                                                                        --------------

Property, Plant and Equipment - Net                                                                          1,556,359

Other Assets
    Mortgage loan costs, net of accumulated amortization of $23,380                                             23,381
   Deposit                                                                                                       2,500
                                                                                                        --------------

      Total Assets                                                                                           1,734,913
                                                                                                        ==============

      Liabilities and Stockholders' Equity

Current Liabilities
   Accounts payable                                                                                             26,180
   Accrued expenses                                                                                          1,108,485
   Accrued interest payable                                                                                    106,559
   Due to stockholder                                                                                           12,505
                                                                                                        --------------

        Total Current Liabilities                                                                            1,253,729
                                                                                                        --------------

      Mortgage payable                                                                                         500,000  

Stockholders' Equity
   Preferred stock, Series A, $.001 par value, 14,000,000 shares authorized -
   voting, non-cumulative convertible, 6,572,424 shares issued and outstanding                                   6,572
   Common stock, $.001 par value, 20,000,000 shares authorized - no shares 
   issued                                                                                                           -
   Additional paid-in capital                                                                               10,820,082
     Deficit accumulated during the development stage                                                     (10,845,470)
                                                                                                        --------------
      Total Stockholders' Equity                                                                              (18,816)
                                                                                                        --------------
                                                                                                      $      1,734,913
        Total Liabilities and Stockholders' Equity
                                                                                                        ==============
</TABLE>

                                       

See notes to the financial statements.
 

                                       2
                                                                                
<PAGE>



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




<TABLE>
<CAPTION>
                                                                                                                       Period From
                                                                                                                        August 31,
                                                                                                                      1988 (Date of
                                                                                                                        Inception)
                                                                                                                         Through
                                                                                                                       December 31,
                                                                                                                           1998
                                                                                                                  ----------------
                                                                                  Years Ended December 31,
                                                                              ---------------------------------   ----------------
                                                                                   1998              1997
                                                                              ---------------   ---------------   ----------------

                                                                                                                    (Unaudited)
                                                                                                                  ----------------

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

Operating Expenses:
   Research and development costs                                                     274,522           453,051          2,498,979
   Research and development costs - related party                                     100,623           212,626            929,388
   General and administrative expenses                                                619,320           721,829          7,563,390
   Depreciation and amortization expense                                               49,073            40,292            368,743
                                                                              ---------------   ---------------   ----------------

      Total Operating Expenses                                                      1,043,538         1,427,798         11,360,500
                                                                              ---------------   ---------------   ----------------

   Loss From Operations                                                            (1,043,538)      (1,427,798)       (10,673,125)
                                                                              ---------------   ---------------   ----------------

Other Income (Expense):
   Interest income                                                                        898            11,262            125,764
   Interest expense                                                                  (59,113)          (15,650)          (298,109)
                                                                              ---------------   ---------------   ----------------

      Total Other Income (Expense)                                                   (58,215)           (4,388)          (172,345)
                                                                              ---------------   ---------------   ----------------

   Net Loss                                                                  $    (1,101,753) $     (1,432,186) $     (10,845,470)
                                                                              ===============   ===============   ================

   Net Loss Per Share                                                        $         (0.17) $          (0.24)
                                                                              ===============   ===============
                                                                                    6,572,013         6,033,669
   Weighted Average Number of Shares
                                                                              ===============   ===============

</TABLE>



                                   




See notes to the financial statements.

                                       3
                                                   

<PAGE>



                           Coates International, Ltd.
                          (A Development Stage Company)
                        Statement of Stockholders' Equity
                Inception (August 31, 1988) to December 31, 1998



                                                                                
<TABLE>
<CAPTION>
                                                                                
                                                 Common Stock          Common Stock        Series A Preferred
                                                    Class A               Class C               Stock            Preferred Stock    
                                             --------------------- -------------------- --------------------- --------------------- 
                                               Shares     Amount     Shares    Amount     Shares     Amount     Shares     Amount
                                             ----------- --------- ---------- --------- ----------- --------- ----------- --------- 
<S>                                                     <C>                  <C>                   <C>                   <C>        
August 31, 1988 (Date of Inception)                    -$        -          -$        -           -$        -           -$        - 
Issuance of Shares                               854,500       854          -         -           -         -           -         - 
Issuance of Stock Pursuant to Private Placement                                                                       
Offering                                         100,000        96          -         -           -         -           -         - 
Net Loss for the Period from August 31, 1988
   (Date of Inception) Through
   December 31, 1988                                   -         -          -         -           -         -           -         - 
                                             ----------- --------- ---------- --------- ----------- --------- ----------- --------- 
     Balance - December 31, 1988                 954,500       950          -         -           -         -           -         - 
Stock Dividend                                    50,000        50    450,000       450           -         -           -         - 
Issuance of Stock for Services Rendered           12,000        12          -         -           -         -           -         - 
Net Loss for Year Ended December 31, 1989              -         -          -         -           -         -           -         - 
                                             ----------- --------- ---------- --------- ----------- --------- ----------- --------- 
     Balance - December 31, 1989               1,016,500     1,012    450,000       450           -         -           -         - 
Issuance of Stock Pursuant to Private
   Placement Offering                             76,000        76          -         -           -         -           -         - 
Issuance of Stock                                962,500       962          -         -           -         -           -         - 
Net Loss for Year Ended December 31, 1990              -         -          -         -           -         -           -         - 
                                             ----------- --------- ---------- --------- ----------- --------- ----------- --------- 
     Balance  December 31, 1990                2,055,000     2,050    450,000       450           -         -           -         - 
Exchange of Preferred Stock for Common        
   Stock Class A                             (2,055,000)   (2,050)          -         -           -         -   2,055,000     2,050 
Exchange of Preferred Stock for Common
   Stock Class C                                       -         -  (450,000)     (450)           -         -     450,000       450 
Cancellation of Common Stock Class C                   -         -          -         -           -         -   (225,000)     (220) 
Issuance of Stock in Connection with
   Reorganization                                    100         -          -         -           -         -           -         - 
Dissolution of Coates International, Ltd.          (100)         -          -         -           -         -           -         - 
Exchange of Series A Preferred Stock for                                                                       2,280,000)
   Preferred Stock                                     -         -          -         -   2,280,000     2,280 (             (2,280) 
Issuance of Stock                                      -         -          -         -     102,000       102           -         - 
Purchase of Treasury Stock                             -         -          -         -           -         -           -         - 
Stock Split 2:1                                        -         -          -         -   2,382,000     2,382           -         - 
New Loss for Year Ended December 31, 1991              -         -          -         -           -         -           -         - 
                                             ----------- --------- ---------- --------- ----------- --------- ----------- --------- 
     Balance -December 31, 1991                        -         -          -         -   4,764,000     4,764           -         - 
To Correct Balance at December 31, 1991                -         -          -         -     772,500       772           -         - 
Issuance of Stock for Service                          -         -          -         -         500         -           -         - 
Issuance of Stock                                      -         -          -         -     115,850       116           -         - 
Private Placement Costs                                -         -          -         -           -         -           -         - 
Net Loss for Year Ended December 31, 1992              -         -          -         -           -         -           -         - 
                                             ----------- --------- ---------- --------- ----------- --------- ----------- --------- 
     Balance - December 31, 1992                       -         -          -         -   5,652,850     5,652           -         - 
Issuance of Stock                                      -         -          -         -      82,250        83           -         - 
Purchase of Treasury Stock                             -         -          -         -           -         -           -         - 
Prior Period Adjustment                                -         -          -         -           -         -           -         - 
Adjustment for Redeemable Preferred Stock              -         -          -         -   (479,950)     (480)           -         - 
Net Loss for Year Ended December 31, 1993              -         -          -         -           -         -           -         - 
                                             ----------- --------- ---------- --------- ----------- --------- ----------- --------- 
     Balance - December 31, 1993                       -         -          -         -   5,255,150     5,255           -         - 
Issuance of Stock                                      -         -          -         -       2,000         2           -         - 
Purchase of Treasury Stock                             -         -          -         -           -         -           -         - 
Adjust Treasury Stock for Redeemable
   preferred Stock                                     -         -          -         -     (1,000)       (1)           -         - 
Adjust Remaining Redeemable Preferred
   Stock Issued in 1994                                -         -          -         -     (1,000)       (1)           -         - 
</TABLE>
                                      4A 

<PAGE>



<TABLE>
<CAPTION>
                                                                            Deficit         
                                                                          Accumulated       Total
                                                Additional                 During the    Stockholders'
                                                 Paid-In    Treasury      Development       Equity
                                                 Capital     Stock           Stage        (Deficit)
                                                ----------  ----------    -----------    -------------
<S>                                          <C>           <C>         <C>            <C>            
August 31, 1988 (Date of Inception)          $            -$        -  $             -$             -
Issuance of Shares                                        -         -                -            854
Issuance of Stock Pursuant to Private Placement                                              
Offering                                            499,900         -                -        499,996

Net Loss for the Period from August 31, 1988
   (Date of Inception) Through
   December 31, 1988                                      -         -         (52,708)       (52,708)
                                              ------------- ---------   -------------- --------------
     Balance - December 31, 1988                    499,900         -         (52,708)        448,142
Stock Dividend                                        (500)         -                -              -
Issuance of Stock for Services Rendered                (12)         -                -              -
Net Loss for Year Ended December 31, 1989                 -         -        (252,288)      (252,288)
                                              ------------- ---------   -------------- --------------
     Balance - December 31, 1989                    499,388         -        (304,996)        195,854
Issuance of Stock Pursuant to Private
   Placement Offering                               701,165         -                -        701,241
Issuance of Stock                                         -         -                -            962
Net Loss for Year Ended December 31, 1990                 -         -        (392,564)      (392,564)
                                              ------------- ---------   -------------- --------------
     Balance  December 31, 1990                   1,200,553         -        (697,560)        505,493
Exchange of Preferred Stock for Common       
   Stock Class A                                          -         -                -              -
Exchange of Preferred Stock for Common
   Stock Class C                                          -         -                -              -
Cancellation of Common Stock Class C                      -         -                -          (220)
Issuance of Stock in Connection with
   Reorganization                                     1,000         -                -          1,000
Dissolution of Coates International, Ltd.           (1,000)         -                -        (1,000)
Exchange of Series A Preferred Stock for     
   Preferred Stock                                   18,990         -                -         18,990
Issuance of Stock                                 1,019,898         -                -      1,020,000
Purchase of Treasury Stock                                -  (25,000)                -       (25,000)
Stock Split 2:1                                     (2,382)         -                -              -
New Loss for Year Ended December 31, 1991                 -         -        (739,096)      (739,096)
                                              ------------- ---------   -------------- --------------
     Balance -December 31, 1991                   2,237,059  (25,000)      (1,436,656)        780,167
To Correct Balance at December 31, 1991               (772)         -                -              -
Issuance of Stock for Service                        10,000         -                -         10,000
Issuance of Stock                                 2,306,884         -                -      2,307,000
Private Placement Costs                            (80,675)         -                -       (80,675)
Net Loss for Year Ended December 31, 1992                           -        (996,055)      (996,055)
                                              ------------- ---------   -------------- --------------
     Balance - December 31, 1992                  4,472,496  (25,000)      (2,432,711)      2,020,437
Issuance of Stock                                 1,944,917         -                -      1,945,000
Purchase of Treasury Stock                                -  (55,000)                -       (55,000)
Prior Period Adjustment                                   -         -          219,224        219,224
Adjustment for Redeemable Preferred Stock       (5,921,818)    65,000                -    (5,857,298)
Net Loss for Year Ended December 31, 1993                           -      (1,270,966)    (1,270,966)
                                              ------------- ---------   -------------- --------------
     Balance - December 31, 1993                    495,595  (15,000)      (3,484,453)    (2,998,603)
Issuance of Stock                                    39,998         -                -         40,000
Purchase of Treasury Stock                                -  (35,000)                -       (35,000)
Adjust Treasury Stock for Redeemable
   preferred Stock                                 (19,999)    20,000                -              -
Adjust Remaining Redeemable Preferred
   Stock Issued in 1994                            (19,999)         -                -       (20,000)

</TABLE>

                                       4B

<PAGE>

<TABLE>
<CAPTION>

                                                                                                                                    
                                                 Common Stock          Common Stock      Series A Preferred                         
                                                    Class A               Class C               Stock            Preferred Stock    
                                             --------------------- -------------------- --------------------- --------------------- 
                                               Shares     Amount     Shares    Amount     Shares     Amount     Shares     Amount
                                             ----------- --------- ---------- --------- ----------- --------- ----------- --------- 

Restoration of Shares Not Redeemed by
<S>                                                     <C>                  <C>            <C>     <C>                  <C>        
   Stockholders                                        -$        -          -$        -     415,200 $     415           -$        - 
Net Loss for Year Ended December 31, 1994              -         -          -         -           -         -           -         - 
   Balance-December 31, 1994                           -         -          -         -   5,670,350     5,670           -         - 
Restoration of Shares Not Redeemed by
   Stockholders                                        -         -          -         -      18,250        18           -         - 
Issuance of Stock in Exchange for U.S.
   Patent Rights                                       -         -          -         -     275,000       275           -         - 
Adjustments to Paid-in Capital                         -         -          -         -           -         -           -         - 
Treasury Stock Adjustment                              -         -          -         -           -         -           -         - 
Net Loss for Year Ended December 31, 1995              -         -          -         -           -         -           -         - 
                                             ----------- --------- ---------- --------- ----------- --------- ----------- --------- 
     Balance - December 31, 1995 (Restated)            -         -          -         -   5,963,600     5,963           -         - 
Adjustments to Paid-in Capital                         -         -          -         -           -         -           -         - 
Net Loss for Year Ended December 31, 1996              -         -          -         -           -         -           -         - 
                                             ----------- --------- ---------- --------- ----------- --------- ----------- --------- 
     Balance - December 31, 1996                       -         -          -         -   5,963,600     5,963           -         - 
Issuance of Stock                                      -         -          -         -      48,000        48           -         - 
Restoration of Shares Not Redeemed by
   Stockholders                                        -         -          -         -      24,325        24           -         - 
Issuance of Stock in Exchange for Mortgage
   Paydown                                             -         -          -         -       2,500         3           -         - 
Issuance of Stock in Exchange for Exclusive
   License                                             -         -          -         -     500,000       500           -         - 
Issuance of Stock for Loans Reclassification           -         -          -         -       5,500         6           -         - 
Completion of 1990 Stock Split 2:1                     -         -          -         -      20,499        20           -         - 
Additional Contributions of Capital From a
   Shareholder                                         -         -          -         -           -         -           -         - 
Net Loss for Year Ended December 31, 1997              -         -          -         -           -         -           -         - 
                                             ----------- --------- ---------- --------- ----------- --------- ----------- --------- 
     Balance - December 31, 1997                       -         -          -         -   6,564,424     6,564           -         - 
                                             ----------- --------- ---------- --------- ----------- --------- ----------- --------- 
Issuance of Stock                                      -         -          -         -       8,000         8           -         - 
                                                                                                                                    
Additional Contributions of Capital From a
    Shareholder                                        -         -          -         -           -         -           -         - 
Net Loss for Year Ended December 31,
    1998                                               -         -          -         -           -         -           -         - 
                                             ----------- --------- ---------- --------- ----------- --------- ----------- --------- 
Balance - December 31, 1998                 $          -$        -$         -$        -$  6,572,424$    6,572$          -$        - 
                                                                                                                                    
                                             =========== ========= ========== ========= =========== ========= =========== ========= 
</TABLE>


See notes to the financial statements.

                                      4C

<PAGE>


<TABLE>
<CAPTION>
                                                                         Deficit                                                    
                                                                       Accumulated           Total
                                                Additional              During the        Stockholders'                             
                                                  Paid-In  Treasury    Developoment          Equity
                                                  Capital    Stock         Stage            (Deficit)
                                               ----------- ----------   -----------      --------------    
Restoration of Shares Not Redeemed by
<S>                                         <C>                      <C>              <C>           
   Stockholders                             $    4,586,883$        - $               -$    4,587,298
Net Loss for Year Ended December 31, 1994                -         -      (1,229,523)     (1,229,523)
   Balance-December 31, 1994                     5,082,478   (30,000)     (4,713,976)        344,172
Restoration of Shares Not Redeemed by
   Stockholders                                     19,982         -                -         20,000
Issuance of Stock in Exchange for U.S.
   Patent Rights                                   433,864         -                -        434,139
Adjustments to Paid-in Capital                   1,177,579         -                -      1,177,579
Treasury Stock Adjustment                          (30,000)   30,000                -              -
Net Loss for Year Ended December 31, 1995                -         -       (1,997,445)    (1,997,445)
                                             ------------- ---------   -------------- --------------
     Balance - December 31, 1995 (Restated)      6,683,903         -       (6,711,421)       (21,555)
Adjustments to Paid-in Capital                   1,132,523         -                -      1,132,523
Net Loss for Year Ended December 31, 1996                          -       (1,600,110)    (1,600,110)
                                             ------------- ---------   -------------- --------------
     Balance - December 31, 1996                 7,816,426         -       (8,311,531)      (489,142)
Issuance of Stock                                  959,952         -                -        960,000
Restoration of Shares Not Redeemed by
   Stockholders                                    496,946         -                -        496,970
Issuance of Stock in Exchange for Mortgage
   Paydown                                          49,997         -                -         50,000
Issuance of Stock in Exchange for Exclusive
   License                                               -         -                -            500
Issuance of Stock for Loans Reclassification         7,994         -                -          8,000
Completion of 1990 Stock Split 2:1                     (20)        -                -              -
Additional Contributions of Capital From a
   Shareholder                                     953,834         -                -        953,834
Net Loss for Year Ended December 31, 1997                -         -       (1,432,186)    (1,432,186)
                                             ------------- ---------   -------------- --------------
     Balance - December 31, 1997                10,285,129         -       (9,743,717)       547,976
                                             ------------- ---------   -------------- --------------
Issuance of Stock                                  149,992         -                -        150,000
Additional Contributions of Capital From a
    Shareholder                                    384,961         -                -        384,961
Net Loss for Year Ended December 31,
    1998                                                 -         -       (1,101,753)    (1,101,753)
                                             ------------- ---------   -------------- --------------
Balance - December 31, 1998                 $   10,820,082$        -  $   (10,845,470$       (18,816)                               
                                             ============= =========   ============== ===============
</TABLE>



See notes to the financial statements.


                                       4D

<PAGE>


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

<TABLE>
<CAPTION>
                                                                                                                    Period From
                                                                                                                    August 31,
                                                                                                                   1988 (Date of
                                                                                                                    Inception)
                                                                                                                      Through
                                                                                                                   December 31,
                                                                                                                       1998
                                                                                                                 -----------------
                                                                                  Years Ended December 31,
                                                                              ---------------------------------  -----------------
                                                                                   1998              1997
                                                                              ---------------   ---------------  -----------------
                                                                                                                    (Unaudited)
                                                                                                                 -----------------
Cash Flows From Operating Activities
<S>                                                                          <C>              <C>               <C>                
    Net Loss                                                                 $     (1,101,753)$      (1,432,186)$      (10,845,470)
                                                                              ---------------   ---------------  -----------------
    Adjustments to Reconcile Net Loss to Net Cash Used in Operating
        Activities
          Depreciation and amortization                                                49,073            40,292            368,743
          Noncash issuance of stock for services                                       10,000                 -             10,000
    Changes in Assets and Liabilities
        (Increase) Decrease in
          Inventory                                                                         -           144,033                  -
        Prepaid insurance                                                            (6,555)                  -            (6,555)
        Due to/from affiliated companies                                            (19,600)              4,485           (19,543)
        Increase (Decrease) in
          Accounts payable and accrued expenses                                       229,961          (542,861)         1,165,798
          Accrued interest payable                                                          -          (114,849)            62,340
                                                                              ---------------   ---------------  -----------------

        Total Adjustments                                                             262,879          (468,900)         1,580,783
                                                                              ---------------   ---------------  -----------------
    Net Cash Used in Operating Activities                                            (838,874)       (1,901,086)        (9,264,687)

Cash Flows from Investing Activities
    Payments for property and equipment                                                     -                 -           (413,032)
    Loans to stockholders                                                                   -                 -           (774,039)
                                                                              ---------------   ---------------  -----------------
    Net Cash Used in Investing Activities                                                   -                 -         (1,187,071)
                                                                              ---------------   ---------------  -----------------

Cash Flows From Financing Activities
    Proceeds from mortgage payable                                                    500,000                 -            500,000
    Repayment of mortgage payable                                                    (160,000)                -           (160,000)
    Payment for mortgage loan costs                                                   (46,761)                -            (46,761)
    Proceeds of additional paid-in capital                                            374,961           938,147          2,682,399
    Proceeds from issuance of stock                                                   150,000           960,000          7,488,148
    Payment for treasury stock                                                              -                 -            (30,000)
    Loans from stockholder                                                                  -            24,547             32,547
                                                                              ---------------   ---------------  -----------------
    Net Cash Provided by Financing Activities                                         818,200         1,922,694         10,466,333
                                                                              ---------------   ---------------  -----------------

    Net (Decrease) Increase in Cash                                                   (20,674)           21,608             14,575
    Cash - Beginning of Periods                                                        35,249            13,641                  -
                                                                              ---------------   ---------------  -----------------
    Cash - End of Periods                                                    $         14,575 $          35,249 $           14,575
                                                                              ===============   ===============  =================
</TABLE>

See notes to the financial statements.


                                       5

<PAGE>

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

                                        





<TABLE>
<CAPTION>
                                                                                                                 Period From
                                                                                                                 August 31,
                                                                                                                1988 (Date of
                                                                                                                 Inception)
                                                                                                                   Through
                                                                                                                December 31,
                                                                                                                    1998
                                                                                                              -----------------
                                                                               Years Ended December 31,
                                                                           ---------------------------------  -----------------
                                                                                1998              1997
                                                                           ---------------   ---------------  -----------------
                                                                                                                 (Unaudited)
                                                                                                              -----------------
Supplemental  Disclosures of Cash Flow  Information Cash paid during the periods
    for:
<S>                                                                       <C>              <C>             <C>               
        Interest paid                                                     $         59,113 $        18,499 $          123,769
        Income taxes paid                                                 $            400 $             - $              400

Supplemental Schedule of Non-Cash Investing and Financing Activities:

    The financial  statements at December 31, 1997,  include a noncash financing
    transaction of $486,970 for the respective exchange and  reclassification of
    redeemable preferred stock to amounts due to certain stockholders.

    The financial statements at December 31, 1997, include noncash investing and
    financing  transactions  of $15,688 for the  acquisition  of  equipment by a
    shareholder which were treated as additional paid-in capital.

    The financial  statements  at December 31, 1997 include a noncash  investing
    and financing transaction of an $8,000 loan from a stockholder,  made in the
    prior year was  exchanged  for 500 shares of Series A  preferred  stock.  In
    addition,  2,500  shares of Series A  preferred  stock was  exchanged  for a
    $50,000 decrease in the mortgage payable.

    Land and building  amounting to $1,500,000  was  transferred  to the company
    from the majority stockholder and his family pursuant to a consent judgement
    on  February  6,  1995.  A  mortgage  of  $300,000  was  assumed  as well as
    $1,200,000 recorded in additional paid-in capital.
</TABLE>











See notes to the financial statements.

                                        6

<PAGE>

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

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Organization
     Coates  International,   Ltd.  ("CIL"  or  the  "Company")  is  a  Delaware
     corporation  organized in October 1991 by its President and majority
     stockholder George J. Coates ("GJC') as the successor in interest to a 
     Delaware  corporation of the same name incorporated in August 1988.

    CIL has developed a spherical rotary valve system  (the"Coates  System") for
    use in  piston  driven  internal  combustion  engines  of all  types  and is
    manufacturing  automotive  engines  modified  with the  Coates  system  on a
    limited scale basis at its Wall Township,  New Jersey facility. CIL also has
    an exclusive  license to sell and grant sublicenses with respect to products
    using the Coates System based on the Coates Patents. Since there has been no
    significant  revenue  generated from the sales of engines  modified with the
    Coates  System,  or from  the  granting  of  sub-licenses,  the  Company  is
    considered  to  be a  Development  Stage  Company  for  financial  reporting
    purposes.

Going Concern Uncertainty
    The  accompanying  financial  statements  have been  prepared  assuming  the
    Company will continue as a going concern. CIL's ability to generate revenues
    and  achieve  profitable   operations  is  principally  dependent  upon  the
    execution   and   funding  of   sub-license   agreements   with  the  engine
    manufacturers of retrofitters, and upon the manufacture and sale, by CIL, of
    high performance  engines.  The Company has suffered recurring losses during
    its  development  stage and has accumulated a deficit since its inception to
    December  31, 1998,  of  $10,845,470.  The Company  also has minimal  liquid
    assets,   while   reporting   $1,253,729   in   current   liabilities.   The
    aforementioned  raise  substantial  doubt  about the  Company's  ability  to
    continue as a going  concern.  The  financial  statements do not include any
    adjustments that might be necessary in the event the Company cannot continue
    as a going concern.

    Management's  plans are to raise  additional  capital through a common stock
    offering,  sell sub-licenses to use its technology to interested  purchasers
    as well as to obtain firm orders on its engines for  delivery to  interested
    customers.  The Company plans to construct a manufacturing  facility as well
    as to  acquire  the  necessary  machinery  and  equipment  for a full  scale
    assembly line.

Property, Plant & Equipment
    Property,  plant and equipment are stated at cost.  Depreciation is computed
    using the straight line method over the estimated useful life of the assets:
    40 years for building and building improvements,  5 to 7 years for machinery
    and equipment  and 5 to 10 years for  furniture  and  fixtures.  Repairs and
    maintenance expenditures which do not extend the useful lives of the related
    assets are expensed as incurred.

    In the event that facts and  circumstances  indicate that long-lived  assets
    may be impaired,  an evaluation of  recoverability  would be performed  and,
    accordingly,  a  determination  of the  write-down  related to the  specific
    assets made.

Earnings (Loss) Per Share
    The Company has not issued any common  stock,  but the  preferred  stock has
    voting  privileges.  (Loss) per share,  in accordance with the provisions of
    Financial  Accounting  Standards  Board No.  128,  "Earnings  Per Share," is
    computed  by  dividing  the net  (loss) by the  weighted  average  number of
    preferred shares outstanding during the periods.

Revenue Recognition
    The Company has not generated  revenues from sales of engines.  Revenue from
    the granting of sub-licenses is recognized upon receipt of funds.

Advertising Costs
    Advertising costs are charged to operations when incurred.  Advertising 
    expense was $104,558 and $50,069 for the years ended  December 31, 1998
    and 1997, respectively.

                                        7

<PAGE>



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

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Continued


Research and Development
    Research and development (R&D) costs are charged to operations as incurred.

Income Taxes
    In accordance with the provisions of Financial Accounting Standards No. 109,
    "Accounting  for  Income  Taxes"  ("SFAS  No.  109"),   deferred  taxes  are
    recognized for operating  losses that are available to offset future taxable
    income.  Valuation  allowances  are  established  when  necessary  to reduce
    deferred tax assets to the amount expected to realized. The Company incurred
    net operating losses for  financial-reporting  and  tax-reporting  purposes.
    Accordingly,  the benefit  from income  taxes has been offset  entirely by a
    valuation  allowance  against  the related  deferred  tax asset for the year
    ended December 31, 1998.

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
    reporting period. Actual results could differ from those estimates.

CONCENTRATIONS OF CREDIT AND BUSINESS RISK

    The  Company  maintains  cash  balances in several  financial  institutions.
    Accounts at each  institution are insured by the Federal  Deposit  Insurance
    Corporation up to $100,000,  of which the Company's  accounts may, at times,
    exceed the federally insured limits.

    The Company intends to market its engines modified with the Coates System to
    the  automotive  racing  market.   To  successfully   develop  and  sell  an
    automobile,  truck or  motorcycle  engine for road use (as opposed to racing
    use) in the United States  (U.S.),  the Company will be required to obtain a
    Certificate  of  Conformity  from  the  Office  of  Mobile  Services  of the
    Environmental  Protection  Agency  (EPA) to the effect  that its  engines as
    modified with the Coates System comply with applicable emission standards.

    Development  of the Coates System  technology  was  initiated by GJC,  CIL's
    founder,  President  and  controlling  stockholder  in the late  1970's  and
    development  efforts have been conducted  continuously since such time. From
    July  1982  through  May 1993,  seven  U.S.  patents  as well as a number of
    foreign patents were issued to GJC with respect to the Coates System.  Since
    the  inception  of CIL in  1988,  all  aspects  of the  business  have  been
    completely dependent upon the activities of GJC (who is a resident alien and
    not a U.S.  citizen and who does not have an employment  contract with CIL).
    The loss of GJC's  availability  or  services  due to death,  incapacity  or
    otherwise would have a material adverse effect on the Company's business and
    operations.

RESTRICTED CASH

    The Company placed $112,000 in an escrow account (pursuant to a court order)
    of net proceeds  raised from a 48,000 CIL Series A Preferred  Stock  private
    placement  offering in July 1997. The funds were escrowed for the payment of
    interest due to two former stockholders.



                                        8

<PAGE>



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

 PROPERTY, PLANT AND EQUIPMENT

    Property,  plant  and  equipment  at cost,  less  accumulated  depreciation,
consists of the following at December 31, 1998:


             Land                                       $         920,550
             Building                                             579,450
             Building improvements                                145,871
             Machinery and equipment                              251,054
             Furniture and fixtures                                39,295
                                                          ---------------
                                                                1,936,220
             Less:  Accumulated depreciation                      379,861
                                                          ---------------
                  Total                                 $       1,556,359
                                                          ===============

    Depreciation  expense  amounted  to $25,692 and  $40,292  for the years 
    ended December 31, 1998 and 1997, respectively.

ACCRUED EXPENSES

    Accrued expenses at December 31, 1998 is comprised of the following:


             Legal Fees                                  $         809,439
             Patent Legal Fees                                      74,873
             Printing Fees                                          18,000
             Audit Fees                                            151,384
             Accounting Fees                                         7,700
             Real Estate Taxes                                      22,089
                                                           ---------------
                                                         $       1,083,485
                                                           ===============

MORTGAGE PAYABLE

    The mortgage payable is  collateralized  by the land and the building with a
    net book value of $1,411,555 that the Company uses as its principal place of
    business.  The  mortgage  bears  interest  at the rate of 18% per  annum due
    monthly  and is due in June  1999.  The  Company  is  making  interest  only
    payments  on the  mortgage.  In March 1999, the mortgage payable was 
    refinanced to a $900,000 balance which will become due and payable on
    April 1, 2004 and bears interest at 15% per annum payable monthly.  The
    balance  has been reclassified  as a long-term liability as a result of
    the subsequent refinancing and has been guaranteed by GJC.

INCOME TAXES

    The Company has available net operating loss  carryforwards  at December 31,
    1998, which may be used to reduce Federal taxable income and tax liabilities
    in future years, approximating $9,918,000 which begin to expire December 31,
    2003 through 2012.

    The Company's  total deferred tax asset and valuation  allowance at December
31, 1998 is as follows:


             Total deferred tax asset                   $       3,471,000
             Less valuation allowance                   $      (3,471,000)
                                                              ------------
                                                                        - 
             Net deferred tax asset                     $     ============
                                                             
                                        9

<PAGE>





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


LICENSES

    The Company has incurred legal and related costs  associated  with licenses.
    Such costs  amounted to $44,113 and $75,305 for the years ended December 31,
    1998 and 1997.  As the  probable  future  economic  benefit of such costs is
    uncertain, they have been expensed.

RELATED PARTY TRANSACTIONS

    Due from related  parties are entities of which GJC is the sole  shareholder
    and represent net  advances/repayments  owed to the Company which amounts to
    $19,543 at December  31, 1998 and are  unsecured,  non-interest  bearing and
    payable on demand.

    Due to  Stockholder  represent net  advances/repayments  made to the Company
    which   amounts  to  $12,505  at  December  31,  1998  and  are   unsecured,
    non-interest bearing and payable on demand.

    The Company subcontracts its project expense from any entity of which GJC is
    the sole shareholder. During the years ended December 31, 1998 and 1997, the
    Company paid $0 and $212,626, respectively, for these services.

    The  Company  has  signed  a  licensing  agreement  with a  company  and its
    affiliates of which the President is a less than 1% stockholder of CIL.

COMMITMENTS AND CONTINGENCIES

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

FAIR VALUE OF FINANCIAL INSTRUMENTS

    Cash, Accounts Payable and Accrued Expenses
        The  carrying  amount  approximates  fair  value  because  of the  short
maturity of these instruments.

    Limitations
        Fair  value  estimates  are made at a specific  point in time,  based on
        relevant  market   information  and  information   about  the  financial
        instrument.  These  estimates  are  subjective  in  nature  and  involve
        uncertainties and matters of significant  judgement and therefore cannot
        be determined with precision. Changes in assumptions could significantly
        affect the estimates.

                                       10

<PAGE>

                                    EXHIBITS

                       SECURITIES AND EXCHANGE COMMISSION

                             WASHINGTON, D.C. 20549


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


                                    FORM 8-K

                                 CURRENT REPORT



                     PURSUANT TO SECTION 13 OR 15(d) OF THE

                         SECURITIES EXCHANGE ACT OF 1934


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

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

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


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

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


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








<PAGE>



Item 5.           Other Events.

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

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

                                        2

<PAGE>


Item 7.           Financial Statements and Exhibits.

                           (c)      Exhibits.

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

                                   SIGNATURES


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


         October 22, 1998                   Coates International, Ltd.



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






coates2.8k

                                                    3

<PAGE>


                                    EXHIBIT

                EXCLUSIVE CONDITIONAL WORLDWIDE LICENSE AGREEMENT

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

                              B A C K G R O U N D:

         WHEREAS,  LICENSOR  I is the  patentee  and owns  and has the  right to
license  certain PATENT RIGHTS (as  hereinafter  defined) used in the design and
construction of internal  combustion  engines employing  spherical rotary valves
(the "COATES SPHERICAL ROTARY VALVE SYSTEM"); and

         WHEREAS, LICENSOR II has loaned LICENSOR I funds to reimburse
Coates International, Ltd. for patent expenses; and

         WHEREAS,  LICENSOR  I has  granted  to  LICENSOR  II and  LICENSOR  has
accepted an exclusive, revocable license with the right to sublicense; and

         WHEREAS,  LICENSOR I and LICENSOR II had each  granted to LICENSEE,  by
License Agreement,  dated December 22, 1997, an exclusive  revocable license for
all of the  countries,  their  territories  and  possessions,  comprising  North
America,  Central  America and South  America to make,  use, sell and have made,
LICENSED PRODUCT falling within the scope of the PATENT RIGHTS; and



<PAGE>



         WHEREAS,  it is the desire of LICENSOR I and  LICENSOR II to modify and
expand  upon the  previously  granted  license for the  consideration  set forth
herein and to render the previously granted licenses  superseded by this license
and hence null and void.

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

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

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

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

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

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



                                        2

<PAGE>



                          ARTICLE II - LICENSES GRANTED

         2.1 - LICENSES GRANTED TO LICENSEE

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

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

         2.2 - IMPROVEMENTS

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

         2.3 - PATENT MARKINGS

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


                                        3

<PAGE>



         2.4      ACKNOWLEDGMENT OF LICENSE

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

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

         3.2 - In  further  consideration  of  the  granting  of  this  License,
LICENSEE shall (a) pay all costs  associated  with the PATENT RIGHTS  identified
herein in the  TERRITORY;  (b) pay to  LICENSOR I a license  payment  fee in the
amount of  $2,500,000,  payable  when,  as and if the  LICENSEE  has  sufficient
capital to make such  payment,  and; (c) pay to LICENSOR I a royalty  payment in
the amount of twenty (20%) percent of any and all royalties received by

                                        4

<PAGE>



the LICENSEE  pursuant to any and all license,  royalty or other  agreement with
any third party in the TERRITORY derived from the manufacture,  assembly or sale
of any part,  accessory,  component  or engine  incorporating  any aspect of the
PATENT RIGHTS, the CSRV VALVE SYSTEM or IMPROVEMENTS.

            ARTICLE IV - REPRESENTATIONS, OBLIGATIONS, WARRANTIES AND
                                   DISCLAIMERS

         4.1 -  LICENSOR  I  represents  and  warrants  that  LICENSOR  I is the
rightful  owner of the PATENT RIGHTS and has the exclusive  right to license all
of the PATENT  RIGHTS and that all such  PATENT  RIGHTS  pertaining  to the CSRV
VALVE SYSTEM under  LICENSOR'S  control and  possession in the TERRITORY are set
forth in Attachment 1.4. Further,  LICENSOR I and LICENSOR II have the power and
authority to execute,  deliver and perform its obligations under this Agreement,
nor the performance of its obligations hereunder will constitute a breach of the
terms or provisions of any contract or agreement to which LICENSOR is a party.

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

                                        5

<PAGE>



                      ARTICLE V - DURATION AND TERMINATION

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

         5.2 - This Agreement shall terminate effective immediately
upon:

                  (a) The  filing by  LICENSEE  of an  involuntary  petition  in
         bankruptcy,  the  entry of a decree  or order by a court or  agency  or
         supervisory  authority  having  jurisdiction  in the  premises  for the
         appointment  of a  conservator,  receiver,  trustee  in  bankruptcy  or
         liquidator  for  LICENSEE  in any  insolvency,  readjustment  of  debt,
         marshaling   of  assets   and   liabilities,   bankruptcy   or  similar
         proceedings,  or the winding up or liquidation of its affairs,  and the
         continuance  of any  such  petition,  decree  or order  undismissed  or
         unstayed and in effect for a period of sixty (60) consecutive days; or

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

                                        6

<PAGE>



         make an assignment for the benefit of its creditors or
         voluntarily suspend payment of its obligations; or

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

                ARTICLE VI - LIMITATION OF ASSIGNMENT BY LICENSEE

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

                           ARTICLE VII - GOVERNING LAW

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

                         ARTICLE VIII - ENTIRE AGREEMENT

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

                                        7

<PAGE>



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

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

                              ARTICLE IX - NOTICES

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

         If to the LICENSORS:

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


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





                                        8

<PAGE>



         If to LICENSEE:

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

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

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

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





                                        9

<PAGE>



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

ATTEST:


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




                                           s/Gregory Coates
                                        GREGORY COATES - INDIVIDUALLY


                                           COATES INTERNATIONAL, LTD.

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





coatlic2.agr


<PAGE>