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                UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                              Washington, DC 20549

                                  FORM 10-KSB/A
(Mark One)

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

                   for the fiscal year ended December 31, 2005
                                       or

|_|   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
      EXCHANGE ACT OF 1934

    For the transition period from _______________ to _______________________

                          Commission File No.: 33-94884

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

                           COATES INTERNATIONAL, LTD.
                 (Name of small business issuer in its charter)

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

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

         Issuer's telephone number, including area code: (732) 449-7717
    Securities registered pursuant to Section 12(b) of the Exchange Act: None
 Securities registered pursuant to Section 12(g) of the Exchange Act:
                         Common Stock, $.0001 par value
                                 ---------------

Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for
such shorter period that the issuer was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes |X| No
|_| Check if there is no disclosure of delinquent filers in response to Item 405
of Regulation S-B contained in this Form 10-KSB, and no disclosure will 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 any amendment to this Form 10-KSB. |X| Check whether the issuer is a shell
company (as defined in Rule 12b-2 of the Exchange Act). Yes |_| No |X| State
issuer's revenues for its most recent fiscal year: $0 Number of shares of the
issuer's Common Stock outstanding at October 16, 2006: 266,894,278 State the
aggregate market value of the voting and non-voting common equity held by
non-affiliates: Not applicable -- the issuer's Common Stock is not traded on any
market. Transitional Small Business Issuer Disclosure Format (check one): Yes
|_| No |X|

EXPLANATORY NOTE: The issuer is amending and restating in its entirety its
filing on Form 10-KSB made on April 17, 2006.
--------------------------------------------------------------------------------

<PAGE>

Item 1. Description of Business

General

      Coates International, Ltd. ("we" or the "Company") has developed over a
period of more than 25 years a patented spherical rotary valve system which is
adaptable for use in piston-driven internal combustion engines of many types.

      The Coates rotary valve system is designed to replace the intake and
exhaust conventional "poppet valves" currently used in almost all piston-driven
stationary, automotive, motorcycle and marine engines. Unlike conventional
valves which protrude into the engine cylinder, the Coates rotary valve system
utilizes spherical valves that rotate in a cavity formed between a two-piece
cylinder head. The Coates rotary valve system uses approximately 1/10th the
moving parts of conventional poppet valve assemblies. As a result of these
design improvements, management believes that the engines incorporating the
Coates rotary valve system (Coates engines) will last significantly longer and
will require less lubrication over the life of the engine, as compared to
conventional engines. In addition, Coates rotary valves can be designed with
larger openings into the engine cylinder than conventional valves so that more
fuel and air can be inducted into and expelled from the cylinder in a shorter
period of time. Larger valve openings permit higher revolutions-per-minute
(RPMs) and permit higher compression ratios with lower combustion chamber
temperatures, allowing the Coates engine to produce more power than equivalent
conventional engines.

      We hold an exclusive license to this technology from our founder, George
J. Coates, and his son, Gregory Coates, for North America, Central America and
South America, and a more limited license, that will become effective no later
than the end of 2006, to this technology outside of the territories mentioned in
the beginning of this sentence.

      Since our inception, the bulk of our development costs and related
operational costs have been funded primarily through cash generated from the
sale of stock, through capital contributions and loans made by George Coates,
through a sale-and-leaseback transaction related to our principal facility, and
from prototype models and licensing fees. The Company has never received any
revenues from the sale of engines, has never been profitable and has incurred
substantial losses from operations of $894,963 and $1,257,576 for the years
ended December 31, 2005 and 2004, respectively. The Company expects that losses
from operations will continue until the Coates engine is successfully introduced
into the marketplace, or the Company receives substantial licensing revenues.
These losses from operations were substantially related to research and
development of our intellectual property and patent filing and maintenance
costs.

      Coates International, Ltd. is a Delaware corporation organized in October
1991 as successor-in-interest to a Delaware corporation of the same name
incorporated in August 1988. All of our operations are located in Wall Township,
New Jersey (outside of New York City). We maintain a website at the following
address: www.coatesengine.com. Through a link on our website to the SEC website,
www.sec.gov, we provide free access to our annual reports on Form 10-K,
quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to
those reports filed or furnished pursuant to Section 13(a) or 15(d) of the
Securities Exchange Act of 1934 as soon as reasonably practicable after
electronic filing with the SEC. The charters of our Board committees, and our
Code of Business Conduct and Ethics for our directors, officers and employees,
will also be available on our website, and we will post on our website any
waivers of, or amendments to, such code of ethics. Our website and the
information contained therein or linked thereto are not incorporated by
reference into this report.

                                     - 1 -
<PAGE>

Background

      The internal combustion engine has been in use for approximately 100 years
and is the most widely used engine in the world. Industry sources indicate that
there are more than 120 million new combustion engines built in the world every
year and that 40 million engines are rebuilt annually. In the late 1960's and
1970's, most vehicle combustion engines in the United States were running at a
compression ratio of 12 to 1 (air to gasoline) which resulted in an engine
efficiency of approximately 35 percent. The rest of the engine's power is lost
in friction, pumping and heat loss. When it was found that lead additives in
fuel had an adverse effect on the environment, unleaded gasoline was Federally
mandated. Unleaded gasoline is not as desirable as a fuel as leaded gasoline
from an engineering and efficiency standpoint, and the early use of unleaded
gasoline created a number of design problems, principally related to overheating
of the engine, pre-ignition and resultant damage. That problem was largely
solved by lowering engine compression ratios, but at a cost of reduced
efficiency from approximately 35% to approximately 22%. This loss of efficiency
reduces gas mileage and engine performance. Efficiency can be increased by
increasing "volumetric efficiency" at maximum RPMs, but conventional valves tend
to "float" or bounce at higher RPMs and are consequently unable to deliver
adequate air and fuel to the cylinder. In an attempt to solve this problem,
engine manufacturers increased the number of valves per cylinder, but this
approach created other problems that cause unburned fuel to escape through the
exhaust valves leading to a loss of power, lower gas mileage and increased
pollutants. In addition, variable valve timing partially solved some of these
additional problems, but that solution involves additional moving parts that
eventually degrade and wear out. Also, variable valve timing on quick
deceleration can cause piston and valve contact with resultant serious damage.
Furthermore, conventional valves with solid "valve lifters" as opposed to
hydraulic valve lifters must have clearances readjusted periodically. In sum,
conventional "poppet" valves have been the most troublesome part of the internal
combustion engine. The basic inefficiencies of the conventional poppet valve
design result in engine inefficiency and decreases in engine life.

      Conventional valves also have significant environmental deficiencies.
Conventional exhaust valves are lubricated with engine oil which burns in
combustion and is expelled directly into the atmosphere. Intake valves are also
lubricated with engine oil, which is washed off and forced into the combustion
chamber with the air and fuel mixture. This slows combustion, produces further
emissions and eventually clogs the catalytic converter.

      Management believes that the patented Coates rotary valve system solves or
significantly mitigates these problems. Coates rotary valves are vented and
charged on the opposite side of each valve sphere and rotate away from the
combustion chamber reducing engine heat and allowing higher compression ratios
that make the engine significantly more efficient and powerful.

      We are now engaged in adapting our technology to manufacturing industrial
engines to power electric generators, and intend to begin to market engines
utilizing our proprietary designs.

Markets

      The design of the Coates Spherical Rotary Valve System (the "CSRV System")
gives the Company the flexibility to retrofit it to existing internal combustion
engines of all sizes and in a wide variety of markets. In addition, the CSRV
System can run on alternative fuels. Accordingly, the markets the Company may
sell the CSRV System include all markets in which internal combustion engines
are sold, including, but not limited to the following: engines for electric
generators from home use to the largest industrial complexes to augmenting
"grid" installations; engines to power motorcycles, automobiles, light trucks,
heavy trucks and machinery; marine engines; military equipment; light aircraft
and helicopters; and lawn mowers, snow mobiles and jet ski's.

      According to the latest information published by the US Census Bureau on
2002, the annual internal combustion engine market in the U.S. was in excess of
$96 billion.

                                     - 2 -
<PAGE>

Strategy

      The long-term objective of the Company is to become the leader in the
Americas in the design and manufacture of internal combustion engines for a wide
variety of uses. The primary market the Company initially is focused on is the
industrial generators market. The Company adapted the CSRV System to manufacture
its 14.0 liter inline, 6-cylinder, 855 cubic inch engine/generator fueled by
natural gas which is in the final stages of testing. The Company has been
informed by the independent testing company, Compliance and Research Services,
Inc. of Plainfield New Jersey, a Federally-sanctioned independent facility, that
our product as described above complies with the governmental standards as set
forth in 40 CFR 1048, the Code of Federal Regulations Part 1048, that regulates
environmental standards for gas powered industrial engines. The Company is now
permitted to market this product to the market. In parallel to penetrating the
industrial generators market, the Company intends to adapt the CSRV System to be
used in the other markets in which internal combustion engines are used, such as
motor vehicles, motorcycles, trucks, ships, trains, military equipment, light
aircraft and helicopters and others.

Operational Plan

Currently, the prototypes of the CSRV System-based generator engine are
undergoing final performance and other tests. The Company intends to market the
engine/generators to parties who have conveyed conditional orders upon the
successful completion of the above tests. We expect that purchase orders for
thousands of the Company's generator engines will thereafter be converted to
firm orders, the fulfillment of these orders to be completed over the next three
to five years. The Company intends to take advantage of the fact that
essentially all the components of the CSRV generator engine may be readily
sourced and acquired from subcontractors, and accordingly, intends to
manufacture the generator engine in the two following ways:

o     Assembly - to develop assembly lines within the Company's premises. The
      Company has been evaluating various opportunities to expand or acquire
      additional manufacturing capacity. When the demand for our products
      justifies it, the Company will take the required steps in order to
      increase its work force. We may hire up to about 200 employees within 12
      to 24 months.

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

Material Agreements

License Agreement - Well to Wire Energy, Inc.

      On September 29, 1999, we signed a license agreement with Well to Wire
Energy, Inc. ("WWE"), an oil and gas company in Canada. The agreement
exclusively licenses in Canada the use of the Coates technology for V-8 engines
to be fueled by natural gas to generate electrical power. The agreement provided
for license fee of $5,000,000, of which a deposit payment in the amount of
$300,000 was made. A separate research and development agreement with WWE
provides for development and delivery of certain prototype engines. The research
and development agreement was not reduced to the form of a signed written
agreement.

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

      o     The Company expects to ship to WWE in the near term the third power
            unit of the Company's generator up to 300 kw depending on the fuel
            used (the 855 cubic inch, 6 cylinder industrial electric power
            generator, incorporating the CSRV engine, the "Generator"). Upon
            receipt of the Generator, and pending test results meeting WWE's
            expectations, the balance of $3,905,000 on account of the research
            and development agreement mentioned above will become due and
            payable to the Company by WWE. In addition, 180 days later, the
            balance of US $4,700,000 on account of September 29, 1999 agreement
            will become due and payable to the Company by WWE in 16 equal
            quarterly installments.

                                     - 3 -
<PAGE>

      o     Pursuant to the agreements by and between WWE and the Company, WWE
            will have the exclusive right to use, lease, and sell the generators
            that are based on the CSRV System technology within Canada.

      o     WWE will have a specified right of first refusal to market the
            Generators worldwide.

      o     The Company and WWE have agreed that the minimum annual number of
            Generators to be purchased by WWE in order to maintain exclusivity
            is 120. Until otherwise agreed between the parties, the price per
            Generator shall be US $150,000. The minimum purchase requirement
            shall start to apply in 2007. In the event WWE fails to purchase the
            minimum 120 Coates generator engines during any year, WWE will
            automatically lose its exclusivity. In such a case, WWE would retain
            non-exclusive rights to continue to use the Coates generator engine.

      o     WWE shall not be required to pay any royalties to us as part of the
            engagements between the parties.

      o     All patent and other intellectual property rights related to the
            engine will remain with the Company.

Competition

      Management believes that the Coates generator engine prototypes which are
based on the CSRV System will provide substantially enhanced efficiencies in
power generation and longevity. We believe that the Coates generator engine will
outperform all other comparable natural gas-fueled electric generator engines
currently utilized in the energy conversion market.

      Notwithstanding our perceived competitive advantages, the power generation
market is a highly competitive industry currently occupied by extremely large
companies such as Caterpillar, Inc., which owns MAK, Perkins and FG Wilson,
Detroit Diesel Corporation, AB Volvo, Cummins and Marathon, among others. All of
these companies have far greater financial and other resources than us and
already occupy segments of the power generation market. In order to successfully
penetrate this industry, the Coates generator engine will have to produce the
performance and durability results anticipated by management and sell at a price
or prices that will enable it to effectively compete and gain entrance into this
market.

Parts and Supplies

      To date, management has utilized the services of various vendors and
manufacturers available throughout the United States to provide all of the parts
necessary to assemble the Coates generator engine. We expect to continue to
purchase all of our raw materials and parts, manufactured to our specifications,
from a wide assortment of suppliers. We intend to commence the assembly of the
Coates generator engines at our New Jersey facility and to acquire additional
facilities if and when needed.

Patents and Licenses

      On December 22, 1997 we signed a license agreement with George J. Coates
and Gregory Coates. The agreement exclusively licenses us to make, use, sell and
have made, products falling within the scope of certain patent rights that
enable us to manufacture the CSRV System in North America, Central America and
South America. In addition, the agreement non-exclusively licenses the
manufacture and sale of a combustion engine head or components thereof
incorporating certain patent rights for testing and evaluation purposes only
anywhere in the world. The patent rights referred to above include the
following, all of which licensed to us by George J. Coates: (I) 17 patents
registered in the United States; (II) certain patents registered in Canada,
Mexico and in countries in Central and South America relating to the CSRV
System; and (III) 1 U.S. patent application filed by Mr. George Coates. In
addition to the patent rights, the agreement licenses to us any improvement
change or modification to the CSRV System developed created or modified by a
party to this agreement to the extent the same comes within the scope of one or
more of the claims of the patent rights mentioned above.

                                     - 4 -
<PAGE>

      In consideration for our rights under the license agreement we issued
George J. Coates 500,000 of our Series A Preferred Shares and paid Gregory
Coates $4,000.

      On November 10, 2005 we signed an additional license agreement with George
J. Coates. The agreement exclusively licenses us to make, use, sell and have
made, products falling within the scope of certain patent rights that relate to
the manufacture of the CSRV System in North America, Central America and South
America. In addition, the agreement non-exclusively licenses the manufacture and
sale of prototypes based on the patent rights anywhere in the world. The patent
rights referred to above include three US patents. In addition to the patent
rights the agreement licenses to us any improvement change or modification to
the CSRV System developed created or modified by a party to this agreement to
the extent the same comes within the scope of one or more of the claims of the
patent rights mentioned above. In consideration for our rights under the
November 10, 2005 license agreement, we issued George J. Coates 1,000,000 of our
common stock.

      On October 23 2006, we signed a license agreement with George J. Coates
and Gregory Coates (the "New Coates License Agreement"), that replaces the
license agreements signed on December 22, 1997 and November 10, 2005. The New
Coates License Agreement will become effective upon the closing by us of an
equity investment of at least $10,000,000 provided that such investment occurs
on or before December 31, 2006. Under the New Coates License Agreement, George
J. Coates and Gregory Coates granted to us: (A) an exclusive, perpetual,
royalty-free, fully paid-up license to all intellectual property that is
currently owned or controlled by them that relates to an internal combustion
engine that includes the CSRV System (the "CSRV Engine") plus any such
intellectual property that is developed by them during their employment with us
and for five years after termination of such employment for the purpose of
development, manufacturing, sale and/or distribution of the CSRV Engine; and (B)
a perpetual, royalty-free, fully paid-up license to all intellectual property
that is currently owned or controlled by them or that is developed by them
during their employment with us and for five years after termination of
employment that do not relate to the CSRV Engine for the purpose of development,
manufacturing, sale and/or distribution of the CSRV Engine. The license under
(B) above shall be exclusive through the earlier to occur of: (i) the end of any
four consecutive fiscal quarters in which we recognize revenue of at least $200
million (the "Threshold Date"); or (ii) December 31, 2009, and thereafter shall
become non-exclusive. The licenses in (A) and (B) above are limited to North,
South and Central America, provided, however, that until the Threshold Date such
licenses shall apply worldwide. In addition, after the Threshold Date such
licenses shall include all countries outside of North America, Central America
and South America in which we will have sold our products through the Threshold
Date for at least $5 million in the aggregate, provided, however, that such
licenses shall be non-exclusive.

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

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

                                     - 5 -
<PAGE>

      For a description to our sublicense agreement with Coates Motorcycle
Company, see Item 12, titled "Certain Relationship and Related Transaction".

      We rely upon patents, trade secrets, know-how and continuing technological
innovation to develop and maintain our competitive position. We cannot assure
you that we can limit unauthorized or wrongful disclosures of trade secrets or
otherwise confidential information. In addition, to the extent we rely on trade
secrets and know-how to maintain our competitive technological position, we
cannot assure you that others may not develop independently the same, similar or
superior techniques.

Environmental Regulatory Compliance

      All of our new engines, including the Coates generator engine, will be
subject to extensive environmental laws, rules and regulations that impose
standards for emissions and noise. Initially, compliance with the emissions
standards promulgated by the U.S. Environmental Protection Agency ("EPA"), as
well as those imposed by the State of New Jersey and other jurisdictions where
we expect our engines will be used, will have to be achieved in order to
successfully market the Coates generator engine. Our natural gas powered
engine/generators comply with governmental standards as set forth in 40CFR (Code
of Federal Regulations) 1048, that regulates environmental standards for
gas-powered industrial engines. The Company's ability to comply with applicable
and future emissions standards is necessary for us to enter the power generation
and other markets. Failure to comply with these standards could result in
material adverse effect on our business and financial condition.

Employees

      At December 31, 2005, we had 11 employees, including George J. Coates and
his son Gregory Coates, who perform management, assembly and research and
development functions. Bernadette Coates, the spouse of George J. Coates, is
employed as administrative manager for the Company. We subcontract for certain
labor services, parts and materials from Coates Precision Engineering, Inc., a
corporation owned by George J. Coates, to which during the years ended December
31, 2005 and 2004, the Company paid $84,058 and $46,112, respectively

Risk Factors

      The following risk factors should be considered carefully in addition to
the other information contained in this report. This report contains
forward-looking statements. Forward-looking statements relate to future events
or our future financial performance. We generally identify forward-looking
statements by terminology such as "may," "will," "should," "expects," "plans,"
"anticipates," "could," "intends," "target," "projects," "contemplates,"
"believes," "estimates," "predicts," "potential" or "continue" or the negative
of these terms or other similar words. These statements are only predictions.
The outcome of the events described in these forward-looking statements is
subject to known and unknown risks, uncertainties and other factors that may
cause our, our customers' or our industry's actual results, levels of activity,
performance or achievements expressed or implied by these forward-looking
statements, to differ. "Risk Factors," "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Business," as well as other
sections in this report, discuss some of the factors that could contribute to
these differences.

                                     - 6 -
<PAGE>

      The forward-looking statements made in this report relate only to events
as of the date on which the statements are made. We undertake no obligation to
update any forward-looking statement to reflect events or circumstances after
the date on which the statement is made or to reflect the occurrence of
unanticipated events.

      This report also contains market data related to our business and
industry. These market data include projections that are based on a number of
assumptions. If these assumptions turn out to be incorrect, actual results may
differ from the projections based on these assumptions. As a result, our markets
may not grow at the rates projected by these data, or at all. The failure of
these markets to grow at these projected rates may have a material adverse
effect on our business, results of operations, financial condition and the
market price of our Common Stock.

      We have never sold any Coates engines, and we have never been profitable.

      None of the cash needed to finance our business has come from sales of
engines. We have never been profitable, and we may continue to incur losses. We
may not be profitable or cash flow positive in 2006, unless we receive payments
we may be entitled to from Well to Wire Energy Inc., as described under section
`Material Agreements' above. In addition, we may not be profitable or cash flow
positive for several additional years after 2006.

      The Coates engine may not have the performance characteristics and
longevity that we expect.

      The Coates engine has been tested in a "real world" environment to a very
limited degree. Commercial use of our industrial engines may not have the
performance characteristics that we expect. Similarly, until the Coates engine
has been in use for a substantial period of time, there is no certain way to
ascertain its expected longevity. Superior performance and longevity are
essential elements of our ability to penetrate the power generation market. Our
failure to do so would have a material adverse effect on our business and we may
be forced to close our operations.

      We are substantially dependent on our founder, George J. Coates.

      We are substantially dependent on our founder, George J. Coates, and to a
lesser extent his son, Gregory Coates. We expect that our future market
capitalization will be in significant part dependent on the productivity of
George Coates. If the employment of George Coates by the Company were to cease
for any reason before we have hired additional senior management and engineering
personnel, our business would be materially adversely affected and we may have
to discontinue operations. We do not maintain key person insurance on either
George J. Coates or Gregory Coates. Our success also depends on our ability to
attract and retain a staff of qualified managerial and engineering personnel.
Qualified individuals are in high demand and are often subject to competing
offers. We cannot be certain that we will be able to attract and retain the
qualified personnel we need for our business. If we are unable to hire
additional personnel as needed, it would likely have a material adverse effect
on us.

      Our industry is subject to intense competition, and our competitors are
well-entrenched and are among the world's largest companies.

      The power generation market is a highly competitive industry currently
occupied by extremely large companies. All of these companies have far greater
financial and other resources than us and already occupy segments of the power
generation market. In order to successfully penetrate this industry, the Coates
engine will have to produce the performance and durability results anticipated
by management and sell at a price or prices that will enable it to effectively
compete and gain entrance into this market.

      We have limited marketing and sales experience.

      The Company has only limited marketing and sales experience in the United
States. The sales process is expected to be lengthy, in part because of
skepticism about the performance of the Coates engine. We are evaluating
alternative marketing and sales channels, distributors, sublicensees and
marketing partners. The Company may never successfully market and sell the
Coates engine.

                                     - 7 -
<PAGE>

      We have only eleven employees, and in order to grow out business we will
need to hire significant additional personnel.

      The Company needs to hire, train and retain additional employees for all
aspects of its business if it is to achieve its sales goals. In particular, the
Company needs trained engineers and sales personnel to educate potential
customers and provide post-installation customer support. The Company is likely
to experience difficulty in recruiting and retaining qualified people because
the pool of experienced candidates is small and the competition to hire them is
intense.

      We have significant immediate capital needs, and ability to raise funds is
highly uncertain.

      The Company may need additional financing in the future for a number of
uses, including:

      o     developing the Company's engineering, administrative and marketing
            and sales organization;
      o     expanding manufacturing capacity;
      o     conducting testing of the Coates engine and obtaining requisite
            governmental approvals; and
      o     expanding our research and development programs with respect to the
            basic Coates technology and applying the Coates technology to
            engines for different applications.

      Additional financing may not be available on terms acceptable to the
Company or not available at all.

      There is no public market for our outstanding Common Stock, and there will
be restrictions on transferability.

      There is presently no public market for our outstanding Common Stock, and
we cannot assure you that a public market will ever develop. We intend to
finance our business through an equity offering, but there can be no assurance
that such an offering will be completed. If such an offering is completed, we
anticipate that our Common Stock may be quoted on the OTC Bulletin Board.
Trading in stock quoted on the OTC Bulletin Board is often thin and
characterized by wide fluctuations in trading prices, due to many factors that
may have little to do with our operations or business prospects. Moreover, the
OTC Bulletin Board is not a stock exchange, and trading of securities on the OTC
Bulletin Board is often more sporadic than the trading of securities listed on a
quotation system or a stock exchange.

      Trading of our Common Stock may be restricted by the SEC'S "penny stock"
regulations which may limit a stockholder's ability to buy and sell our stock.

      The Securities and Exchange Commission has adopted regulations which
generally define "penny stock" to be any equity security that has a market price
less than $5.00 per share or an exercise price of less than $5.00 per share,
subject to certain exceptions. Our securities will likely be covered by the
penny stock rules, which impose additional sales practice requirements on
broker-dealers who sell to persons other than established customers and
accredited investors. The penny stock rules require a broker-dealer, prior to a
transaction in a penny stock not otherwise exempt from the rules, to deliver a
standardized risk disclosure document in a form prepared by the Securities and
Exchange Commission that provides information about penny stocks and the nature
and level of risks in the penny stock market. The broker-dealer also must
provide the customer with current bid and other quotations for the penny stock,
the compensation of the broker-dealer and its salesperson in the transaction and
monthly account statement showing the market value of each penny stock held in
the customer's account. The bid and offer quotations, and the broker-dealer and
salesperson compensation information, must be given to the customer orally or in
writing prior to effecting the transaction and must be given to the customer in
writing before or with the customer's confirmation. In addition, the penny stock
rules require that prior to a transaction in a penny stock not otherwise exempt
from these rules, the broker-dealer must make a special written determination
that the penny stock is a suitable investment for the purchaser and receive the
purchaser's written agreement to the transaction. These disclosure and
suitability requirements may have the effect of reducing the level of trading
activity in the secondary market for a stock that is subject to these penny
stock rules. Consequently, these penny stock rules may affect the ability of
broker-dealers to trade our securities. We believe that the penny stock rules
discourage investor interest in and limit the marketability of our capital
stock. Trading of our capital stock may be restricted by the SEC'S "penny stock"
regulations which may limit a stockholder's ability to buy and sell our stock.
We have no intention to pay dividends.

                                     - 8 -
<PAGE>

      George J. Coates and his family own a majority of our Common Stock
allowing him to unilaterally determine the outcome of all matters submitted to
our stockholders for approval, which influence may conflict with our interests
and the interests of our other stockholders.

      George J. Coates, together with members of his family and related trusts,
beneficially own more than 80% of the outstanding shares of Common Stock at
October 16, and will therefore be able to unilaterally determine the outcome of
all matters submitted to our stockholders for approval, including the election
of our directors and other corporate actions. In addition, such influence by Mr.
Coates could have the effect of discouraging others from attempting to take us
over, thereby increasing the likelihood that the market price of the Common
Stock will not reflect a premium for control.

      Because we do not intend to pay dividends, stockholders will benefit from
an investment in our Common Stock only if it appreciates in value.

      We have never declared or paid any cash dividends on our Common Stock. We
currently intend to retain our future earnings, if any, to finance further
research and development and do not expect to pay any cash dividends in the
foreseeable future. As a result, the success of an investment in our Common
Stock will depend upon any future appreciation in its value. There is no
guarantee that our Common Stock will appreciate in value or even maintain the
price at which stockholders have purchased their shares.

      Trading in our Common Stock, if and when it commences may be volatile,
which may result in substantial declines in its market price.

      If our Common Stock becomes publicly traded (and there can be no assurance
that it will), it is likely to experience significant volatility in response to
periodic variations in:

      o     results of testing of the Coates engine;
      o     performance of the Coates engine in the field;
      o     improvements in competitive engines; and
      o     changes in general conditions in the economy or the financial
            markets.

      The market has also experienced significant decreases in value. This
volatility and the recent market decline has affected the market prices of
securities issued by many companies, often for reasons unrelated to their
operating performance, and may adversely affect the price of our Common Stock.

      If our Common Stock becomes listed, the market for it will be limited. We
cannot assure that an active trading market will develop or, if developed, will
be maintained. As a result, our stockholders may find it difficult to dispose of
shares of our Common Stock and, as a result, may suffer a loss of all or a
substantial portion of their investment.

Item 2. Description of Property.

      Our executive offices and testing facility are located in an approximately
25,000 square foot in Wall Township, New Jersey, outside of New York City. At
the end of November 2005, the Company entered into a sale/leaseback arrangement
of this property. The Company has an option to repurchase the property at any
time during the first three years of the agreement for $5,200,000. The new lease
agreement with the purchaser provides for monthly payments of $32,500 over a six
year period. Under the lease agreement, the Company is responsible for all real
estate taxes and operating expenses of the property, including insurance. On
June 2006 the Company signed a non-binding letter of intent to buy the leased
premises for an aggregate amount of $4,500,000. We will be able to finance the
purchase of the leased premises only with outside financing in the near future.

                                     - 9 -
<PAGE>

      In our development operations, we own and utilize 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.

Item 3. Legal Proceedings.

The Company, its officers and directors and other related and unrelated parties
have been named as defendants in a lawsuit brought in the Superior Court of New
Jersey that is captioned H. Alton Neff v. George Coates, Coates International,
Ltd. et al. Plaintiff contends that he is the assignee of 1107 North West
Central Avenue Inc. ("1107"). Preliminary agreements and an amendment thereto
relating to purchase of certain license by 1107 from the Company provided, inter
alia, that the $500,000 deposit made by 1107 to the Company would convert to the
stock of the Company if certain conditions were not met by 1107. The Company
maintains that 1107 did not fulfill such conditions, and failed to make a
certain payment, and therefore, the deposit converted into shares of the
Company's restricted Common Stock. Management believes that this lawsuit is
without merit and intends to vigorously defend this action. The Company is not a
party to any other litigation that is material to the Company's business.

      In July 2004, the Company agreed to settle its claim against an accounting
firm for proceeds of $107,500.

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

      No matters were submitted to a stockholder vote in 2005.


                                     - 10 -
<PAGE>

                                     PART II

Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and
Issuer Purchases of Equity Securities.

Market

      There is no established public trading market for our Common Stock.

Holders

      At December 31, 2005, the number of holders of record of the Common Stock
was 1,183. We have not paid any dividends with respect to our Common Stock, and
anticipated capital requirements make it highly unlikely that we will pay any
dividends in the foreseeable future.

Recent Sales of Unregistered Securities

      In 2004, the Company issued a total of 267,286 shares of its Common Stock
to seven accredited investors for a total of $815,000 in cash at the following
prices per share: 200,000 shares at $2.50 per share, 14,286 shares at $3.50 per
share and 53,000 shares at $5.00 per share.

      In 2005, the Company issued 1,000,000 shares of its Common Stock to George
J. Coates in exchange for a new technology license agreement. Also in 2005, the
Company issued a total of 33,000 shares of its Common Stock to two accredited
investors at a price of $5.00 per share.

      We did not employ an underwriter in connection with the issuance of the
securities described above. We believe that the issuance of the foregoing
securities was exempt from registration under Section 4(2) of the Securities Act
of 1933, as amended (the "Securities Act"), as transactions not involving a
public offering. Each of the recipients were accredited investors, and acquired
the securities for investment purposes only and not with a view to distribution.

Rule 144

      In general, under Rule 144 under the Securities Act, a person who has
beneficially owned shares of our Common Stock for at least one year would be
entitled to sell within any three-month period a number of shares that does not
exceed the greater of:

      o     1% of the number of shares of our Common Stock then outstanding,
            which will equal approximately 2,668,942 shares of our Common Stock;
            or
      o     the average weekly trading volume of our Common Stock, if and when
            our Common Stock is traded on the OTC Bulletin Board, during the
            four calendar weeks preceding the filing of a notice on Form 144
            with respect to the sale.

      Sales under Rule 144 are also subject to manner of sale provisions and
notice requirements and to the availability of current public information about
us for at least 90 days. As of May 31, 2006, a total of 265,861,278 shares of
our Common Stock are eligible for resale under Rule 144.

      Under Rule 144(k) under the Securities Act, a person who is not deemed to
have been one of our affiliates at any time during the 90 days preceding a sale,
and who has beneficially owned the shares proposed to be sold for at least two
years, is entitled to sell the shares without complying with the manner of sale,
public information, volume limitation or notice provisions of Rule 144. Under
Rule 144(k), as of May 31, 2006, 43,644,398 shares of our Common Stock qualified
for resale under Rule 144(k).

                                     - 11 -
<PAGE>

Stock Options

      The Company has never granted any stock options. The Company undertook to
grant an aggregate number of 7,525,000 options to four of its employees. It has
adopted its 2006 Stock Option and Incentive Plan described below, subject to
stockholder approval. The Board will consider option grants to new and existing
employees following stockholder approval.

Dividends

      We have never declared or paid any cash dividends on shares of our capital
stock. We currently intend to retain earnings, if any, to fund the development
and growth of our business and do not anticipate paying cash dividends in the
foreseeable future. Our payment of any future dividends will be at the
discretion of our board of directors after taking into account various factors,
including our financial condition, operating results, cash needs and growth
plans

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

Background and Critical Accounting Policies

      We have substantially completed the development of the Coates spherical
rotary valve engine. We are now engaged in adapting our technology to
manufacturing industrial engines to power electric generators with outup of up
to 300kw, depending on the primary fuel. Thereafter, we intend to manufacture
engines for many other applications and uses.

Results of Operations for the Years Ended December 31, 2005 and December 31,
2004

      The Company did not earn any revenues during 2005 and 2004. The Company's
principal business activities and efforts during 2005 and 2004 were devoted to
(i) the completion of the research, development, construction and testing of the
prototype engines for WWE, and (ii) successfully securing additional working
capital through the sale and leaseback financing of its principal offices,
warehouse and manufacturing facility.

      Total operating expenses for the years ended December 31, 2005 and 2004
were $894,963 and $1,257,576, respectively, representing a decrease of
approximately 28.9%, which was primarily attributable to the Company's lack of
available funds during most of 2005 to finalize testing for the functionality,
design and components through the final phases of the prototype engines and the
Company's focus on reducing general and administrative expenses. Approximately
$380,000 and $391,000 for the years ended December 31, 2005 and 2004,
respectively, represented labor charges. Research and development expenses
decreased primarily as a result of a lower level of purchases of parts and
supplies. General and administrative expenses decreased from $1,032,529 in 2004
to $819,915 in 2005. This $212,614, or 20.6%, decrease primarily resulted from
the Company's efforts to preserve its working capital by reducing such
expenditures.

      The loss from operations of $894,963 for the year ended December 31, 2005
decreased from $1,257,576 in 2004. During 2005, the Company's activities were
adversely affected by inadequate working capital.

      Other (Expense) Income decreased to a net expense in 2005 of ($365,953)
from net other income of $275,902 in 2004. This resulted from (i) gains in 2004
of $225,000 and $260,336 from a one-time settlement of litigation and one-time
settlement of legal fees, partially offset by a gain of $47,000 from the sale of
a portion of the Company's investment in Coates Motorcycle (ii) an increase in
the Company's equity share of the losses from its investment in Coates
Motorcycle from ($101,856)in 2004 to ($260,344)in 2005 and (iii) a higher level
of interest expense due to the financing at the end of November 2005, of its
principal offices, warehouse and manufacturing facility.

      The Company provided for state income taxes in 2005 in the amount of
($11,117) as compared with a state income tax benefit realized in 2004 of
$218,349. This resulted from the requirement to recognize a taxable gain for
income tax purposes on the sale/leaseback of the Company's principal offices,
warehouse and manufacturing facility in 2005. No federal income tax resulted
from this gain on sale as there were sufficient net operating loss carryforwards
to offset this gain. However, as the Company had previously sold all of its
state income tax net operating loss carryforwards, no such offset was available
for state income tax purposes.

                                     - 12 -
<PAGE>

      The net result for the year was a loss of ($1,272,033) or $0.00 per share,
as compared to a net loss of ($763,325) or $0.00 per share for 2004.

Liquidity and Capital Resources

      In 2005, the Company issued a total of 35,000 shares of its Common Stock
to two accredited investors at a price of $5.00 per share and realized cash
proceeds of $175,000 which is being used for working capital purposes. During
2004, the Company received subscription proceeds of $815,000 in cash from seven
accredited investors from the issuance of 267,286 shares of its Common Stock,
concluding our private placement. We had positive working capital of $1,721,743
as of December 31, 2005, compared with negative working capital of ($268,404) at
December 31, 2004. This substantial improvement was primarily the result of the
successful sale/leaseback of the Company's principal offices, warehouse and
manufacturing facility in 2005. This transaction is being treated as a financing
transaction for accounting purposes. The Company realized net proceeds from this
transaction of $3,876,607 which was partially used to repay the $868,182
remaining balance of a mortgage loan bearing interest at a 13.99% annual rate
and the balance of the proceeds will be utilized for working capital purposes.
Under this method of accounting, the monthly rent payments under the lease of
$32,500 are treated as interest expense translating into an effective annual
interest rate of 10.06%. Current liabilities are primarily composed of
approximately $486,000 of legal fees due to a law firm for its representation of
us in litigation over the past several years, income taxes payable of $127,000
and due to related parties of $138,000.

      We are currently refining the construction of the production prototype
Coates generator engines and testing them. We expect to be able to complete the
testing of the production model and delivery to WWE this year. Subject to
meeting WWE expectations with respect to the prototype Coates generator engine,
we will receive the balance of $3,905,000 from WWE under our research and
development agreement with them. Under our agreement with WWE, an additional
balance due to us of $4,700,000 is payable in equal quarterly payments over a
four year period, commencing 180 days following delivery to WWE of this third
prototype, and subject to meeting WWE expectations as mentioned above. We expect
that the prototype Coates generator engine will meet WWE's expectations. There
can be no assurance, however, that these agreements, as well as those presently
in negotiations with other licensees, will be consummated in accordance with
these expectations or that payments will be received as called for in the
agreements.

Item 7. Financial Statements.

      Reference is made to the Index to Financial Statements on page F-1.

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

      None.

Item 8A.  Controls and Procedures.

      Evaluation of disclosure controls and procedures:

      Based on their evaluation as of a date within 90 days of the filing date
of this report, George J. Coates, our principal executive officer and principal
financial officer until October 23, 2006, Mark Goldsmith, our current Chief
Executive Officer, and Barry Kaye, our current Chief Financial Officer, have
concluded that our disclosure controls and procedures (as defined in Rules
13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934, as amended
(the "Exchange Act") are sufficiently effective to ensure that the information
required to be disclosed by the Company in the reports that we file under the
Exchange Act is gathered, analyzed and disclosed with adequate timeliness,
accuracy and completeness.

                                     - 13 -
<PAGE>

      Changes in internal controls:

      There have been no significant changes in our internal controls or in
other factors that could significantly affect these controls subsequent to the
date of the evaluation referred to above, nor were there any significant
deficiencies or material weaknesses in the Company's internal controls.
Accordingly, no corrective actions were required or undertaken.

      Limitations on the effectiveness of controls:

      A control system, no matter how well conceived and operated, can provide
only reasonable, not absolute, assurance that the objectives of the control
system are met. Because of inherent limitations in all control systems, no
evaluation of controls can provide absolute assurance that all control issues,
if any, within a company have been detected.

Item 8B. Other Information.

      The following actions and events took place recently, which otherwise
should have been reported on Form 8-K:

      The Company has entered into the following Material Definitive Agreements,
      all of them described in Item 10: Executive Compensation, under caption
      `Employment contracts and termination of employment and change-in-control
      arrangements':

      o     Employment Agreement between the Company and Mark D. Goldsmith dated
            October 18, 2006

      o     Employment Agreement between the Company and Barry C. Kaye dated
            October 18, 2006

      o     Employment Agreement between the Company and George J. Coates dated
            October 23, 2006

      o     Employment Agreement between the Company and Gregory Coates dated
            October 23, 2006

            The Company has entered into the following Material Definitive
            Agreements, all of them described in Item 1: Description of
            Business, under caption `Patents and Licenses':

      o     License Agreement between the Company and George J. Coates and
            Gregory Coates dated October 23, 2006

      o     License Agreement between the Company and Coates Trust dated October
            23, 2006

The composition of the Company's Board of Director has been changed, as provided
for in Item 9: Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act.

The Company replaced all of its executive officers, as provided for in Item 9:
Directors, Executive Officers, Promoters and Control Persons; Compliance with
Section 16(a) of the Exchange Act.

                                     - 14 -
<PAGE>

                                    PART III

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

      The following table lists the current members of our board of directors
and our executive officers. The address for our directors is c/o Coates
International, Ltd., Highway 34 & Ridgewood Road, Wall Township, New Jersey
07719. There are no family relationships among members of our board or our
executive officers, with the exception of Gregory Coates, who is the son of
George Coates.

--------------------------------------------------------------------------------
      Name                Age              Position
--------------------------------------------------------------------------------
Gregory Coates            36     Director, Chairman of the Board, and President-
                                 Technology Division
--------------------------------------------------------------------------------
Mark D. Goldsmith         63     Director, President and Chief Executive Officer
--------------------------------------------------------------------------------
Barry C. Kaye             53     Director, Treasurer and Chief Financial Officer
--------------------------------------------------------------------------------
Richard W. Evans          75     Director and Secretary
--------------------------------------------------------------------------------
Dr. Michael J. Suchar     50     Director *, **
--------------------------------------------------------------------------------
Dr. Frank Adipietro       48     Director *, **
--------------------------------------------------------------------------------
Glen Crocker              57     Director *, ***
--------------------------------------------------------------------------------
Richard Whitworth         57     Director *, ***
--------------------------------------------------------------------------------
*        Serves as an independent director.
**       Serves as a member of our compensation committee
***      Serves as a member of our audit committee

      Gregory Coates became a director of the Company on October 24, 2006, and
has served as the Chairman of our Board of Directors since then. On October 23,
2006 he became our President - Technology Division. For the past fifteen years,
Gregory Coates has worked with us as a design engineer, working in the research
and development designing and building of the CSRV System and adapting this
system to various existing applications. He created certain of our licensed
inventions, and patented certain of them. Gregory Coates is an Associate Member
of the Society of Automotive Engineers, Inc., and a Member of the American
Society of Mechanical Engineers. He graduated from the College of Technology of
Ireland.

      Mark D. Goldsmith became a director of the Company on October 24, 2006,
and has been serving as our President and Chief Executive Officer since October
18, 2006. Prior to that Mr. Goldsmith served as the President, Chief Executive,
Officer, Interim Chief Financial Officer and Director of Coates Motorcycle Co
Ltd. Prior to that, Mr. Goldsmith worked in the securities industry in various
managerial and supervisory capacities, beginning in 1973. In 1973, Mr. Goldsmith
was named Vice President in charge of internal auditing and accounting for MKI
Securities Inc., a New York Stock Exchange member, a position he held until 1979
when he took the position of Treasurer and Chief Financial Officer with Muller &
Company, Inc., a New York Stock Exchange member firm. Mr. Goldsmith served in
these positions until 1988. In 1988, Mr. Goldsmith left Muller & Company, Inc.
when it was sold and became Senior Vice President of Sales with Moore, Schley,
Cameron & Co., Inc., a New York Stock Exchange member firm, in which position he
managed certain accounts of high net worth individuals through 1991. From 1991
through 1995, Mr. Goldsmith served as a Senior Vice President in charge of
investment banking and syndication with Stuart Coleman & Co., Inc., a New York
Stock Exchange member firm.

                                     - 15 -
<PAGE>

During the period 1996 through 1998, Mr. Goldsmith served as Executive Vice
President, supervising investment banking and syndication, with Northeast
Securities, Inc., a registered NASD broker-dealer in Garden City, New York.
Following this period, Mr. Goldsmith served as a Securities Principal with the
firm of Paul L. Forchheimer & Co., Inc., an American Stock Exchange associate
member firm, until 2000 when he became President of Adolph, Komorsky & Co.,
Inc., a registered NASD broker-dealer in Tarrytown, New York. Mr. Goldsmith
served in this capacity until October, 2001 when Adolph, Komorsky & Co., Inc.
was merged into another securities brokerage firm.

In January 2002 Mr. Goldsmith became a financial consultant, initially, with the
NASD member firm, MH Meyerson & Co., Inc., a public company, and shortly
thereafter was appointed the Chief Financial Officer of this firm. In January,
2004, Mr. Goldsmith left to become a Managing Director of Chapman Spira & Carson
LLC, an investment banking and consulting firm in New York City.

During his tenure at MH Meyerson & Co., Inc. the firm was found to be in
violation of Rule 15c3-1 and Section 15(c) of the Securities Exchange Act of
1934, the "net capital rule" on three separate occasions with respect to certain
of the firm's periodic reports filed with the Securities and Exchange Commission
and the NASD that contained material misstatements. By reason of the foregoing,
it was alleged that Mr. Goldsmith violated NASD Conduct Rules. Without admitting
or denying the NASD allegations and for the purpose of settling this matter, on
December 4, 2004 Mr. Goldsmith entered into a settlement with NASD providing for
a four month NASD member suspension and a fine of $10,000, payable only upon Mr.
Goldsmith's re-registration with the NASD. Mr. Goldsmith is currently eligible
to re-register with an NASD firm if he chooses to do so. Mr. Goldsmith attended
Pace University in New York.

      Barry C. Kaye became a director of the Company on October 24, 2006 and has
been serving as our Treasurer and Chief Financial Officer since October 18,
2006. Mr. Kaye is a Certified Public Accountant in both New York and New Jersey.
From 2004 to 2005, Mr. Kaye served as Corporate Controller of Development
Corporation for Israel. He was the Vice President, Finance & Operations for
Alliance Corner Distributors, Inc. from 2003 to 2004. From 1999 to 2003, he was
an Executive Business Consultant with BCK Business Consulting. From 1987 to
1999, he served as Group Vice President, Finance at Sharp Electronics
Corporation. From 1976 to 1987, Mr. Kaye was a Senior Audit Manager for Arthur
Andersen & Co. He is a member of the American Institute of Certified Accountants
as well as a member of the New York and New Jersey State Societies of Certified
Public Accountants. Mr. Kaye received his B.S. Degree in Accounting from
Brooklyn College.

      Richard W. Evans became a director of the Company in May 1996. Dr. Evans
holds an ED.D degree from Rutgers University, was a Supervisor of the Highland
Park School in Highland Park, New Jersey, a post held for more than the
preceding five years until his retirement in June 1996.

      Michael J. Suchar became a director of the Company in May 1996. Dr.
Suchar, who holds a Doctor of Dental Surgery degree from Temple University
Dental School, has been a practicing pediatric dentist for more than the
preceding five years.

      Frank Adipietro became a director of the Company on October 24, 2006. Dr.
Adipietro, who holds an M.D. degree from Downstate Medical School, Brooklyn, has
been practicing in the area of anesthesia and interventional pain management for
more than twenty years.

      Glenn Crocker became a director of the Company on October 24, 2006. Mr.
Crocker, who holds an MBA degree in Engineering Design, has been working for
most of the past thirty five years as a designer and design engineer with
various vehicle manufacturers.

                                     - 16 -
<PAGE>

      Richard Whitworth became a director of the Company on October 24, 2006.
Mr. Whitworth, who holds a Bachelor of Science degree from the University of
Florida, has been serving as the president of the Whitworth Group Inc. for the
past 19 years. The Whitworth Group specializes in governmental and public
relations, organizational development and financial services.

Significant Employees; Control Persons

      George J. Coates is our founder and served since our organization and
until October 23, 2006 as a director of our Company, Chairman of the Board of
Directors, President, Chief Executive Officer, Treasurer and Chief Financial
Officer. Since October 23, 2006, he is employed by us in a non-executive
position, and is considered by us as a significant employee. George J. Coates
served two apprenticeships in Europe while attending the College of Technology
in London , and as an associate member of the S.A.E. He received The City and
Guilds of London for electrical and mechanical engineering. He is a former
management director of SCR motor engineers of Europe and holds the certificates
of Ministry of Transport in the United Kingdom. He worked as an engineer for
Rolls Royce and Mercedes Benz, and holds approximately 300 patents worldwide. He
invented coolant disc brakes, invented a hydraulic suspension, invented and
patented the Coates rotary valve system and invented and patented a turbine
engine. George Coates is 66 years old.

      Due to his holdings in the our share capital George J. Coates is a control
person. In 1991, the SEC commenced proceedings against Mr. Coates and the
Company in the United States District Court, Southern District of New York,
which, in August 2001, was settled and the case dismissed. The SEC brought a
civil action against the Company, Mr. George Coates and related parties for
alleged breaches of federal securities laws in connection with certain private
placements that occurred in the early 1990's. Initially, the Court froze the
assets of the Company and George J. Coates and appointed a special master to
manage the Company's business affairs. Thereafter, the Company and George J.
Coates negotiated a settlement with the SEC and a consent judgment was signed by
them. The principal settlement provisions of this final consent judgment
required Mr Coates to transfer ownership of the Company's Wall Township business
premises to the Company, permitted Mr. Coates to retain title to the Coates
Patents as long as he reimbursed the Company for the costs associated therewith,
and the Company's commitment to undertake a registered rescission offer to
certain private placement investors. George J. Coates agreed to use up to
approximately $800,000 of his own funds first to buy back Company stock from
those investors who chose rescission, with any required further rescission funds
necessary to complete the rescission offer to be paid by the Company. The
rescission offer was completed in 1997 with only 32 of the 328 private placement
investors electing to rescind their investment. The 32 rescinding investors
received $1,270,000 of rescission funds out of approximately $6,500,000 invested
by all investors. Following the rescission, the Court dismissed the special
master and the Company continued under the control of Mr. Coates. In concluding
this proceeding, Mr. Coates was assessed a fine of $40,000 by the Court based
upon its findings of four violations of federal securities disclosure laws in
connection with the private placements. Specifically, the Court found that the
private placement offering documents used by Mr. Coates at the time
misrepresented that (1) the Coates engine surpassed the emissions standards
imposed by the EPA; (2) the Company had a substantial number of firm orders for
engines equipped with the Coates engine when the orders were found to be
provisional; (3) the Company owned the patents to the Coates System when, at the
time, they were owned by Mr. Coates, and; (4) the offering documents omitted
disclosing Harley Davidson's discontinuance of testing the Coates prototype
engines due to Harley's claims of malfunction.

      Mr. Coates does not agree with a number of the Court's findings.

Board Committees

      Our board of directors established an audit committee and a compensation
committee in October 2006. All of the members of each of these standing
committees are independent as defined under Nasdaq rules and, in the case of the
audit committee, the independence requirements contemplated by Rule 10A-3 under
the Securities Exchange Act.

                                     - 17 -
<PAGE>

      Audit Committee

      The audit committee's responsibilities will include: appointing, approving
the compensation of, and assessing the independence of our independent auditor;
overseeing the work of our independent auditor, including through the receipt
and consideration of reports from the independent auditor; reviewing and
discussing with management and our independent auditor our annual and quarterly
financial statements and related disclosures; monitoring our internal control
over financial reporting, disclosure controls and procedures, and code of
business conduct and ethics; discussing our risk management policies;
establishing policies regarding hiring employees from our independent auditor
and procedures for the receipt and retention of accounting related complaints
and concerns; meeting independently with our independent auditor and management;
and preparing the audit committee report required by SEC rules to be included in
our proxy statements.

      All audit services and all non-audit services, except de minimis non-audit
services, must be approved in advance by the audit committee.

      Our Board of Directors has determined that it does not have a member of
its audit committee that qualifies as an "audit committee financial expert" as
defined in Item 401(e) of Regulation S-B, and is "independent" as the term is
used in Item 7(d)(3)(iv) of Schedule 14A under the Securities Exchange Act of
1934, as amended. The Company restructured its Board of Directors, which
required efforts and resources. However, it failed to attract adequate nominees
for the position of audit committee financial expert due to the Company's
limited resources.

      Compensation Committee

      The compensation committee's responsibilities will include:

      o     annually reviewing and approving corporate goals and objectives
            relevant to compensation of our chief executive officer;
      o     determining the compensation of our chief executive officer;
      o     reviewing and approving, or making recommendations to our board of
            directors with respect to, the compensation of our other executive
            officers;
      o     overseeing an evaluation of our senior executives;
      o     overseeing and administering our cash and equity incentive plans;
            and
      o     reviewing and making recommendations to our board with respect to
            director compensation.

Corporate Governance

      We believe that good corporate governance is important to ensure that, as
a public company, we will managed for the long-term benefit of our stockholders.
In that regard, we have established and adopted charters for the audit committee
and compensation committee, as well as a code of business conduct and ethics
applicable to all of our directors, officers and employees.

Compensation Committee Interlocks and Insider Participation

      Mark D. Goldsmith, Gregory Coates, Richard Evans and Barry C. Kaye will be
our only executive officers who serve as members of the board of directors. None
of our executive officers serves as a member of our compensation committee,
audit committee or other committee serving an equivalent function. None of the
current members of the compensation committee of our board has ever been one of
our employees.

                                     - 18 -
<PAGE>

Liability Limitations and Indemnification

      The following description is intended as a summary only and is qualified
in its entirety by reference to our amended and restated charter and amended and
restated by-laws filed as exhibits to this report and to Delaware law. We refer
in this section to our amended and restated charter as our charter, and we refer
to our amended and restated by-laws as our by-laws.

      Our charter and by-laws limit the liability of directors to the maximum
extent permitted by Delaware law. Delaware law provides that directors of a
corporation will not be personally liable for monetary damages for breach of
their fiduciary duties as directors, except liability for:

      o     any breach of their duty of loyalty to the corporation or its
            stockholders;
      o     acts or omissions that are not in good faith or that involve
            intentional misconduct or a knowing violation of law;
      o     unlawful payments of dividends or unlawful stock repurchases or
            redemptions; or
      o     any transaction from which the director derived an improper personal
            benefit.

      The limitations do not apply to liabilities arising under the federal
securities laws and do not affect the availability of equitable remedies,
including injunctive relief or rescission.

      Our charter and by-laws provide that we will indemnify our directors and
officers, and may indemnify other employees and agents, to the maximum extent
permitted by law. We believe that indemnification under our by-laws covers at
least negligence and gross negligence on the part of indemnified parties. Our
by-laws also permit us to secure insurance on behalf of any officer, director,
employee or agent for any liability arising out of actions taken in his or her
capacity as an officer, director, employee or agent, regardless of whether the
by-laws would permit indemnification.

      At present, the only litigation or proceeding involving any of our
directors, officers or employees in which indemnification is, or may be sought
in the future is the H. Alton Neff v. George Coates, Coates International, Ltd.
et al. case which is described under Item 3 above (Legal Proceedings). We are
not aware of any threatened litigation that may result in claims for
indemnification.

      Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to our directors, officers and controlling persons under
our charter or by-laws or the indemnification agreements we have entered into
with our directors and officers, we have been advised that in the opinion of the
SEC this indemnification is against public policy as expressed in the Securities
Act and is, therefore, unenforceable.

Compliance with Section 16(a) of the Securities Exchange Act of 1934

      The Company knows of no person, who, at any time during the fiscal year
ended December 31, 2005 to the date hereof, was a director, officer, beneficial
owner of more than ten percent of any class of equity securities of the Company
(a "Reporting Person"), that failed to file on a timely basis any reports
required to be furnished pursuant to Section 16(a). Based upon a review of Forms
3, 4 and 5 furnished to the Company under Rule 16(a)-3(d), the Company knows of
no Reporting Person that failed to file the required reports within the required
time limits.

Item 10. Executive Compensation.

      With respect to the 2005 fiscal year, we had no executive officers other
than George J. Coates, whose compensation was as follows:

                                     - 19 -
<PAGE>

                           Summary Compensation Table
                  (for the fiscal year ended December 31, 2005)
<TABLE>
<CAPTION>
                                                                                          Long Term Compensation
                                                                                                  Awards
                                                          Annual Compensation             ----------------------
                                                ---------------------------------------   Restricted   Securities
                                                                         Other Annual       Stock     Underlying       All Other
Name and Principal Position              Year    Salary        Bonus     Compensation      Awards       Options      Compensation
---------------------------              ----   ---------    --------   -------------     ----------   ----------    -------------

<S>                                      <C>    <C>          <C>           <C>            <C>               <C>       <C>
George J. Coates,                        2005   $ 183,549    $      0      $      0       $      (1)        0         $       (1)
  President, Chief Executive Officer,
   Treasurer and Chief Financial
   Officer                               2004   $ 186,948    $      0      $      0       $       0         0         $        0

                                         2003   $ 183,548    $      0      $      0       $       0         0         $        0
</TABLE>

(1)   The Company granted Mr. Coates 1,000,000 shares of its common stock as
      consideration for a license agreement.

Option Grants / SARs

      The Company has never granted any stock options or SARs.

Director Compensation

      As of today, the directors who are not also our employees do not receive
any compensation for serving in the Company's Board of Directors, the audit or
compensation committees. The Company intends to adopt a scheme for compensation
of our non-employee directors. Non-employee directors also will be eligible to
receive stock options under our equity incentive plan.

      We reimburse all of our non-employee directors for reasonable travel and
other expenses incurred in attending board of directors and committee meetings.
Any director who is also one of our employees receives no additional
compensation for serving as a director.

Employment contracts and termination of employment and change-in-control
arrangements

On October 18 and 23, 2006, we signed employment contracts with George J. Coates
and with three new executives, who are serving as directors of the Company.
Under the four employment agreements the employees are entitled to terminate
their employment with us under certain circumstances, referred to as a good
reason, thus receiving severance payment and full acceleration of their options.
Such circumstances include reduction in salary or benefits and diminution in
authority or responsibility to a non-executive position.

Under the four employment agreements the employees are entitled to customary
benefits and expense reimbursement, as well as for an annual bonus that shall
not exceed $100,000 until the Threshold Date. Summary of the additional
compensation terms under the employment agreements appears in the table below.

<TABLE>
<CAPTION>
-------------------------- --------------- --------------- --------------- ------------------ ------------
                               Annual      Number of stock                     Severance      Term of the
Name & position             compensation      options *     Life insurance     payment**       Agreement
-------------------------- --------------- --------------- --------------- ------------------ ------------
<S>                          <C>              <C>             <C>           <C>                <C>
George Coates, non
  executive, significant                                                    One year salary
  employee                   $ 300,000        3,000,000       $2,000,000          ***          Five years
-------------------------- --------------- --------------- --------------- ------------------ ------------

Gregory Coates, President                                                   One year salary
  Technology Division        $ 200,000        3,000,000       $2,000,000          ***          Five years
-------------------------- --------------- --------------- --------------- ------------------ ------------
                                                                            Salary through
                                                                             the remaining
Mark D. Goldsmith,                                                            term of the
  President and Chief                                                         agreement,
  Executive Officer          $ 200,000        1,500,000          None       minimum One year   Three years
-------------------------- --------------- --------------- --------------- ------------------ ------------

Barry C. Kaye, Treasurer
  and Chief Financial
  Officer                    $ 125,000           25,000          None       One year salary    Three years
-------------------------- --------------- --------------- --------------- ------------------ ------------
</TABLE>

                                     - 20 -
<PAGE>

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

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

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

Under their employment agreements, George and Gregory Coates undertook to vote
all their shares in the Company to elect to our Board of Directors at least two
`independent directors' as defined by the rules of the SEC and NASDAQ. In
addition, our rights in intellectual property rights developed by George and
Gregory Coates will be as set forth in a certain license agreement dated October
23, 2006 and described in Item 1, under caption `Patents and Licenses'. Under
their employment agreements we are not entitled to terminate either George or
Gregory Coates employment unless they are terminated for cause.

Item 11. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters.

      The following table sets forth information with respect to the beneficial
ownership of our Common Stock as of October 16, 2006 for:

      o     each of our executive officers and directors;
      o     all of our executive officers and directors as a group; and
      o     any other beneficial owner of more than 5% of our outstanding Common
            Stock.

      Beneficial ownership is determined in accordance with the rules of the
SEC. These rules generally attribute beneficial ownership of securities to
persons who possess sole or shared voting power or investment power with respect
to those securities and include ordinary shares issuable upon the exercise of
stock options that are immediately exercisable or exercisable within 60 days.
Except as otherwise indicated, all persons listed below have sole voting and
investment power with respect to the shares beneficially owned by them, subject
to applicable community property laws. The information is not necessarily
indicative of beneficial ownership for any other purpose.

      Percentage ownership calculations are based on 266,894,278 shares
outstanding as of October 16, 2006 . Addresses of named beneficial owners are
care of Coates International, Ltd., Highway 34 & Ridgewood Road, Wall Township,
New Jersey 07719.

                                     - 21 -
<PAGE>

<TABLE>
<CAPTION>
                                                            Beneficial Ownership
                                -----------------------------------------------------------------------
                                 Outstanding Shares    Right to Acquire       Shares Beneficially Owned
                                 ------------------    ----------------       -------------------------
Name and Address of Beneficial  Beneficially Owned  Within 60 Days After     Number         Percentage
             Owner                                      June 30, 2005
------------------------------  ------------------- --------------------    -------------   -----------
<S>                                  <C>                      <C>           <C>                 <C>
Gregory Coates                       14,032,520               0             14,032,520          5.26%

Frank Adipietro                         810,000               0                810,000           0.3%

Richard Evans                           660,000               0                660,000          0.25%

Michael J. Suchar                       241,600 (1)           0                241,600 (1)      0.09%

All executive officers and
directors as a group (3
persons)                             15,744,120               0             15,744,120           5.9%

Other 5% owners:

George J Coates                     208,272,760 (2)           0            208,272,760 (2)     78.03%
</TABLE>

(1) Includes 20,000 shares owned by Mr. Suchar's spouse, beneficial ownership of
which is disclaimed by Michael J. Suchar.

(2) Includes 1,956,960 shares owned by Mr. Coates' spouse, beneficial ownership
of which is disclaimed by George J. Coates.

Option Grants

      The Company has never granted any stock options. It has adopted its 2006
Stock Option and Incentive Plan described below, subject to stockholder
approval. The Board will consider option grants to new employees following
stockholder approval. The Company undertook to grant an aggregate number of
7,525,000 options to four of its employees.

2006 Stock Option and Incentive Plan

      The Company's 2006 Stock Option and Incentive Plan (the "Stock Plan") was
adopted by the Company's Board of Directors in October 2006, subject to
stockholder approval. The Stock Plan provides for the grant of stock-based
awards to employees, officers and directors of, and consultants or advisors to,
the Company and its subsidiaries. Under the Stock Plan, the Company may grant
options that are intended to qualify as incentive stock options ("incentive
stock options") within the meaning of Section 422 of the Internal Revenue Code
of 1986, as amended (the "Code"), options not intended to qualify as incentive
stock options ("non-statutory options"), restricted stock and other stock-based
awards. Incentive stock options may be granted only to employees of the Company.
A total of 12,500,000 shares of Common Stock may be issued upon the exercise of
options or other awards granted under the Stock Plan. The maximum number of
shares with respect to which awards may be granted to any employee under the
Stock Plan shall not exceed 25% of that number.

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

                                     - 22 -
<PAGE>

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

      The Board may at any time provide that any stock options shall become
immediately exercisable in full or in part, that any restricted stock awards
shall be free of some or all restrictions, or that any other stock-based awards
may become exercisable in full or in part or free of some or all restrictions or
conditions, or otherwise realizable in full or in part, as the case may be.

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

Item 12. Certain Relationships and Related Transactions.

      The Company subcontracts its project expense from Coates Precision
Engineering, of which George J. Coates is the sole shareholder. During the years
ended December 31, 2005 and 2004, the Company paid $84,058 and $46,112,
respectively, for these services.

      On April 30, 2003, the Company entered into a sublicense agreement with
Coates Motorcycle Company, Ltd ("Coates Motorcycle"). Prior to the agreement,
Gregory Coates, son of George J. Coates, owned 100% of Coates Motorcycle.
Pursuant to the agreement, the Company granted an exclusive license to utilize
the CSRV System for the manufacturing use or sale of motorcycles and gasoline
powered internal combustion engines used in motorcycles in North America,
Central America and South America. In addition the Company granted the
non-exclusive license to use the CSRV Seals in the manufacture of the CSRV
Systems for incorporation into motor engines in North America, Central America
and South America. In consideration we received approximately 51% of the common
shares of Coates Motorcycle. In addition, the Company had an anti-dilution
right. On March 5, 2004, the Company amended its license agreement with Coates
Motorcycle to expand the license rights granted and to remove the anti-dilution
provision in exchange for 1,000,000 common shares of Coates Motorcycle. As a
result of the transactions, the Company owned 3,558,000 shares of Coates
Motorcycle, representing a 30% ownership interest. During 2005, the Company sold
9,400 shares of Coates Motorcycle for $5.00 per share and realized a gain of
$47,000 on the sale.

                                     - 23 -
<PAGE>

Item 13.  Exhibits.

--------------------------------------------------------------------------------
Exhibit No.                  Description
--------------------------------------------------------------------------------
3.1*        -     Restated Certificate of Incorporation
--------------------------------------------------------------------------------
3.1(i)+     -     Certificate of Amendment to Certificate of Incorporation filed
                  with the Secretary of State of Delaware on May 22, 2000
--------------------------------------------------------------------------------
3.1(ii)+    -     Certificate of Amendment to Certificate of Incorporation filed
                  with the Secretary of State of Delaware on August 31, 2001
--------------------------------------------------------------------------------
3.2*        -     Bylaws
--------------------------------------------------------------------------------
10.3*       -     License Agreement dated December 22, 1997 between George J.
                  Coates and the Company and First and Second Amendments thereto
                  dated July 17, 1995.
--------------------------------------------------------------------------------
10.4*       -     Third Amendment dated September 21, 1995 to License Agreement
                  dated February 17, 1995 between George J. Coates and the
                  Company
--------------------------------------------------------------------------------
10.5*       -     License Agreement dated February 22, 1993 between Gregory
                  Coates and the Company, and First Amendment thereto dated July
                  17, 1995
--------------------------------------------------------------------------------
10.6+       -     License Agreement, dated September 29, 1999, with Well to Wire
                  Energy, Inc.
--------------------------------------------------------------------------------
10.7+       -     Amendment No. 1 to License Agreement with Well to Wire Energy
                  Inc. dated April 6, 2000
--------------------------------------------------------------------------------
10.8+       -     Amendment No. 2 to License Agreement with Well to Wire Energy
                  Inc. dated July 21, 2000
--------------------------------------------------------------------------------
10.11#      -     Sublicense Agreement, dated April 30,2003, the Company and
                  Coates Motorcycle Company, Ltd.
--------------------------------------------------------------------------------
10.12#      -     License Agreement, dated April 30, 2003, by and between George
                  J. Coates, Gregory G. Coates and the Coates Trust,
                  collectively as Licensor, and Coates Motorcycle Company, Ltd.,
                  as Licensee.
--------------------------------------------------------------------------------
10.13&            Amendment No. 1 to Sublicense Agreement, dated March 5, 2004,
                  between the Company and Coates Motorcycle Company, Ltd.
--------------------------------------------------------------------------------
10.14&      -     Amendment No. 1 to License Agreement, dated March 5, 2004,
                  between George J. Coates, Gregory G, Coates and the Coates
                  Trust and Coates Motorcycle Company, Ltd.
--------------------------------------------------------------------------------
10.15 ^     -     Confirmation Letter Agreement between the Company and Well to
                  Wire Energy Inc. dated July 7, 2006
--------------------------------------------------------------------------------

                                     - 24 -
<PAGE>

--------------------------------------------------------------------------------
Exhibit No.                  Description
--------------------------------------------------------------------------------
10.16 @     -     Employment Agreement between the Company and Mark D. Goldsmith
                  dated October 18, 2006
--------------------------------------------------------------------------------
10.17 @     -     Employment Agreement between the Company and Barry C. Kaye
                  dated October 18, 2006
--------------------------------------------------------------------------------
10.18 @     -     Employment Agreement between the Company and George J. Coates
                  dated October 23, 2006
--------------------------------------------------------------------------------
10.19 @     -     Employment Agreement between the Company and Gregory Coates
                  dated October 23, 2006
--------------------------------------------------------------------------------
10.20 @     -     License Agreement between the Company and George J. Coates and
                  Gregory Coates dated October 23, 2006
--------------------------------------------------------------------------------
10.21 @     -     License Agreement between the Company and Coates Trust dated
                  October 23, 2006
--------------------------------------------------------------------------------
10.22 @     -     2006 Employee Stock Option and Incentive Plan adopted on
                  October 25, 2006
--------------------------------------------------------------------------------

* These Exhibits are hereby incorporated by reference from the Company's
Registration Statement filed on Form S-1 with the Securities and Exchange
Commission on November 1, 1995, File No. 33-94884. + Incorporated by reference
from the Company's Registration Statement and amendments thereto filed on Form
10-SB12G with the Securities and Exchange Commission, File No. 000-33155.
# Incorporated by reference from the Company's Form 10-QSB for the quarter ended
June 30, 2003.

& Incorporated by reference from the Company's Form 10-KSB for the fiscal year
ended December 31, 2004.

^ Incorporated by reference from the Company's Form 10-QSB for the quarter ended
June 30, 2006.

@ Filed herewith

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

      No reports on Form 8-K were filed during the last quarter of the fiscal
year ended December 31, 2005.


                                     - 25 -
<PAGE>

Item 14. Principal Accounting Fees and Services.

      Audit Fees:

      Rosenberg Rich Baker Berman & Company ("Rosenberg") billed us in the
aggregate amount of $42,445 and $40,883 for professional services rendered for
their audit of our annual financial statements and their reviews of the
financial statements included in our Forms 10-QSB for the year ended December
31, 2005 and December 31, 2004, respectively.

      Audit-related Fees:

      Rosenberg did not bill us for, nor performed professional services
rendered for assurance and related services that were reasonably related to the
performance of audit or review of the Company's financial statements for the
fiscal years ended December 31, 2005 and December 31, 2004.

      Tax Fees:

      Rosenberg billed us in the aggregate amount of $2,194 and $1,820 for
professional services rendered for tax related services for the fiscal years
ended December 31, 2005 and December 31, 2004, respectively.

      All Other Fees:

      No fees were billed by Rosenberg for services rendered to the Company
during the last two fiscal years, other than as audit, audit-related and tax
fees.


                                     - 26 -
<PAGE>

                                   SIGNATURES

      In accordance with Section 13 or 15(d) of the Exchange Act, the issuer has
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized, on October 25, 2006.


                                        COATES INTERNATIONAL, LTD.


                                        By: /s/ Mark D. Goldsmith
                                           -------------------------------------
                                        Mark D. Goldsmith, President

      In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the issuer and in the capacities and on the
dates indicated.

      Signature                   Title                             Date
----------------------  -----------------------------------  -------------------


/s/ Gregory Coates      Director, Chairman,                     October 25, 2006
----------------------  President-Technology Division
Gregory Coates


/s/ Mark D. Goldsmith   Director, President,                    October 25, 2006
----------------------  Chief Executive Officer
Mark D. Goldsmith       (principal executive officer)


/s/ Barry C. Kaye       Director, Treasurer,                    October 25, 2006
----------------------  Chief Financial Officer
Barry C. Kaye           (principal financial and
                        accounting officer)


/s/ Richard W. Evans    Director and Secretary                  October 25, 2006
----------------------
Richard W. Evans


/s/ Michael J. Suchar   Director                                October 25, 2006
----------------------
Michael J. Suchar


/s/ Frank Adipietro     Director                                October 25, 2006
----------------------
Frank Adipietro


/s/ Glenn Crocker       Director                                October 25, 2006
----------------------
Glenn Crocker


                        Director                                October 25, 2006
----------------------
Richard Whitworth


                                     - 27 -
<PAGE>

                           Coates International, Ltd.
                        Index to the Financial Statements
                                December 31, 2005

                                                                            Page

Report of Independent Registered Public Accounting Firm                       1

Financial Statements

      Balance Sheet                                                           2

      Statements of Operations                                                3

      Statements of Stockholders' Impairment                                  4

      Statements of Cash Flows                                                5

      Notes to the Financial Statements                                     6-11

<PAGE>

             Report of Independent Registered Public Accounting Firm


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

We have audited the accompanying balance sheets of Coates International, Ltd. as
of December 31, 2005 and 2004, and the related statements of operations, cash
flows and stockholders' impairment for the years then ended. 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 the standards of the Public Company
Accounting Oversight Board (United States). 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 audits 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. as
of December 31, 2005 and 2004, and the results of its operations and its cash
flows for the years then ended in conformity with accounting principles
generally accepted in the United States of America.

As more fully described in the notes to the financial statements, the Company's
financial statements as of December 31, 2004 and for the year then ended have
been restated.


Bridgewater, New Jersey
February 28, 2006


                                       1
<PAGE>


                           Coates International, Ltd.
                                 Balance Sheets

                                     Assets

<TABLE>
<CAPTION>
                                                                               2005            2004
                                                                                            (Restated)
                                                                           ------------    ------------
<S>                                                                        <C>             <C>
Current Assets
      Cash                                                                 $  1,928,123    $    180,182
      Inventory                                                                 409,300         290,312
       Prepaid expenses                                                         191,644              --
                                                                           ------------
           Total Current Assets                                               2,529,067         470,494

Investment in related party                                                          --         260,344
Deferred offering costs                                                          22,500              --
Property, plant and equipment, net of accumulated                             1,502,494       1,555,103
depreciation of $708,291 and $652,676 in 2005 and 2004,
respectively (note 11)
Due from related party                                                               --          32,888
Security deposits (note 10)                                                     197,500           2,500
Patents, net of accumulated amortization of $1,102 in 2005                       54,356              --
                                                                           ------------    ------------

           Total Assets                                                       4,305,917       2,321,329
                                                                           ============    ============

                    Liabilities and Stockholders' Impairment

Current Liabilities
      Accounts payable                                                            1,289          39,819
      Accrued expenses                                                          541,242         544,309
      Current portion of mortgage payable                                            --           4,770
      Income taxes payable                                                      127,156              --
      Due to related parties                                                    137,637         150,000
                                                                                           ------------
           Total Current Liabilities                                            807,324         738,898

License deposits                                                                940,000         940,000
Mortgage payable, net of current portion                                             --         863,412
Finance obligation (note 11)                                                  3,876,607              --
                                                                           ------------    ------------
           Total Liabilities                                                  5,623,931       2,542,310
                                                                           ------------    ------------

Commitments and Contingencies                                                        --              --

Stockholders' Impairment
      Preferred stock, Series A, $.001 par value 14,000,000
      shares authorized,
                                                                           ------------    ------------
      no shares issued or outstanding
      Common stock, $.0001 par value, 1,000,000,000 shares authorized,
       266,894,278 and 265,859,278 shares issued and outstanding in 2005         26,689          26,586
      and
      2004, respectively
      Additional paid-in capital                                             17,176,155      17,001,258
      Accumulated deficit                                                   (18,520,858)    (17,248,825)
           Total Stockholders' Impairment                                    (1,318,014)       (220,981)
                                                                           ------------    ------------

           Total Liabilities and Stockholders' Impairment                  $  4,305,917    $  2,321,329
                                                                           ============    ============
</TABLE>

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

                                       2
<PAGE>

                           Coates International, Ltd.
                            Statements of Operations

<TABLE>
<CAPTION>
                                                          Year Ended December 31,
                                                      ------------------------------
                                                          2005             2004
                                                                        (Restated)
                                                      -------------    -------------
<S>                                                   <C>              <C>
Revenue                                               $          --    $          --
                                                      -------------    -------------

Operating Expenses:
      Research and development costs                         18,290          112,949
      Research and development costs, related party              --           46,112
      General and administrative expenses                   819,915        1,032,529
      Depreciation                                           55,656           62,743
      Amortization                                            1,102            3,243
                                                      -------------    -------------
           Total Operating Expenses                         894,963        1,257,576
                                                      -------------    -------------

      Loss From Operations                                 (894,963)      (1,257,576)
                                                      -------------    -------------

Other Income (Expense):
      Equity loss in related party investment              (260,344)        (101,856)
      Gain on sale of investment in related party            47,000               --
      Gain from legal settlement                                 --          225,000
      Gain from settlement of legal expenses                     --          260,336
      Interest income                                            --           17,610
      Interest expense                                     (152,609)        (125,188)
                                                      -------------    -------------
           Total Other (Expense) Income                    (365,953)         275,902
                                                      -------------    -------------

Loss Before Income Taxes                                 (1,260,916)        (981,674)

(Provision) Benefit from Income Taxes , net                 (11,117)         218,349
                                                      -------------    -------------

Net Loss                                              $  (1,272,033)   $    (763,325)
                                                      =============    =============

Net Loss Per Share, basic and diluted                 $       (0.00)   $       (0.00)
                                                      -------------    -------------

Weighted Average Number of Shares                       265,996,673      265,269,092
                                                      =============    =============
</TABLE>

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

                                       3
<PAGE>

                           Coates International, Ltd.
                     Statements of Stockholders' Impairment
                                   (Restated)

<TABLE>
<CAPTION>
                                                              Common Stock           Additional
                                                      ---------------------------     Paid in       Accumulated     Shareholders'
                                                         Shares         Amount        Capital         Deficit        Impairment
                                                      ------------   ------------   ------------    ------------    ------------
<S>                                                   <C>           <C>            <C>             <C>             <C>
Balance, January 1, 2004, as previously reported       265,591,992   $      2,655   $ 16,210,189    $(16,485,500)   $   (272,656)

     Restatement for correction of error                        --         23,904        (23,904)             --              --
                                                      ------------   ------------   ------------    ------------    ------------

Balance, January 1, 2004, restated                     265,591,992         26,559     16,186,285     (16,485,500)       (272,656)

    Issuance of common stock for cash                      267,286             27        814,973              --         815,000

    Net loss for the year                                       --             --             --        (763,325)       (763,325)
                                                      ------------   ------------   ------------    ------------    ------------

Balance, December 31, 2004                             265,859,278         26,586     17,001,258     (17,248,825)       (220,981)

    Issuance of common stock  for license agreement      1,000,000            100           (100)             --              --

    Issuance of common stock  for cash                      29,000              2        144,998              --         145,000

    Issuance of common stock  in settlement of               6,000              1         29,999              --          30,000
        accounts payable and accrued interest

    Net loss for the year                                       --             --             --      (1,272,033)     (1,272,033)
                                                      ------------   ------------   ------------    ------------    ------------

Balance, December 31, 2005                             266,894,278   $     26,689   $ 17,176,155    $(18,520,858)   $ (1,318,014)
                                                      ============   ============   ============    ============    ============
</TABLE>

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

                                       4
<PAGE>

<TABLE>
<CAPTION>
                           Coates International, Ltd.
                      Consolidated Statements of Cash Flows

                                                                 Year Ended December 31,

                                                                 2005           2004
                                                              -----------    -----------
<S>                                                           <C>            <C>
Cash Flows From Operating Activities:

Net Loss                                                      $(1,272,033)   $  (763,325)
      Adjustments to Reconcile Net Loss to Net Cash Used in
      Operating Activities -
           Depreciation                                            55,656         62,743
           Amortization                                             1,102          3,243
           Write off obsolete inventory                                --         12,394
           Gain on sale of investment in related party            (47,000)       (17,322)
            Equity losses from investment in related party        260,344        101,856

Changes in Operating Assets and Liabilities -                          --
     Inventory                                                    (86,100)            --
     Prepaid expenses                                            (191,644)            --
     Accounts payable                                              (8,530)        16,023
     Accrued expenses                                               9,009       (289,258)
     Accrued interest                                             (12,076)            --
     Income taxes payable                                         127,156             --
                                                              -----------    -----------
Net Cash (Used in) Operating Activities                        (1,164,116)      (873,646)
                                                              -----------    -----------

Cash Flows From Investing Activities:
     Acquisition of property, plant and equipment                  (3,047)            --
     Proceeds from sale of investment - related party              47,000             --
     Security deposit on leased property                         (195,000)            --
     Outlays for patents                                          (55,458)            --
                                                              -----------    -----------
Net Cash Used in Investing Activities                            (206,505)            --
                                                              -----------    -----------

Cash Flows From Financing Activities:
       Cash received from finance obligation (note 11)          3,876,607             --
       Deferred offering costs paid                               (22,500)            --
       Proceeds from issuance of stock                            145,000        815,000
       Proceeds of loan from related party                        200,437             --
       Repayment of loan from related party                      (212,800)      (313,164)
       Repayment of mortgage (note 11)                           (868,182)        (2,962)
                                                              -----------    -----------
Net Cash Provided by Financing Activities                       3,118,562        498,874
                                                              -----------    -----------

      Net Increase (Decrease) in Cash                           1,747,941       (374,772)
      Cash - Beginning of Period                                  180,182        554,954
                                                              -----------    -----------
      Cash - End of Period                                    $ 1,928,123    $   180,182
                                                              ===========    ===========
</TABLE>

                                       5
<PAGE>

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

      Nature of Organization

            Coates International, Ltd. (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. The
            Company's operations are principally dependent upon successful
            commercial applications of it proprietary internal combustion
            engine, which has been designed around its patented Coates Spherical
            Rotary Valve system ("CSRV"). These internal combustion engines have
            numerous applications, including high performance industrial,
            automotive and marine racing engines as well as all other
            applications for internal combustion engines. The Company intends to
            manufacture and sell such engines. It has also entered into
            sublicense agreements with engine manufacturers or retrofitters and
            intends to enter into further such sublicense agreements in the
            future.

      Inventory

            Inventories are stated at the lower of cost or market determined by
            the first-in, first-out method.

      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 is
            performed. Should such evaluation indicate that there has been an
            impairment of one or more long-lived assets, the cost basis of such
            assets would be adjusted accordingly at that time.

      Loss per Share

            In accordance with the provisions of Financial Accounting Standards
            Board No. 128, "Earnings Per Share," Loss per share is determined by
            dividing the net loss by the weighted average number of common
            shares outstanding during the period.

      Revenue Recognition

            The Company has not generated revenue from the sales of engines.
            Revenue from the granting of sub-licenses is recognized when earned,
            generally commencing upon utilization by the licensee over the
            period of time that the sub-license has been granted (i.e. upon
            expiration of the Company's patent protection period which expires
            at the earliest in 2007), using the straight-line method. Revenue
            from research and development activities is recognized when earned
            provided that financial risk has been transferred from the Company
            to its customer.

      Advertising Costs

            Advertising costs are charged to operations when incurred.
            Advertising expense was $20,757 and $25,001 for the years ended
            December 31, 2005 and 2004, respectively.

      Research and Development

            Research and development 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 be realized. The Company incurred net operating losses for
            financial-reporting and tax-reporting purposes. The benefit from
            federal income tax net operating losses incurred in the current and
            prior years has been offset by a valuation allowance against the
            related deferred tax asset. The income tax benefit from sales of
            unutilized state tax net operating losses to third parties is
            recognized in the period of sale.

                                       6
<PAGE>

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

      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.

2. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION

      Cash and cash equivalents for purposes of the statements of cash flows is
      comprised of cash and short-term, highly liquid investments with a
      maturity of three months or less.

      Cash payments for interest expense totaled $152,609 for the year ended
      December 31, 2005 and $125,188 for the year ended December 31, 2004.

      There were no cash payments for income taxes during the years ended
      December 31, 2005 and 2004.

      During 2005, the Company issued 1,000,000 shares of its common stock to
      acquire a patent license from a related party.

      During 2005, the Company issued 6,000 common shares in payment of accounts
      payable and accrued interest totaling $30,000.

3. 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.

      Development of the Coates System technology was initiated by George
      Coates, the Company'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 with respect to the Coates
      System. Since the inception of the Company in 1988, all aspects of the
      business have been completely dependent upon the activities of George
      Coates, who does not have an employment contract with the Company. The
      loss of George Coates' availability or service due to death, incapacity or
      otherwise would have a material adverse effect on the Company's business
      and operations.

4. 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 judgment and therefore
            cannot be determined with precision. Changes in assumptions could
            significantly affect the estimates.

                                       7
<PAGE>

5. CONTINGENCIES

      The Company has entered into a research and development agreement with
      Well to Wire, Inc. (the "R&D Agreement"). The R&D Agreement requires the
      payment of $5,000,000 to the Company for research, development and
      delivery of three prototype Coates Generator Engines which revenue will be
      recognized by the Company as received since the financial risk has been
      transferred from the Company to its customer. The Company has received
      payments to date, of $1,200,000 under this agreement. The $3,800,000
      balance is not payable until the Company completes testing and delivery of
      the last of three prototype engines. The Company expects to complete such
      testing and delivery during the first half of 2006. The performance period
      during which the Company is required to conduct such activities has been
      extended from time to time by mutual agreement.

6. INVENTORY

      Inventory at December 31, consists of the following:

                          2005       2004
                        --------   --------
      Raw Materials     $186,918   $102,860
      Work in Process    222,382    187,452
                        --------   --------
                Total   $409,300   $290,312
                        ========   ========

7. PREPAID EXPENSES

      Prepaid expense consists of payments made in advance pursuant to a lease
      agreement covering the Company's principal offices, warehouse and
      manufacturing facility.

8. LICENSE DEPOSITS

      Effective September 29, 1999 the Company entered into a license agreement
      with a Canadian corporation. Pursuant thereto, the Company has received a
      license deposit of $300,000.

      During 2002 the Company entered into various license agreements. Pursuant
      to such agreements, the Company received an aggregate $1,140,000 of
      license deposits.

      During 2003 license deposits totaling $500,000 were converted to 25,000
      shares of common stock of the Company, pursuant to the license agreement.
      No other license agreements have a convertible feature.

      License deposits received by the Company are non-refundable and are to be
      applied against the total licensing agreement fee upon the completion of
      certain tests and approval by the licensee.

      Recognition of revenue attributable to the above license payments has been
      deferred until such time as all conditions have been satisfied and the
      benefits of the license can be realized by the licensee Thereafter, such
      revenue will be recognized over the term of the Company's various patent
      registrations which expire at various times during the period from 2007
      through 2020.


                                       8
<PAGE>

9. PROPERTY, PLANT AND EQUIPMENT

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

                                           2005           2004
                                       -----------    -----------
       Land                            $   920,550    $   920,550
       Building                            579,450        579,450
       Building improvements               219,371        219,371
        Machinery and equipment            452,119        449,113
        Furniture and fixtures              39,295         39,295
                                       -----------    -----------
                                         2,210,785      2,207,779
      Less: Accumulated depreciation      (708,291)      (652,676)
                                       -----------    -----------

                  Total                $ 1,502,494    $ 1,555,103
                                       ===========    ===========

      Depreciation expense amounted to $55,656 and $62,743 for the years ended
December 31, 2005 and 2004, respectively.

10. SECURITY DEPOSITS

      Security deposits primarily consist of a deposit on the Company's
principal offices, warehouse and manufacturing facility pursuant to a lease
agreement.

11. SALE/LEASEBACK OF LAND AND BUILDING

      At the end of November 2005, the Company entered into a sale/leaseback
      arrangement of the property which houses its principal offices, warehouse
      and manufacturing facilities. Pursuant to generally accepted accounting
      principles this transactions is to be accounted for under the finance
      method because the Company has a continuing interest in the property
      represented by an option to repurchase the property at any time during the
      first three years of the agreement for $5,200,000. The Company realized
      net proceeds from this transaction of $3,876,607 which was partially used
      to repay the $868,182 remaining balance of a mortgage loan bearing
      interest at a 13.99% annual rate and the balance of the proceeds will be
      utilized for working capital purposes. The monthly rental payments
      provided for by the lease agreement are being accounted for as interest
      expense, which amounted to $35,750 in the accompanying statement of
      operations for the year ended December 31, 2005.

      Had this transaction qualified for sale reporting, the Company would have
      realized a net gain of $2,411,579. This gain will be recognized upon
      expiration or exercise of the option to repurchase. The new lease
      agreement with the purchaser, which is being accounted for on the finance
      method, provides for monthly payments of $32,500 over a six year period.
      Under the finance method, these payments are to be accounted for as
      interest expense at the implicit annual interest rate of 10.06%. In
      addition, the land, building and building improvements will continue to be
      carried at cost and depreciated. Under the lease agreement, the Company is
      responsible for all real estate taxes and operating expenses of the
      property, including insurance. Minimum payments under the lease agreement,
      which are being charged to interest expense, are as follows:

      11. SALE/LEASEBACK OF LAND AND BUILDING (Continued)

      Year Ending December 31,      Amount

            2006                   $390,000
            2007                    390,000
            2008                    390,000
            2009                    390,000
            2010                    390,000
            Thereafter              357,500

                                       9
<PAGE>

12. PATENTS

      In 2005, the Company changed it accounting policy for costs incurred in
      connection with registering new patent protection of patent technology it
      licenses from George J. Coates, President and controlling stockholder. In
      prior years, such costs were charged to expense in the year incurred.
      Effective with the year ended December 31, 2005, patent fees such as legal
      cost for registration, legal fees, if any, from the costs incurred in
      successful defense to the extent of an evident increase in the value of
      the patents and models and drawings required for registration are stated
      at cost less accumulated amortization which is calculated on a
      straight-line basis over the remaining useful lives of the assets,
      estimated by management to average 20 years. At December 31, the cost of
      such patent expenses, net of accumulated amortization amounted to $54,356.

13. ACCRUED EXPENSES

      Accrued expenses at December 31 are comprised of the following:

                                                    2005       2004
                                                  --------   --------
            Legal fees                            $519,345   $483,297
            General and administrative expenses     21,896     48,936
                                                  --------   --------
             Interest expense                          -0-     12,076
                                                  --------   --------
                       Total                      $541,241   $544,309
                                                  ========   ========

14. SALE OF COMMON STOCK

      In 2005, the Company issued 1,000,000 shares of its common stock to George
      J. Coates in exchange for a new technology license agreement granting the
      Company the non-exclusive rights to make, use, sell and have made in all
      of the countries and their territories and possessions, comprising North
      American, Central America and South America, three licensed products
      patented by George J. Coates. These products consist of a self-adjusting
      bearing assembly, an improved valve seal (pressure regulated) and a
      cooling system for the rotary valve engine. The term of this license
      agreement will expire upon the last patent to expire on these products.
      The Company is also responsible for all costs associated with maintaining
      the underlying patent rights in the licensed territory. Also, in 2005, the
      Company issued a total of 35,000 shares of its common stock to two
      accredited investors at a price of $5.00 per share. In 2004 the Company
      issued a total of 267,286 shares of its common stock to seven accredited
      investors for a total of $815,000 in cash at the following prices per
      share: 200,000 shares at $2.50 per share, 14,286 shares at $3.50 per share
      and 53,000 shares at $5.00 per share.

15. INCOME TAXES

      The current income tax (provision) benefit is comprised of the following:

                  2005        2004
                --------    --------

      Federal   $     --    $     --
                --------    --------

      State     $(11,117)   $218,349
                --------    --------

      In 1998, the State of New Jersey enacted legislation allowing emerging
      technology and/or biotechnology companies to sell their unused New Jersey
      Net Operating Loss ("NOL") Carryover Research and Development Tax Credits
      ("R&D Credits") to corporate taxpayers in New Jersey. During 2005 and
      2004, the Company entered into an agreement under which it retained a
      third party broker to identify a buyer for its New Jersey State income

15. INCOME TAXES (Continued)

      tax net operating loss carryforwards from for the 2004 and 2003 tax years.
      As a result, the Company realized a current tax benefit of $116,039 and
      $218,348, for the years ended December 31, 2005 and 2004, respectively.

                                       10
<PAGE>

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

                                      2005          2004
                                  -----------    -----------
      Total deferred tax assets   $ 5,097,713    $ 4,098,789
      Less valuation allowance     (5,097,713)    (4,098,789)
                                  -----------    -----------
      Net deferred tax assets     $        --    $        --
                                  ===========    ===========

      The differences between income tax benefit (provision) in the financial
      statements and the tax benefit (provision) computed at the U.S. Federal
      statutory rate of 34% at December 31 are as follows:

                                                                2005     2004
                                                               ------   ------
Federal Tax benefit at the statutory rate                        34.0%    34.0%
State income taxes, net of federal benefit                       (6.7)     5.9
Sale of prior year state net operating loss carryforward,
net of federal tax                                                6.1    (22.2)
Gain on sale of property deferred for financial reporting       (65.0)     --
purposes
Equity in loss of unconsolidated subsidiary not deductible       (7.0)     --
Utilization of Federal net operating loss carryforward           37.7      --
Valuation Allowance                                                --    (39.9)
                                                               ------   ------
   Effective Tax Rate                                             0.9%   (22.2)%
                                                               ======   ======

      At December 31, 2005, the Company had available approximately $14,993,000
      of net operating loss carryforwards which may be used to reduce future
      federal taxable income, which expire between December 31, 2008 and 2023.
      There are no available net operating loss carryforwards available for
      state income tax purposes.

16. RELATED PARTY TRANSACTIONS

      The Company subcontracts its project expense from Coates Precision
      Engineering, of which George J. Coates is the sole shareholder. During the
      years ended December 31, 2005 and 2004, the Company paid $84,058 and
      $46,112, respectively, for these services. On April 30, 2003, the Company
      entered into a sublicense agreement with Coates Motorcycle Company, Ltd
      ("Coates Motorcycle"). Prior to the agreement, Gregory Coates, an officer
      of the Company, owned 100% of Coates Motorcycle. Pursuant to the
      agreement, the Company granted certain exclusive licenses in exchange for
      approximately 51% of the common shares of Coates Motorcycle. In addition,
      the Company had an anti-dilution right. During 2004, the Company amended
      its license agreement with Coates Motorcycle to expand the license rights
      granted and to remove the anti-dilution provision in exchange for
      1,000,000 common shares of Coates Motorcycle. As a result of the
      transactions, the Company owned 3,558,000 shares of Coates Motorcycle,
      representing a 30% ownership interest. During 2005, the Company sold 9,400
      shares of Coates Motorcycle for $5.00 per share and realized a gain of
      $47,000 on the sale.

      The Company's investment in Coates Motorcycle is valued at $-0-, because
      that was the cost basis of the assets and the license agreement exchanged
      for those shares. This investment in Coates Motorcycle is being accounted
      for under the equity method of accounting for investments. As such, the
      investment is being carried at cost, adjusted for the Company's
      proportionate share of undistributed earnings and losses.


                                       11
<PAGE>

16. RELATED PARTY TRANSACTIONS (CONTINUED)

      Summarized information for Coates Motorcycle is as follows:

                                                 Year Ended December 31,
                                                --------------------------
                                                   2005           2004
                                                -----------    -----------
      Revenue                                   $        --    $        --
       Operating expenses                         1,087,331        344,249
       Net loss                                  (1,083,292)      (340,705)

                                                     As of December 31,
                                                --------------------------
                                                   2005           2004
                                                -----------    -----------

      Current assets                            $   209,216    $    27,711
       Total assets                                 759,159        383,384
       Current liabilities                         (438,821)      (219,925)
       Total liabilities                         (1,030,020)      (224,425)
       Stockholders' impairment                    (272,861)      (158,959)

      The Company also made loans to Coates Motorcycle from time to time to
      provide working capital for the development and testing of motorcycle
      engines which incorporate the Company's technologies. As of December 31,
      2004, the total outstanding balance of these loans, including accrued
      interest thereon, was $362,200 and was converted into 362,200 shares of
      Preferred Series A Stock of Coates Motorcycle. The Company has accounted
      for its equity in the common stock and ownership of Preferred Stock of
      Coates Motorcycle in accordance with Emerging Issues Task Force (EITF")
      Issue No. 98-13 "Accounting by an Equity Method Investor for Investee
      Losses When the Investor has Loans to and Investments in Other Securities
      of the Investee." The Company's equity investment in the common stock of
      Coates Motorcycle is $-0- as of December 31, 2005 and 2004. The EITF
      requires that additional equity in the losses of Coates Motorcycle be
      recorded until the Company's investment in the preferred stock of Coates
      Motorcycle has been reduced to $-0-.

      During the year ended December 31, 2005, the Company received $76,911 from
      Coates Motorcycle as partial reimbursement for various overhead expenses,
      incurred on its behalf.

      George J. Coates and Bernadette Coates, George's wife have made loans to
      the Company at various times to provide working capital. The net
      outstanding balance was $137,637 and $-0- at December 31, 2005 and 2004,
      respectively. These borrowings are in the form of demand loans which carry
      no interest and are repaid from time to time depending upon cash
      availability. It is the intention of Mr. George J. Coates and Mrs.
      Bernadette Coates to assist the Company with its working capital
      requirements in the form of loans as needed in the future even, though
      they are not legally obligated to do so.

17. EQUITY METHOD LOSSES AND IMPAIRMENT OF INVESTMENT IN RELATED PARTY

      Emerging Issues Task Force ("EITF") 98-13, "Accounting by an Equity Method
      Investor for Investee Losses When the Investor has Loans to and
      Investments in Other Securities of the Investee", requires an investor
      using the equity method, that has reduced the value of the investment to
      $-0-, but also has loans outstanding or other forms of equity such as
      preferred stock to continue to report its share of the losses.
      Accordingly, during the years ended December 31, 2005 and 2004, the
      Company recorded losses from its investment in Coates Motorcycle in the
      amount of $260,344 and $101,856, respectively.

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

                                       12
<PAGE>

18. SETTLEMENT OF LITIGATION

      In July 2004, the Company agreed to settle its claim against an accounting
      firm for $225,000. In connection therewith, the Company and its attorneys
      agreed to evenly divide the settlement proceeds to satisfy the expenses
      and legal fees owed to the attorneys pertaining to this litigation. In
      addition, its attorneys also waived $260,336 of its legal fees. The
      Company realized net proceeds in the amount of $107,500.

19. NEW ACCOUNTING PRONOUNCEMENTS

      Management does not believe that any recently issued, but not yet
      effective, accounting standards would have a material effect on the
      accompanying financial statements if adopted currently.

20. RESTATEMENT

      The opening balances of common stock, par value and additional paid-in
      capital at January 1, 2004 have been restated in order to correct an error
      in the recorded amount of common stock, at par value. This restatement did
      not have any affect on the statement of operations or total stockholders'
      impairment.

      Also, the Company has determined that FASB Statement 115 "Accounting for
      Certain Investments in Debt and Equity Securities" as it relates to EITF
      98-13 does not apply to it's investment in Coates Motorcycle as its
      preferred shares are not readily marketable securities as defined by FASB
      Statement 115.

      Therefore, the investment in related party has been reduced from $362,200
      to $260,344 and the other comprehensive income component of stockholders'
      impairment has been reduced from $101,857 to $-0- in order to correct this
      error.

      The impact of these adjustments on the financial statements as originally
reported is summarized below:

                                                December 31, 2004
                                           As reported    As Restated
                                          ------------    ------------
Investment in related party               $    362,200    $    260,344
 Total assets                                2,423,185       2,321,329
 Common stock, par value                         2,658          26,586
 Additional paid in capital                 17,025,186      17,001,258
 Accumulated other comprehensive income        101,856             -0-
 Stockholders' impairment                     (119,125)       (220,981)
 Other comprehensive income                   (101,856)            -0-
 Net loss per share                                -0-             -0-


                                       13