UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                              Washington, D.C 20549

                                   FORM 10-KSB

[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
    ACT OF 1934

                   For the fiscal year ended December 31, 2000
                                       OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
    OF 1934

            For the transition period from___________to______________

                         COMMISSION FILE NUMBER 33-94884

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

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

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

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

Securities registered pursuant to Section 12(b) of the Act:  NONE

Title of Class:  NONE

Securities registered pursuant to Section 12(g) of the Act:  NONE

Title of Class:  NONE

Check  whether the issuer (1) filed all reports  required to be filed by Section
13 or 15(d) of the  Exchange  Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports),  and (2) has been
subject to such filing requirements for the past 90 days. Yes [X] No [ ]

Check if there is no disclosure of delinquent  filers in response to Item 405 of
Regulation  S-B is not  contained  in  this  form,  and no  disclosure  will  be
contained,  to the  best of  registrant's  knowledge,  in  definitive  proxy  or
information statements incorporated by reference in Part III of this Form 10-ISB
or any amendment to this Form 10-KSB. [ ]

Issuer's  revenues for the year ended December 31, 2000 were $845,000.

During the fiscal year ended December 31, 2000, there was no established  public
trading market for the issuer's  Series A Preferred or Common Stock. On December
31, 2000, there were 66,097,910 shares of Common Stock issued and outstanding.

<PAGE>

PART I.   COATES INTERNATIONAL LTD.

ITEM 1. DESCRIPTION OF BUSINESS

Background

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

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

CIL has concentrated  its efforts since the inception of its predecessor  entity
in August 1988 to the present date in the research and development of the Coates
spherical   rotary  valve   combustion   engine   technology  and  has  realized
insignificant  revenues  throughout this period. In 1996 CIL realized $73,375 US
dollars in  revenues  paid by  Nicholson  McLaren in partial  payment for 2 high
performance racing car engines utilizing the Coates system, which was shipped to
Nicholson  McLaren by CIL in April 1996. CIL executed a license  agreement and a
sales  representative   agreement  with  Nicholson  McLaren.  See  "Patents  and
Licensing".

Since its inception,  the bulk of the development costs and related  operational
costs of CIL have been funded primarily  through cash generated from the sale of
stock,  through capital  contributions and loans made by Gregory Coates and from
several entities for prototype models and licensing fees. As a development stage
company, CIL has incurred losses from the inception of the predecessor entity in
August 1988 through  December 31, 2000 of $10,688,006  and at December 31, 2000,
had a net worth of $ 503,428 and a negative working capital of ($283,519).

                                       2
<PAGE>


NOTE REGARDING FORWARD-LOOKING STATEMENTS

CAUTOINARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995

This Annual Report contains  historical  information as well as  forward-looking
statements.  Statements  looking  forward in time are  included  in this  Annual
Report  pursuant  to  the  safe  harbor  provisions  of the  Private  Securities
Litigation  Reform Act of 1995. Such statements  involve known and unknown risks
and  uncertainties  that may cause CIL's actual  results in future periods to be
materially different from any future performance suggested herein. CIL wishes to
caution readers that in addition to the important factors described elsewhere in
this Form 10-KSB,  the  following  forward  looking  statements,  among  others,
sometimes  have affected,  and in the future could affect,  CIL's actual results
and could cause CIL's acutal  consolidated  results during 2000, and beyond,  to
differ materially from those expressed in any forward-looking statements made by
or on behalf of CIL.

Forward-looking statements include, but are not limited to, statements under the
following headings; (i) "Business Plan," about inquires from potential customers
and the Companys  attempts to convert these  inquiries  into sales orders;  (ii)
"Business  Plan,"  >about the intention of the Company to fund its business plan
by borrowings,  sale of financial  instruments and sale of sub- licenses;  (iii)
"Results  of  Operations,"  about  the  Company's  plans  to  place  on hold its
potential transactions concentrating its efforts in the transaction with Well to
Wire Energy, a Canadian company;(iv)"Liquidity and Capital Resources,"about the
company's plan to raise additional capital;(v)"Liquidity and Capital Resources,"
about the contingent  nature of the  consumation of any agreements  with Well to
Wire Energy.

BUSINESS PLAN

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

License Agreement - Well to Wire Energy, Inc.

On September 29, 1999, CIL signed a license  agreement with Well to Wire Energy,
Inc.,  an oil and gas  company  in  Canada,  to license  the  production  of V-8
cylinder  engines modified with the Coates System to be fueled by natural gas to
generate electrical power. Following due diligence investigation of the proposed
applications  for the  production of  electrical  energy and the location of the
engines in the natural gas fields or generation sites, it was agreed between CIL
and Well to Wire Energy,  Inc.  that a larger  engine  modified  with the Coates
System  would be more  appropriate.  Well to Wire Energy,  Inc.  made a $300,000
deposit on a license  for Canada and a payment of $250,000  for the  development
costs to construct a prototype.

                                       3
<PAGE>


On November 27, 2000, CIL and Well to Wire Energy,  Inc.  terminated the earlier
1999  license  agreement  and  replaced it with a formal use license  agreement,
granting Well to Wire Energy, Inc. an exclusive use license to utilize a natural
gas fed, 855  industrial  electric  generator  engine,  modified with the Coates
System (the "Coates Generator Engine") in the territory of Canada,  applying the
$300,000  deposit  previously  received as a  downpayment  against a  $5,000,000
license fee. Pursuant to a separate agreement,  Well to Wire Energy, Inc. agreed
to pay  $5,000,000  for the  development  of three  prototype  Coates  Generator
Engines. To date, Well to Wire Energy, Inc. has paid $1,200,000 to CIL for these
prototypes,  $550,000  of which was paid and  recognized  in  calendar  1999 and
$650,000 of which was paid and recognized in fiscal year 2000. CIL has completed
the  construction  of the first two prototypes of the Coates  Generator  Engines
which have been  delivered to Well to Wire Energy,  Inc. The third  prototype is
expected to be  completed by CIL and  delivered to Well to Wire Energy,  Inc. by
April 30,  2001.  Upon  receipt of the  Coates  Generator  Engine,  Well to Wire
Energy,  Inc. is obligated  to pay to CIL the balance of the license  payment of
$4,700,000 and the balance of the prototype development agreement of $3,800,000,
together  with an  additional  $300,000  arising from  modifications  and change
orders requested by Well to Wire Energy, Inc.

Upon consummation of the Well to Wire Energy, Inc. license payments, CIL expects
to expand its operations and acquire an additional facility in order to assemble
and fulfill the orders for the Coates Generator Engines.  The Company expects to
employ  the   necessary   experienced   personnel   in  order  to  operate   the
production/assembly facility as necessary to meet demands.

It is the  intention  of  management  to fund its business  operations  through,
initially,  the  consummation  of the  Well to Wire  Energy,  Inc.  license  and
prototype  development  transactions  and,  thereafter,  through  private and/or
public financings and sales of sub-licenses.

THE COATES SRV ENGINE

The Coates SRV Engine differs from the conventional  poppet valve currently used
in almost  all  piston  driven  automotive,  motorcycle  and  marine  engines by
changing  the method  which the air and fuel  mixture is delivered to the engine
cylinder as well as the method of expelling  the exhaust gases after the mixture
is ignited.  Unlike the poppet valve which  protrudes into the engine  cylinder,
the Coates SRV Engine utilizes  spherical  valves which do not protrude into the
cylinder head but rotate in a cavity formed  between a two piece  cylinder head.
As a result of employing  fewer moving parts as compared to the poppet valve and
not protruding into the engine cylinder, management believes that the Coates SRV
Engine will promote less engine wear and will require less  lubrication over the
life of the engine.  In addition,  because the Coates SRV Engine does not employ
parts  which  protrude  into the engine  cylinder,  it is  designed  with larger
openings into the cylinder than the conventional poppet valves so that more fuel
and air mixture can be inducted into and expelled from the engine  cylinder in a
shorter period of time using the Coates SRV Engine, leading to an eligibility to
operate the engine faster and an ability to utilize  higher  compression  ratios
with lower  compression  chamber  temperatures.  Management  believes  that as a
result, engines modified with the Coates SRV Engine will produce more power than
similar  engines  utilizing  the poppet valve system.  However,  there can be no
assurance  that the Coates  SRV  Engines  will find  general  acceptance  in the
marketplace.

                                       4

<PAGE>


The  combustion  engine has been in use for  approximately  100 years and is the
most widely  used  powerpack  in the world.  There are more than 120 million new
combustion  engines  built in the world every year,  and 40 million  engines are
rebuilt annually.  Management of CIL believes that the Coates Engine will be the
engine of the future.  In the late 1960's and 1970's,  most  vehicle  combustion
engines in the USA were running at a compression ratio of 12 to 1 which resulted
in an engine  efficiency of approximately  55 percent.  The rest of the engine's
power was lost in friction,  pumping and heat loss.  When it was found that lead
additives in fuel had an adverse effect on the environment,  it was removed from
the fuel.  This  caused  the  poppet  valve  engines to  overheat,  raising  the
temperature in excess of 2500 degrees  farenheit and damaging the poppet valves.
The answer to this problem was to lower the compression ratios of all engines to
10  to 1 or  lower,  thus  reducing  efficiency  of  the  combustion  engine  to
approximately  24 percent.  This means less miles per gallon (MPG),  lower brake
horse power (BHP) and lower torque.  The air traveling through the inlet venturi
of a combustion  engine inlet travels at a speed of up to 450 ft per second.  In
normally aspirated engines this works, but in poppet valve engines,  the BHP and
torque  decreased  as the air  traveling  in does not increase in speed unless a
turbo or supercharger is incorporated. At higher RPM's the poppet valve tends to
float or bounce and is unable to service  the  cylinder  and chamber to capacity
with air and fuel  mixture.  This is the reason  for adding two extra  valves to
modern engines including turbos or  superchargers.  The large overlap is another
common defect in poppet valve engines,  causing  unburned fuel to escape through
the exhaust SRV Engine which leads to a loss of power,  lower MPG and production
of pollution.

The poppet valves' stems are lubricated with engine oil which is burnt off after
a short period of running. The stem of the inlet valve system is also lubricated
with engine oil,  which is washed off and inducted into the  combustion  chamber
with air and fuel mixture.  This slows combustion and produces further emissions
and eventually clogs the catalytic converter.

Variable  valve  timing has  advantages  at lower  RPM's as it can  shorten  the
overlap  duration of the valves,  but the extra moving parts eventually wear. On
quick  deceleration,  it can cause piston and valve contact where serious damage
can occur.  Poppet valves,  if not activated with hydraulic  systems,  must have
clearances readjusted periodically.  The poppet valve of the original engine has
been used and modified  continuously until the present,  However, it is the most
troublesome  part of a  combustion  engine  and has lower  efficiency  at higher
RPM's.

Because the valves  rotate away from the  combustion  chamber and are vented and
charged  on the  opposite  side  of each  sphere,  a  lower  combustion  chamber
temperature  is  created,  allowing  higher  compression  ratios to be used thus
creating an extremely  efficient  engine.  Some of the Coates  Spherical  Rotary
Combustion  Engines  run at 12 to 1, 13 to 1, 14 to 1,  and 15 to 1  compression
ratios depending on the application.

PATENTS AND LICENSES

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

                                       5

<PAGE>


                                    Date                       Date
Us Patent No.               Application Filed              Of Patent

4,989,579(Mark I)           July 26,1982                   February 5,1991
4,953,527Mark II)           November 14, 1998              September 4, 1990
4,989,558                   September 14,1998              February 5, 1991
4,944,261(Mark IIB)         October 16, 1989               July 31, 1990
4,976,232`                  December 6, 1989               December 11, 1990
5,109,814                   May 10, 1991                   May 5, 1992
5,361,739(Mark III)         May 12, 1993                   November 8, 1994

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

In February 1995, George J. Coates and his son Gregory Coates each granted CIL a
non-exclusive  license to manufacture,  sell and grant sub-licenses with respect
to  products  based  on  the  Coates  Patents  within  the  United  States,  its
territories and possessions.  On December 27, 1997, George J. Coates and Gregory
Coates amended the existing license agreement and previous  amendments  thereto,
modifying  them from a  non-exclusive  license to an exclusive one. The licenses
expire in the event of bankruptcy or similar insolvency of CIL. George J. Coates
and Gregory  Coates have also  agreed,  as long as CIL remains  independent  and
viable,  not to compete with CIL in the  manufacture,  assembly,  use or sale of
internal combustion engines utilizing the technology falling within the scope of
the Coates  Patents in the Licensed  Areas,  or to grant any other  exclusive or
non-exclusive  license in the Licensed  Areas  except  through CIL. In addition,
George J. Coates and Gregory Coates have executed an agreement  granting CIL the
right to retain any monies including  royalties  received from Nicholson McLaren
or from Noble Motor Sport  (manufacturer of Ascari racing cars) for manufacture,
sale, use or assembly of internal combustion engines anywhere in the world using
the technology falling within the scope of the Coates Patents. CIL agreed to pay
$5,500,000 license fee to George J. Coates in consideration for his grant to CIL
of the non-exclusive license payable at management's  discretion but in no event
later than February 17, 1998. In September 1998, this  arrangement was modified.
CIL and George J. Coates  agreed that  instead of the  $5,500,000  payment,  CIL
would issue  275,000  shares of Series A Stock to Mr. Coates as the license fee.
The shares were issued to Mr. Coates in November 1998.

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

                                       6

<PAGE>


Engine  assembled by Nicholson  McLaren with components  purchased from CIL. The
balance is payable  pursuant to a payment schedule to be mutually agreed between
both parties.

EMPLOYEES

At December 31, 2000, CIL employed six (6) employees, including George J. Coates
and his son Gregory  Coates who perform both  management,  assembly and research
and  development  functions,  and;  Bernadette  Coates,  the spouse of George J.
Coates, is employed as administrative manager for the Company.

ITEM 2. DESCRIPTION OF PROPERTY

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

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

ITEM 3. LEGAL PROCEEDINGS

There are no legal proceedings against the Company.

In February,  1995, the Company and George J. Coates consented to the entry of a
civil  consent  judgment in the United  States  District  Court for the Southern
District of New York arising out of a civil complaint  brought by the Securities
and  Exchange   Commission  (the  "SEC").   Without  admitting  or  denying  SEC
allegations,  CIL and Mr. Coates agreed to offer rescission to certain investors
and conduct any future offerings of CIL securities in accordance with securities
registration  laws or  exemptions.  Following the  completion of the  rescission
offer in accordance with its terms,  the Court, in 1997,  discharged the special
master and Company management resumed its business activities.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

CIL did not submit any matter to a vote of its stockholders  during the calendar
year 2000.

                                       7


<PAGE>


COATES INTERNATIONAL LTD.

PART II

ITEM 5: MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS

There is no established  public trading market for CIL's only outstanding  class
of capital stock, its Common Stock. At December 31, 2000 the approximate  number
of holders of record of the Common Stock was 804. CIL has not paid any dividends
with respect to its Common Stock and anticipated  capital  requirements  make it
highly  unlikely that any  dividends  will be paid by CIL in the year 2001 or in
the forseeable future

ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF
              OPERATION

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

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

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

                                       8


<PAGE>

RESULTS OF OPERATIONS

Fiscal Years 1999 and 2000

CIL  recognized  revenue of $850,000 for the fiscal year ended December 31, 2000
as compared with the $550,000 of recognized revenue for the prior fiscal year of
1999.  This  significant  increase in revenue  was the result of the  additional
payments made by Well to Wire Energy,  Inc. to the Company towards a license and
to  finance  the  development  of  prototypes  of a  natural  gas fed,  electric
generator  engine  modified  with the Coates SRV  Engine.  See  "Description  of
Business-License  Agreement-Well  to Wire Energy,  Inc.".  CIL had a net loss of
$122,211  for fiscal  year 2000 as  compared  to net income of  $279,675  earned
during fiscal year 1999. The  approximate  $400,000 shift from net income to net
losses  between  fiscal years 1999 and 2000 was primarily due to CIL's 1999 sale
of its New Jersey net operating loss carry-forwards through a special New Jersey
tax certificate  program (the "NJ nol's") benefiting  technology  companies that
resulted  in the Company  obtaining  approximately  $600,000  in income  derived
through the sale of CIL's accrued NJ nol's.

Operating  expenses  increased for fiscal year 2000 to $819,301  from  $748,156,
incurred during fiscal year 1999, due to the approximate 35% increase in general
and  administrative  expenses due  principally to increased  patent  maintenance
costs of approximately  $27,000 and additional purchases of shop supplies in the
approximate  amount of $62,000,  expended in connection with the construction of
the prototype engines for the Well to Wire Energy, Inc. project.

LIQUIDITY AND CAPITAL RESOURCES

Since its inception,  all of the development costs and operating expenses of CIL
have  primarily  been financed  through the cash  generated  through the sale of
stock,  through  capital  contributions  made by George J. Coates' son,  Gregory
Coates,  and through several payments for prototype and license fees made by two
entities.  Gregory  Coates made no capital  contributions  to the Company during
fiscal year 2000 and1999 as compared to $384,961  and $953,834  advanced in 1998
and 1997, respectively.

The  Company  expects  to  finalize  the  construction  and  validation  of  the
prototypes of its natural gas fed, electric  generator engines modified with the
Coates SRV Engine (the "Coates Generator Engine")in  connection with its project
with Well to Wire Energy,  Inc.  CIL has  completed  two of the three  prototype
Coates Generator  Engines required under its agreement with Well to Wire Energy,
Inc.  and expects  completion  and  delivery of the last  prototype on or before
April 30, 2001.  Following  additional  testing and  validation,  CIL expects to
receive the balance of its license  payment due of $4,700,000 and the balance of
its prototype  development  costs of $4,100,000  from Well to Wire Energy,  Inc.
during fiscal year 2001. If required, management will raise additional operating
funds through combination of private or public offerings of its securities.

                                       9

<PAGE>


COATES INTERNATIONAL LTD.

PART III

ITEM 7.  FINANCIAL STATEMENTS

              The  Company's   Financial   Statements  and  Notes  to  Financial
Statements  are  attached  hereto  as  Exhibit  A  and  incorporated  herein  by
reference.

ITEM 8.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
             ACCOUNTING AND FINANCIAL DISCLOSURE

               There  have  been  no  changes  in  or  disagreements   with  the
Registrant's independent auditors during the last two years..

ITEM 9  DIRECTORS AND EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
              PERSONS, COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT

At  December  31,  2000 the  executive  officers  and  directors  of CIL were as
follows:

<TABLE>
<CAPTION>
         Name                   Position                                Term(s) of Office
-----------------------    ------------------------                   -----------------------

George J. Coates  age 60   President, Treasurer, Chief Executive
<S>                       <C>                                           <C>
                           Officer, Chief Financial Officer and
                           Director                                     From Inception to present

Richard W. Evans age  69   Secretary and Director                       May, 1996 until present

Michael J. Suchar age 47   Director                                     May, 1996 until present
</TABLE>


George J. Coates has been  employed by CIL since its  inception as president and
chief  executive  officer.  Mr.  Coates is an Irish citizen but has been granted
resident alien status in the United  States.  He served two  apprenticeships  in
Europe while attending the College of Technology,  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 SRV Engine,
and invented and patented a turbine engine.

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


                                       10

<PAGE>

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

Compliance with Section 16(a) of the Exchange Act

CIL's  only  class of  outstanding  capital  stock,  its  Common  Stock,  is not
registered  pursuant to Section 12 of the Exchange Act so that fillings of Forms
3,4, and 5 in compliance with such Section are not required.

ITEM 10.  EXECUTIVE COMPENSATION

None of CIL's  executive  officers has an  employment  contract  with CIL.  With
respect to each of calendar years 1998, 1999, and 2000, no executive officer had
compensation  paid or accrued in excess of $100,000 for any such year except for
George J. Coates,  CIL's Chief  Executive  Officer,  while  compensation  was as
follows:

SUMMARY COMPENSATION TABLE

Annual Compensation Year ended Name December 31 Salary

         Name                       Position         Year            Salary
         -------                    ---------        -----        -------------
George J. Coates  President, Chief Executive
                             Officer and Chief
                             Financial Officer       2000           $183.548
                                                     1999           $183,548
                                                     1998           $186,947

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

                                       11


<PAGE>


ITEM 11.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
               MANAGEMENT

The  following  table sets forth as of December  31, 2000 the  ownership  of CIL
Common Stock by (i) each person known by CIL to be beneficial owner of more than
5 percent of the  outstanding  Common  Stock,  (ii) each  director and executive
officer of CIL who owned shares,  and (iii) all directors and executive officers
as a group.

Title             Name and Address of       Amount and Nature of     Percent
of Class          Beneficial Owner       Beneficial Ownership (1)   of Class
----------       ----------------------- -------------------------  --------
Common Stock      George J. Coates*       51,400,000 shares           77.8%
                  Gregory Coates*          3,530,630 shares           5.3 %
                  Richard W. Evans*          165,000 shares         .0025 %
                  Michael J. Suchar*          50,000 shares          .001 %

                  All directors and
                  executive officers
                  as a Group (4 persons)  55,145,630 shares           83.4%

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

ITEM 12  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

                 NONE

ITEM 13   EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits

Exhibit No.                Description of Exhibit

F-1               Independent auditors report and financial statements for the
                  fiscal years ended December 31, 2000 and 1999.

The following  listed  Exhibits are hereby  incorporated  by reference into this
Form 10-KSB for the fiscal year ended  December  31,  2000,  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:

3.1               CIL's Restated Certificate of Incorporation
3.2               CIL's By-Laws
4.1               Form of Certificate for CIL's Series A Non-Cumulative
                  Convertible Preferred Stock
10.1              Deed dated February 21, 1995 transferring title to CIL's
                  Principal Facility at Route 34
10.2              Assumption and Indemnification Agreement dated
                  February 21, 1995 between the partnership and CIL.

                                       12

<PAGE>


10.3              License Agreement dated December 22, 1997 between George J.
                  Coates and CIL. George J. Coates and CIL 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 CIL.
10.5              License Agreement dated February 22, 1993 between Gregory
                  Coates and CIL and First Amendment thereto dated July 17,1995.
10.6              Prototype Manufacturing Agreement dated July 16, 1991 Between
                  CIL, George J. Coates and Harley-Davidson Inc.
10.7              License Agreement dated February 4, 1994 by and between CIL,
                  Coates International Licensing Partnership, L.P.,
                  George J. Coates and Millwest Corporation.
10.8              Securities and Exchange Commission Complaint filed on
                  July 22, 1994 in the United States District Court for the
                  Southern District of New York (94 Civ. 5361) against George
                  J. Coates, CIL and related entities.
10.9              Final Consent Judgment of CIL in the above action Initiated
                  by the Commission (94 Civ. 5361)
10.10             Final Consent Judgment of George J. Coates in the above
                  Action initiated by the Commission (94 Civ. 5361).

(b) No reports on Form 8-K were filed during the last quarter of the fiscal year
ended December 31, 2000.

                                       13

<PAGE>



                                   SIGNATURES

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

DATE:  March 31, 2001                 COATES INTERNATIONAL LTD.

                                        /s/George J. Coates
                                      ------------------------------
                                        George J. Coates, President
                                          Chief Executive Officer and
                                          Chief Financial Officer

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

SIGNATURE                           TITLE                         DATE
-----------------                 ---------                     ---------

/s/George J. Coates
------------------------
George J. Coates               Director, Chief               March 31, 2001
                               Executive Officer,
                               President, and
                               Chief Financial Officer

/s/Richard W. Evans
------------------------
Richard W. Evans                Director                      March 31, 2001

/s/Michael J. Suchan
------------------------
Michael J. Suchar               Director                      March 31, 2001


                                       14

<PAGE>



                           Coates International, Ltd.

                              Financial Statements

                           December 31, 2000 and 1999


<PAGE>




                           Coates International, Ltd.
                        Index to the Financial Statements
                           December 31, 2000 and 1999





                                                          Page

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

Financial Statements

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

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

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

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

     Notes to the Financial Statements.............       7-11



<PAGE>



                          Independent Auditors' Report

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

We have audited the balance sheet of Coates  International,  Ltd. as of December
31, 2000 and the related statements of operations, stockholders' equity and cash
flows for the years ended December 31, 2000 and 1999. These financial statements
are the  responsibility of the Company's  management.  Our  responsibility is to
express an opinion on these financial statements based on our audits.

We  conducted  our  audits  in  accordance  with  generally   accepted  auditing
standards.  Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements.  An audit also includes
assessing the  accounting  principles  used and  significant  estimates  made by
management,  as well as evaluating the overall financial statement presentation.
We believe that our 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, 2000,  and the results of their  operations,  and cash flows for
the years ended December 31, 2000 and 1999 in conformity with generally accepted
accounting principles.



/s/Rosenberg Rich Baker Berman & Company
-----------------------------------------
Rosenberg Rich Baker Berman & Company
Bridgewater, New Jersey
February 13, 2001

                                       1
<PAGE>



                           Coates International, Ltd.
                                  Balance Sheet
                                December 31, 2000

<TABLE>
<CAPTION>
      Assets
Current Assets
<S>                                                                                                       <C>
   Cash                                                                                                   $        340,821
   Restricted cash                                                                                                 112,000
   Inventory                                                                                                       205,357
   Prepaid insurance                                                                                                 6,432
                                                                                                            --------------

      Total Current Assets                                                                                         664,610

Property, Plant and Equipment - Net of $440,128 of accumulated depreciation                                      1,625,892

Other Assets
    Mortgage loan costs, net of accumulated amortization of $22,701                                                 42,159
   Deposit                                                                                                           2,500
                                                                                                            --------------

      Total Assets                                                                                               2,335,161
                                                                                                            ==============

      Liabilities and Stockholders' Equity

Current Liabilities
   Current portion of mortgage payable                                                                               8,903
   Note payable                                                                                                     58,731
   Accounts payable                                                                                                 45,485
   Accrued expenses                                                                                                716,619
   Accrued interest payable                                                                                        118,391
                                                                                                            --------------

        Total Current Liabilities                                                                                  948,129

Mortgage payable, net of current portion                                                                           883,604
                                                                                                            --------------

        Total Liabilities                                                                                        1,831,733

Stockholders'  Equity  Preferred  stock,  Series A,  $.001 par value  14,000,000
   shares authorized - no shares
      issued                                                                                                             -
   Common stock, $.0001 par value, 200,000,000 shares authorized - 66,097,910shares
   issued and outstanding                                                                                            6,610
   Additional paid-in capital                                                                                   11,184,824
   Accumulated deficit                                                                                         (10,688,006)
                                                                                                            --------------

        Total Stockholders' Equity                                                                                 503,428
                                                                                                            --------------
                                                                                                          $      2,335,161
        Total Liabilities and Stockholders' Equity
                                                                                                            ==============
</TABLE>

See notes to the financial statements.

                                       2
<PAGE>




                           Coates International, Ltd.
                            Statements of Operations

<TABLE>
<CAPTION>






                                                                                                     Years Ended December 31,
                                                                                                 ---------------------------------
                                                                                                      2000              1999
                                                                                                 ---------------   ---------------


<S>                                                                                            <C>               <C>
Revenue                                                                                        $         845,000 $         550,000
                                                                                                 ---------------   ---------------

Operating Expenses:
   Research and development costs                                                                        225,579           235,906
   Research and development costs - related party                                                        222,549           211,589
   General and administrative expenses                                                                   324,931           240,070
   Depreciation                                                                                           33,270            26,998
   Amortization                                                                                           12,972            33,593
                                                                                                 ---------------   ---------------

      Total Operating Expenses                                                                           819,301           748,156
                                                                                                 ---------------   ---------------

   Income (Loss) From Operations                                                                          25,699          (198,156)
                                                                                                 ---------------   ---------------

Other Income (Expense):
   Miscellaneous income                                                                                   15,000                 -
   Interest income                                                                                         2,583             1,400
   Interest expense                                                                                     (149,548)         (133,471)
                                                                                                 ---------------   ---------------

      Total Other Income (Expense)                                                                      (131,965)         (132,071)
                                                                                                 ---------------   ---------------

   Loss Before Benefit From Income Taxes                                                               (106,266)         (330,227)

   (Provision for) Benefit From Income Taxes                                                            (15,945)           609,902
                                                                                                 ---------------   ---------------

   Net Loss (Income)                                                                           $       (122,211) $         279,675
                                                                                                 ===============   ===============

   (Loss) Earnings Per Share                                                                   $         (0.002) $           0.004
                                                                                                 ===============   ===============
   Weighted Average Number of Shares                                                                 66,097,910         65,724,240
                                                                                                 ===============   ===============
</TABLE>



See notes to the financial statements.

                                       3
<PAGE>




                           Coates International, Ltd.
                        Statement of Stockholders' Equity
<TABLE>
<CAPTION>







                                                                     Common Stock                   Series A Preferred Stock
                                                          ----------------------------------  ------------------------------------
                                                              Shares            Amount             Shares             Amount
                                                          --------------   -----------------  ----------------   -----------------
<S>                                                        <C>            <C>                        <C>                     <C>
Balance - December 31, 1997                                            -                   -         6,601,011  $            6,602
Issuance of Stock                                                      -                   -             8,000                   8
Additional Contributions of Capital From a
    Shareholder                                                        -                   -                 -                   -
Net Loss for Year Ended December 31, 1998                              -                   -                 -                   -
                                                          --------------   -----------------  ----------------   -----------------
Balance - December 31, 1998                                            -                   -         6,609,011               6,610
Additional Contributions of Capital From
     Shareholders                                                                                                                -
Net Income for Year Ended December 31, 1999                                                                  -                   -
                                                          --------------   -----------------  ----------------   -----------------

Balance - December 31,1999                                             -                   -         6,609,011              (6,610
Exchange of Series A Preferred Stock for
Common Stock                                               66,090,110               $  6,609        (6,609,011)                  -

Issuance of stock                                               7,800                      -                 -                   -
Additional Contributions of Capital
  from a Shareholder                                                   -                   -                 -                   -
Net Loss for year ended December 31, 2000                              -                   -                 -                   -
                                                          --------------   -----------------  ----------------   -----------------
                                                          66,097,910      $            6,609                 -  $                -
                                                          ==========       =================  ================  ==================
</TABLE>




See notes to the financial statements.

                                       4A

<PAGE>

Coates International, Ltd.
Statement of Stockbrokers' Equity - CONTINUED
<TABLE>
<CAPTION>

                                                                                                   Total
                                                                               Retained         Stockholders'
                                                           Additional          Earnings            Equity
                                                         Paid-In Capital       (Deficit)          (Deficit)
                                                        -----------------  -----------------  -----------------
<S>                                                    <C>                 <C>                          <C>
Balance - December 31, 1997                            $       10,285,130 $       (9,743,717)$          548,014
Issuance of Stock                                                 149,992                  -            150,000
Additional Contributions of Capital From a
    Shareholder                                                   384,961                  -            384,961
Net Loss for Year Ended December 31, 1998                               -         (1,101,753)        (1,101,753)
                                                        -----------------  -----------------  -----------------
Balance - December 31, 1998                                    10,820,083        (10,845,470)           (18,778)
Additional Contributions of Capital From
     Shareholders                                                 171,742                  -            171,742
Net Income for Year Ended December 31, 1999                             -            279,675            279,675
                                                        -----------------  -----------------  -----------------

Balance - December 31,1999                                     10,991,825        (10,565,795)           432,639
Exchange of Series A Preferred Stock for

  Common Stock                                                          -                  -                  -

Issuance of stock                                                  80,000                  -             80,000
Additional Contributions of Capital
  from a Shareholder                                              113,000                  -            113,000
Net Loss for year ended December 31, 2000                               -           (122,211)          (122,211)
                                                        -----------------  -----------------  -----------------
                                                       $       11,184,825 $      (10,688,006)$          503,428

Balance - December 31, 20000                            =================  =================  =================
</TABLE>



See notes to the financial statements.


                                       4B
<PAGE>


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


                                                                                             Years Ended December 31,
                                                                                         --------------------------------
                                                                                              2000             1999
                                                                                         --------------   ---------------

Cash Flows From Operating Activities
<S>                                                                                     <C>              <C>
    Net (Loss) Income                                                                   $      (122,211) $        279,675
                                                                                         --------------   ---------------
    Adjustments to Reconcile Net (Loss) Income to Net Cash Used in
    Operating Activities
          Depreciation                                                                           33,270            26,998
          Amortization                                                                           12,972            33,593
          Deferred taxes                                                                        251,000          (251,000)
    Changes in Assets and Liabilities
        (Increase) Decrease in
          Inventory                                                                            (205,357)                -
          Prepaid insurance                                                                         457              (334)
          Due to/from affiliated companies                                                            -            19,543
        Increase (Decrease) in
          Accounts payable and accrued expenses                                                (144,043)         (228,480)
          Accrued interest payable                                                                 (101)           11,933
                                                                                         --------------   ---------------

        Total Adjustments                                                                       (51,802)         (387,747)
                                                                                         --------------   ---------------
    Net Cash Used in Operating Activities                                                      (174,013)         (108,072)
                                                                                         --------------   ---------------

Cash Flows from Investing Activities
    Payments for property and equipment                                                         (74,000)          (55,800)
    Loans to stockholders                                                                       (16,000)                -
                                                                                         --------------   ---------------
    Net Cash Used in Investing Activities                                                       (90,000)          (55,800)
                                                                                         --------------   ---------------

Cash Flows From Financing Activities
    Proceeds from mortgage payable                                                                    -           900,000
    Repayment of mortgage payable                                                                (3,060)         (504,433)
    Payment for mortgage loan costs                                                                   -           (65,344)
    Proceeds of additional paid-in capital                                                      113,000           171,742
    Proceeds from issuance of stock                                                              80,000                 -
    Proceeds from note payable                                                                   75,000
    Repayment of note payable                                                                   (16,269)                -
    Loans from stockholder                                                                            -             3,495
                                                                                         --------------   ---------------
    Net Cash Provided by Financing Activities                                                   248,671           505,460
                                                                                         --------------   ---------------

    Net Decrease (Increase) in Cash                                                             (15,342)          341,588
    Cash - Beginning of Periods                                                                 356,163            14,575
                                                                                         --------------   ---------------
    Cash - End of Periods                                                               $       340,821  $        356,163
                                                                                         ==============   ===============
</TABLE>







See notes to the financial statements.

                                       5

<PAGE>




                           Coates International, Ltd.
                            Statements of Cash Flows

<TABLE>
<CAPTION>




                                                                                                      Years Ended December 31,
                                                                                                  --------------------------------
                                                                                                       2000             1999
                                                                                                  ---------------  ---------------

Supplemental  Disclosures of Cash Flow  Information Cash paid during the periods
    for:
<S>                                                                                             <C>               <C>
        Interest paid                                                                           $         149,648 $        121,538
                                                                                                  ===============  ===============
        Income taxes paid                                                                       $             200 $            400
                                                                                                  ===============  ===============
</TABLE>











See notes to the financial statements.

                                       6

<PAGE>




                           Coates International, Ltd.
                        Notes to the Financial Statements

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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

    CIL has developed a spherical rotary valve system  (the"Coates  System") for
    use in  piston  driven  internal  combustion  engines  of all  types  and is
    manufacturing  on a limited  scale  basis at its Wall  Township,  New Jersey
    facility.  CIL also has an exclusive  license to sell and grant  sublicenses
    with  respect  to  products  using the  Coates  System  based on the  Coates
    Patents. The Company was in the development stage through December 31, 1999.
    The year 2000 is the first year during which it is  considered  an operating
    company.

Inventory
    Inventory  is valued at the lower of cost  (determined  on a first in, first
out basis) or market.

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

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

Earnings (Loss) Per Share
    Earnings  (loss) per share,  in accordance  with the provisions of Financial
    Accounting  Standards  Board No. 128,  "Earnings  Per Share," is computed by
    dividing  the net income  (loss) by the  weighted  average  number of common
    shares and preferred shares outstanding during the periods.

Revenue Recognition
    The Company has not generated  revenues from sales of engines.  Revenue from
    the  granting  of  sub-licenses  and  research  and  development   costs  to
    manufacture prototype engines are recognized upon receipt of funds.

Advertising Costs
    Advertising costs are charged to operations when incurred.  Advertising
    expense was $12,356 and $72,000 for the years
    ended December 31, 2000 and 1999, 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 realized. The Company incurred
    net operating losses for  financial-reporting  and  tax-reporting  purposes.
    Accordingly,  the  benefit  from income  taxes has been  mostly  offset by a
    valuation  allowance  against  the related  deferred  tax asset for the year
    ended December 31, 1998.

                                       7
<PAGE>




                           Coates International, Ltd.
                        Notes to the Financial Statements


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.

CONCENTRATIONS OF CREDIT AND BUSINESS RISK

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

    The Company  entered into a license  agreement with a Canadian  corporation,
    whereby  the Company is  granting  an  exclusive  license for the use of the
    Coates  Engine  in  connection   with  the  conversion  of  natural  gas  to
    electricity in Canada.  The licensing fee is $5,000,000 and the Company also
    receives a royalty equal to 5% of the gross profit which is derived from all
    sources.  The Company also retains the exclusive right to manufacturing both
    the engine and generator  components  for sale to the Canadian  corporation.
    The  revenues  generated  for years  ended  December  31,  2000 and 1999 are
    entirely attributable to the Canadian corporation. The loss of this customer
    would  have  a  material  adverse  effect  on  the  Company's  business  and
    operations.

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

RESTRICTED CASH

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

INVENTORY

    Inventory  consists of work in process  valued at  $205,357 at December  31,
2000.


                                       8
<PAGE>




                           Coates International, Ltd.
                        Notes to the Financial Statements

 PROPERTY, PLANT AND EQUIPMENT

    Property,  plant  and  equipment  at cost,  less  accumulated  depreciation,
consists of the following at December 31, 2000:

<TABLE>
<CAPTION>
<S>                                                                                               <C>
             Land                                                                                 $         920,550
             Building                                                                                       579,450
             Building improvements                                                                          201,671
             Machinery and equipment                                                                        325,054
             Furniture and fixtures                                                                          39,295
                                                                                                    ---------------
                                                                                                          2,066,020
             Less:  Accumulated depreciation                                                                440,128
                                                                                                    ---------------
                                                                                                  $       1,625,892
                  Total
                                                                                                    ===============

    Depreciation  expense  amounted  to $33,270  and $26,997 for the years ended
December 31,2000 and 1999, respectively.

ACCRUED EXPENSES

    Accrued expenses at December 31, 2000 is comprised of the following:


             Legal Fees                                                                           $         542,834
             Accounting Fees                                                                                 25,000
             Patent Legal Fees                                                                               39,770
             Audit Fees - prior auditors                                                                    109,015
                                                                                                    ---------------
                                                                                                  $         716,619
                                                                                                    ===============

NOTE PAYABLE

    The note payable represents a bank loan with interest at 13.64% due in equal
    monthly  installments of $6,907 including  interest through  September 2001,
    secured by equipment with a net book value of $66,600.

MORTGAGE PAYABLE

    Interest at 15.99% per annum due in equal  monthly  installments  of $12,521
    including interest, due on April 1, 2004 secured by land and building with a
    net book value of $1,552,621.


                                                                                                  $         892,507
          Less current maturities                                                                             8,903
                                                                                                    ---------------
          Mortgage payable, net of current maturities                                             $         883,604
                                                                                                    ===============

    Total maturities of mortgage payable are as follows:

             Year Ending December 31,
             2001                                                                $          8,903
             2002                                                                          10,435
             2003                                                                          12,232
             2004                                                                         860,937
                                                                                  ---------------
                                                                                 $        892,507
                                                                                  ===============
</TABLE>



                                       9

<PAGE>

                           Coates International, Ltd.
                        Notes to the Financial Statements

CAPITAL STOCK

    During the year, the Company increased its authorized shares of common stock
    from  20,000,000 to  200,000,000  and changed the par value per common share
    from $0.001 to $0.0001.  The Company also converted all shares of its Series
    A preferred  stock into common  stock,  on the basis of ten shares of common
    stock for each share of Series A preferred stock.

    The earnings per share  calculation for the year ended December 31, 1999 has
been restated to reflect the above.

INCOME TAXES

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

<TABLE>
<CAPTION>


                                                                                               Year Ended December 31,
                                                                                          ----------------------------------
                                                                                               2000            1999
                                                                                          ---------------  -----------------
<S>                                                                                     <C>               <C>
        State current (provision) benefit                                               $         (15,945)$          358,902
        State deferred benefit                                                                          -            251,000
                                                                                          ---------------  -----------------
                                                                                        $         (15,945)$          609,902
                                                                                          ===============  =================
</TABLE>


    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  and Research  and  Development  Tax
    Credits ("R&D  Credits) to corporate  taxpayers in New Jersey.  During 1999,
    the Company  entered into an agreement under which it retained a third party
    broker to identify a buyer for its NOL Carryover.  The total anticipated net
    proceeds of this  transaction  $609,902) was recorded as a current  deferred
    tax asset and benefit for the year ending December 31, 1999.

    Due to limitations  placed by the State of New Jersey on the total amount of
    NOL Carryover and R&D Credits  eligible to be sold in any one year, the sale
    of only a portion  of the  Company's  NOL  Carryover  ($358,902),  which was
    received in 1999 funds was recorded as a current tax benefit in the December
    31, 1999  financial  statements.  The sale of the  remaining  balance of the
    Company's  NOL  Carryover  ($235,033),  which was  recorded as an  estimated
    deferred  tax benefit of $251,000 at December 31, 1999 was received in 2000.
    This resulted in a current tax provision of $15,945 at December 31, 2000.

    The  Company's  total  deferred  tax asset and  valuation  allowance  are as
follows at December 31, 2000:




        Total deferred tax asset, current                    $       4,239,951
        Less valuation allowance                                     4,239,951
                                                               ---------------
        Net deferred tax assets, current                     $               -


    The differences between income tax benefits in the financial statements
    and the tax benefit computed at the U. S. Federal statutory rate of 34%
    at December 31, 2000 are as follows:


        Tax benefit                                                34 %
        Valuation allowance                                      (30) %
                                                      ---------------
        Effective tax rate                                          4 %
                                                      ===============

    At December 31, 2000, the Company has available approximately $10,316,657 of
    net  operating  losses to  carryforward  which may be used to reduce  future
    federal taxable income and expire between December 31, 2003 and 2020.

    At December 31, 2000 the Company has available  approximately  $2,931,190 of
    net  operating  losses to  carryforward  which may be used to reduce  future
    state taxable income and begin to expire December 31, 2004.

                                       10

<PAGE>



                           Coates International, Ltd.
                        Notes to the Financial Statements


LICENSES

    The Company has incurred legal and related costs  associated  with licenses.
    Such costs amounted to $107,232 and $80,586 for the years ended December 31,
    2000 and 1999.  As the  probable  future  economic  benefit of such costs is
    uncertain, they have been expensed.

RELATED PARTY TRANSACTIONS

    The Company  subcontracts its project expense from certain entities of which
    GJC is the sole  shareholder.  During the years ended  December 31, 2000 and
    1999,  the Company  paid  $222,549  and  $211,589,  respectively,  for these
    services.

FAIR VALUE OF FINANCIAL INSTRUMENTS

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

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

                                       11