Summary of COATES INTERNATIONAL LTD \DE\

Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward Looking Statements

This quarterly report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and Federal securities laws, and is subject to the safe-harbor created by such Act and laws. Forward-looking statements may include our statements regarding our goals, beliefs, strategies, objectives, plans, including product and service developments, current dependence on our agreements with Well to Wire Energy, Inc., future financial conditions, results or projections or current expectations. In some cases, you can identify forward-looking statements by terminology such as "may," "will," "should," "expect," "plan," "anticipate," "believe," "estimate," "predict," "potential" or "continue," the negative of such terms, or other comparable terminology. These statements are subject to known and unknown risks, uncertainties, assumptions and other factors that may cause actual results to be materially different from those contemplated by the forward-looking statements. The business and operations of Coates International, Ltd. are subject to substantial risks, which increase the uncertainty inherent in the forward-looking statements contained in this report. Except as required by law, we undertake no obligation to release publicly the result of any revision to these forward-looking statements that may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. Further information on potential factors that could affect our business is described in our various periodic reports filed with the SEC. Readers are also urged to carefully review and consider the various disclosures we have made in this and such previously filed reports.

Background

We have completed development of the Coates spherical rotary valve engine ("CSRV") system technology. We believe that the CSRV system technology delivers significant competitive advantages over conventional internal combustion engines, including a substantial improvement in fuel efficiency, a substantial reduction in harmful emissions and longer intervals between scheduled engine maintenance. This technology has been successfully applied to natural gas fueled industrial electric power generator engines, automobile engines, residential generators and high performance racing car engines. We have also completed designing and retrofitting the CSRV system technology into a diesel engine for heavy trucks. The next steps on this diesel truck engine include completing the mapping of the computer circuitry for certain truck functions powered by the engine and testing. We have been developing plans for transitioning to large scale production in order to be properly positioned to take advantage of this technology as it achieves acceptance in the marketplace. This includes searching for the optimal location, shipping logistics, manufacturing facility and qualified labor pool for such large scale manufacturing. We continue to actively seek out new sources of working capital to fund our plans for the commencement of manufacturing activities.

We are also engaged in new research and development activities in connection with applying this technology to other commercially feasible internal combustion engine applications and are planning to manufacture engines and/or license the technology to third party OEM's for multiple other applications and uses. We believe the CSRV system technology has wide applicability to products of all types powered by internal combustion engines.

We are actively engaged in efforts to raise working capital to fund our ongoing operations and the start up of large scale production of our products incorporating the CSRV system technology.

Significant Estimates

The preparation of our financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. These significant estimates include determining a value for the Series A Preferred Stock issued and certain limited anti-dilution rights granted to George J. Coates, assigning useful lives to our property, plant and equipment, determining an appropriate amount to reserve for obsolete and slow moving inventory, a valuation allowance for deferred tax assets, assigning expected lives to, and estimating the rate of forfeitures of, stock options granted and selecting a volatility factor for our stock options in order to estimate the fair value of our stock options on the date of grant.

Agreements with Well to Wire Energy, Inc.

On September 29, 1999, we signed a sublicense agreement with Well to Wire Energy, Inc. ("WWE"), a company based in Canada that services the oil and gas industry. This agreement exclusively licenses within Canada the use of the CSRV system technology for industrial engines to be fueled by natural gas to generate electrical power for the oil and gas industry (the "Canadian License"). The agreement provided for a license fee of $5,000,000. A deposit payment in the amount of $300,000 was received at that time. A separate research and development agreement provided for WWE to pay us a $5,000,000 fee in consideration for the development and delivery of certain prototype engines. We completed development of the prototypes in accordance with this agreement at the end of 2007. The research and development agreement has not been reduced to the form of a signed, written agreement. As of June 30, 2009, we have been paid a total of approximately $4,003,000 by WWE under these agreements.

Additional provisions of the Canadian License agreement are as follows:

? WWE shall have the exclusive right to use, lease and sell electric power generators that are based on the CSRV System technology within Canada for use in the oil and gas industry.
? WWE shall have a specified right of first refusal to market the electric power generators worldwide in the oil and gas industry and landfill operations.
? Upon commencement of the production and distribution of the electric power generators, 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 $150,000. We received a firm order from WWE for approximately 7,400 engine generators at a mutually agreed upon increased price per unit of $159,000. In the event WWE fails to purchase the minimum 120 Coates generator engines during any year, WWE will automatically lose its exclusivity. In such case, WWE would retain non-exclusive rights to continue to use the Coates generator engine in the territory of Canada.
? WWE shall not be required to pay us any royalties as part of the agreements between the parties.
? All licensed rights under the Canadian License related to the CSRV system technology will remain with Coates.

In 2008, we entered into a conditional second sublicense agreement with WWE for the territory of the United States (the "US License"). The US License provides for a license fee of $50 million and annual minimum purchases of Coates CSRV Systems as a condition of exclusivity. The US license has been deposited into an escrow account and the grant under the license is not effective until the conditions for release from escrow are satisfied.

The Escrow Agreement was established to provide a more secure mechanism for us to collect payments due under both the Canadian licensing and research and development agreements and the $50 million US License (the "Escrow Agreement"). The Escrow Agreement provides that the US License shall be held until WWE remits a release payment (the "Release Payment"). The Release Payment consists of (i) an initial down payment required under the US License of $1 million and (ii) $8.5 million in payment of the balance of the monies due to us, at the date of the Escrow Agreement, in connection with the license for the territory of Canada, including the Canadian License agreement and the research and development agreement (the "Canadian Agreements"). While the US License is held in escrow, there shall not be any grant of license to WWE. WWE is expected to make non-refundable periodic payments to us in unspecified amounts as partial payments of the Release Payment until the Release Payment has been paid in full. The first $3.8 million of the Release Payment, which has been designated as payment of the fees due under the research and development Agreement, is being recognized as revenue at the time the cash payments are received. WWE has made nonrefundable payments to us totaling $1.5 million in prior years. In 2009, we received $690,000 of non-refundable payments from WWE. For the year ended December 31, 2008, we received $1,813,000 of such payments. These payments were recognized as research and development revenue. Upon full satisfaction of the Release Payment, WWE would be granted a license for the territory of the United States under the US License agreement.

WWE is a privately held company and its ability to make the license payments due to us and to honor the minimum purchase requirements under the licenses is dependent on the success of its continued efforts to raise new equity capital. At June 30, 2009, the remaining balance of the Release Payment was approximately $6,997,000. Interest on the unpaid balance at 5% per annum of approximately $383,000 is also due. To the extent that WWE is not successful or experiences delays in raising such additional new equity capital, our cash flow, results of operations and financial condition could be adversely affected.

WWE was unable to remit the entire remaining amount of the Release Payment required to be made under the Amended Escrow Agreement by July 31, 2009 (the "Extended Payment Period"). In consideration of the severe world-wide economic climate and WWE's continued good faith efforts to make substantial periodic, non-refundable installments of the Release Payment, we agreed to extend the due date for paying the entire remaining balance of the Release Payment due under the Escrow Agreement to September 30, 2009. Under the extension agreement, WWE is required to make periodic installment payments throughout the extension period. Under the provisions of the amended Escrow Agreement, WWE would no longer be subject to the license cancellation provisions once it has remitted in excess of 45% of the $9 million total Release Payment; however, exclusivity would be forfeited if WWE failed to pay us the entire remaining balance of the Release Payment. Interest continues to be payable at the rate of 5% per annum on the unpaid balance of the Release Payment. Such interest shall be recognized as income upon receipt from WWE.

The US License would, if WWE is able to satisfy the Escrow Agreement release provisions, grant to WWE the right to use, sell and lease Licensed Products manufactured by us as the power source for the generation of electrical energy for the oil and gas industry and landfills. Licensed Products consist of CSRV Valve Systems, CSRV Valve Seals, CSRV Rotary Valve Spheres, CSRV Valve Components and CSRV Engines for the oil and gas industry and landfills.

The manufacture of any Licensed Products by WWE is prohibited. WWE is required to procure all internal combustion engines incorporating the CSRV system technology from us or our designee. The license granted to WWE is exclusive within the territory of the United States, provided that WWE satisfies the minimum annual purchase commitment of 120 internal combustion engines incorporating the CSRV System, the Coates Engines and all component parts. The agreement also grants WWE a right of first refusal in the event that we negotiate an offer with another third party for a worldwide license to use the Licensed Product in the oil and gas industry and landfill operations.

After payment of the Release Payment required under the Escrow Agreement, the remaining unpaid balance of the US License fee of $49 million is payable in quarterly installments which were to commence October 27, 2008 in an amount equal to WWE's prior quarter net profits. As WWE has not generated a net profit to date, no quarterly installment payments have been required. In any event, the entire balance of the licensing fee must be paid in full on or before February 12, 2012.

Acceleration of the balance of the licensing fee payments shall be required in the event that WWE completes a stock offering or private placement offering. The entire unpaid balance of the licensing fee shall become due and payable if WWE raises $100 million or more from such offering.

In 2008, WWE secured an equipment lease finance commitment from Meek Development Corporation, (formerly known as Canada West Corporate Finance, Inc.) ("MDC"), which is to be utilized for its CSRV engine generator purchases and related equipment and parts over a five-year period pursuant to its licensing agreement with us. The five-year WWE business plan on which this agreement was based provides for the purchase of approximately 7,400 Engine Generators. Although the initial price per unit under the firm order we received from WWE was $159,000 per unit, the maximum price per unit provided for under this finance commitment is $222,000. Should WWE fulfill its five year business plan at a price per unit of $159,000, we would earn revenues of almost $1.2 billion. The current economic environment, which is characterized by tight credit markets, investor uncertainty about how to safely invest their funds and low investor confidence, has introduced additional risk and difficulty for borrowers. Accordingly, there can be no assurance that tight credit markets will not affect the availability of funds under the financing commitment obtained from MDC by WWE.

We do not currently have the production capacity to fulfill orders for this number of engine generators over the next five years. Management believes that we could be successful in entering into a procurement contract with one or more major engine suppliers in the United States to deliver engine blocks incorporating our proprietary pistons and heads. Under this approach, we would complete the production of the engines by incorporating the CSRV system technology into these engine blocks.

There are a number of inherent risks associated with achieving this level of revenues over the next five years, including:

� Although we intend to pursue numerous other opportunities to generate revenues from production of internal combustion engines incorporating the CSRV system technology and/or licensing of this technology to original equipment manufacturers, until we are able to enter into definitive agreements with new customers, our revenues will be concentrated with a single customer, WWE. WWE will be required to remit periodic installments of the Release Payment due us under the Escrow Agreement to retain their exclusivity.

� There can be no assurances that we will have adequate capital resources to acquire an appropriate manufacturing plant and procure a sufficient number of engine blocks, inventory and parts on a timely basis, as well as cover the payroll costs for an increased labor force and overhead that would be required in order to fulfill orders for this volume of engine generators over the next five years. In the event that we are unable to fulfill this volume of orders, our revenues and profitability would be negatively impacted to the extent of any such shortfall.

Results of Operations - Three Months Ended June 30, 2009 Compared to Three Months Ended June 30, 2008

In the second quarter of 2009, we shifted our emphasis more towards efforts to raise working capital and reduced the extent of our efforts on research and development. As a result, there was a corresponding increase in general and administrative expenses and decrease in research and development expenses. We also repurchased the property which serves as our headquarters and research and development facility resulting in the recognition of the approximately $895,000 balance of the deferred gain on sale of that property in 2005.

Revenue from research and development was approximately $475,000 and $700,000 in 2009 and 2008, respectively. The revenue from research and development was comprised of non-refundable partial payments of the Release Payment provided for by our Escrow Agreement with WWE established in connection with our licensing and research and development agreements. Gain on sale of land and building was approximately $895,000 and $-0- in 2009 and 2008, respectively. The gain on sale of land and building in 2009 resulted from the recognition of the entire remaining balance of the deferred gain on sale of the property, which houses our headquarters and research and development facility. This entire balance was recognized in the second quarter as a result of the repurchase of this property, whereupon the operating lease effectively terminated.

Research and development expenses in connection with developing other commercially viable applications of the CSRV technology to internal combustion engines were approximately $96,000 and $159,000 for the three months ended June 30, 2009 and 2008, respectively. The reduction in research and development expenses in the 2009 period resulted primarily from a reduction in the effort devoted to research and development activities as we devoted significantly more time in 2009 towards seeking out new sources of working capital and new business opportunities. Included in research and development costs for the three months ended June 30, 2009 and 2008 were approximately $54,000 and $105,000, respectively, of allocated compensation and benefits and approximately $42,000 and $47,000, respectively, of stock-based compensation expense. There was a net increase in the amount of stock-based compensation expense in 2009 due to the grant of additional employee stock options in January 2009 to purchase 1,750,000 shares of common stock, which was partially offset by a lower allocation of this expense to research and development due to the shift in our emphasis toward raising working capital and pursuing new business opportunities.

General and administrative expenses increased to approximately $516,000 for the three months ended June 30, 2009 from approximately $354,000 in the corresponding period in 2008. This net increase of approximately $162,000 primarily resulted from the following: A $90,000 increase in stock-based compensation expense due to a higher amount of expense resulting from the 2009 grant of stock options and the higher allocation of stock-based compensation expense to general and administrative expenses. In addition, rent expense increased by approximately $72,000 in connection with the lease of our principal facility. The conditions for recognition of the gain on this transaction were satisfied in November 2008. Subsequent thereto, payments under the related lease were recorded as rent expense in accordance with the accounting for an operating lease. Prior to recognition of this gain, the transaction met the conditions of the lease finance method of accounting for leases which requires that the lease payments be recorded as interest expense. The remainder of the increase in general and administrative expenses primarily resulted from an increase in compensation and benefits of approximately $49,000, largely due to a lower allocation to research and development expenses, an increase in marketing expenses of approximately $14,000, an increase in office expenses of approximately $5,000 and a net increase in other expenses of approximately $2,000, offset by a decrease in legal and professional fees of approximately $44,000, a decrease in trade show expenses of approximately $12,000, a decrease in shop supplies used of approximately $9,000 and a decrease in travel and entertainment expenses of approximately $5,000.

Depreciation and amortization expense decreased to approximately $6,000 in the three months ended June 30, 2009 from approximately $9,000 in the comparable period in 2008. This decrease was primarily due to the discontinuance of depreciation of assets which became fully depreciated and the depreciation of our building for only one month in 2009 after it was reacquired in June 2009, while a full three months of depreciation was taken in the 2008 period.

Interest expense, net, amounted to approximately $8,000 for the three months ended June 30, 2009 primarily related to interest expense on the mortgage loan which was funded in mid-June 2009. For the three months ended June 30, 2008 interest expense, net amounted to approximately $98,000 in connection with the accounting for the sale/leaseback transaction on our principal facility which was being accounted for in accordance with the lease finance method of accounting for leases during that period.

The change in deferred tax assets for the three months ended June 30, 2009 and 2008 was fully offset by a valuation allowance, resulting in a $-0- net income tax provision.

We earned net income for the three months ended June 30, 2009 and 2008 of approximately $744,000 and $81,000, respectively.

Results of Operations - Six Months Ended June 30, 2009 Compared to Six Months Ended June 30, 2008

Revenue from research and development was approximately $690,000 and $700,000 in 2009 and 2008, respectively. The revenue from research and development was comprised of non-refundable partial payments of the Release Payment provided for by our Escrow Agreement with WWE established in connection with our licensing and research and development agreements. Gain on sale of land and building was approximately $978,000 and $-0- in 2009 and 2008, respectively. The gain on sale of land and building in 2009 resulted from the recognition of the entire remaining balance of the deferred gain on sale of the property, which houses our offices and research and development facility. This entire balance was recognized as a result of the repurchase of this property, whereupon the operating lease effectively terminated.

Research and development expenses in connection with developing other commercially viable applications of the CSRV technology to internal combustion engines were approximately $255,000 and $295,000 for the six months ended June 30, 2009 and 2008, respectively. The reduction in research and development expenses in the 2009 period resulted primarily from a reduction in the effort devoted to research and development activities as we devoted significantly more time in the second quarter of 2009 towards seeking out new sources of working capital and new business opportunities. Included in research and development costs for the six months ended June 30, 2009 and 2008 were approximately $138,000 and $179,000, respectively, of allocated compensation and benefits and approximately $115,000 and $88,000, respectively, of stock-based compensation expense. There was a net increase in the amount of stock-based compensation expense in 2009 due to the grant of additional employee stock options in January 2009 to purchase 1,750,000 shares of common stock, which was partially offset by a lower allocation of this expense to research and development due to the shift during the second quarter of 2009 in our emphasis toward raising working capital and pursuing new business opportunities.

General and administrative expenses increased to approximately $1,126,000 for the six months ended June 30, 2009 from approximately $694,000 in the corresponding period in 2008. This net increase of approximately $432,000 primarily resulted from the following: An increase in rent expense of approximately $179,000 in connection with the lease of our principal facility. The conditions for recognition of the gain on this transaction were satisfied in November 2008. Subsequent thereto, payments under the related lease were recorded as rent expense in accordance with the accounting for an operating lease. Prior to recognition of this gain, the transaction met the conditions of the lease finance method of accounting for leases which requires that the lease payments be recorded as interest expense. In addition, an increase in stock-based compensation expense of approximately $111,000 resulted from the amount expensed for the 2009 grant of stock options and the higher allocation of stock-based compensation expense to general and administrative expenses. The remainder of the increase in general and administration expenses primarily resulted from an increase in compensation and benefits of approximately $74,000, largely due to a lower allocation to research and development expenses, an increase in marketing and printing expenses of approximately $52,000, an increase in legal and professional fees of approximately $50,000, an increase in travel and entertainment expenses of approximately $14,000 and an increase in office expenses of approximately $8,000, offset by a decrease in patent maintenance of approximately ($20,000), a decrease in trade show expenses of approximately ($18,000), a decrease in shop supplies used of approximately ($9,000) and a net decrease in other expenses of approximately ($6,000).

Depreciation and amortization expense decreased to approximately $10,000 in the six months ended June 30, 2009 from approximately $19,000 in the comparable period in 2008. This decrease was primarily due to the discontinuance of depreciation of assets which became fully depreciated and the depreciation of our building for only one month in 2009 after it was reacquired in June 2009, while a full six months of depreciation was taken in the 2008 period.

Interest expense, net, amounted to approximately $8,000 for the six months ended June 30, 2009 primarily related to interest expense on the mortgage loan which was funded in mid-June 2009. For the six months ended June 30, 2008 interest expense, net amounted to approximately $196,000 in connection with the accounting for the sale/leaseback transaction on our principal facility which was being accounted for in accordance with the lease finance method of accounting for leases during that period.

The change in deferred tax assets for the six months ended June 30, 2009 and 2008 was fully offset by a valuation allowance, resulting in a $-0- net income tax provision.

We earned net income for the six months ended June 30, 2009 of approximately $269,000 compared to a net loss for the corresponding period in 2008, of approximately ($501,000).

Liquidity and Capital Resources

Our cash position at June 30, 2009 was approximately $98,000, a decrease of approximately $624,000 from the cash position of approximately $722,000 at December 31, 2008. We had negative working capital of approximately ($2,070,000) at June 30, 2009 which represents an approximately ($2,036,000) decrease from the approximately ($34,000) of negative working capital at December 31, 2008. Our current liabilities of approximately $2,815,000 at June 30, 2009 increased by approximately $1,567,000 from approximately $1,248,000 at December 31, 2008. The increase in current liabilities was primarily due to the new mortgage . . .