OMB APPROVAL OMB Number: 3235-0070 Expires: January 31, 2008 Estimated average burden hours per response: 192.00  UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549  FORM 10-Q/A Amendment No. 3  (Mark One)  [X]  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934  For the quarterly period ended September 30, 2005  or  [  ]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934  For the transition period from _________ to _________  Commission File Number: 000-30709  POWERCOLD CORPORATION (Exact name of registrant as specified in its charter)  NEVADA 23-2582701 (State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)  PO Box 1239 115 CANFIELD ROAD LA VERNIA, TEXAS 78121 (Address of principal executive offices) (Zip Code)  830-779-5213 (Registrant's telephone number, including area code)  Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  [X] Yes    [  ] No  Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes  [  ] No  [X]  Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  [  ] No  [X]  APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS:  Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.   [  ] Yes    [  ] No  APPLICABLE ONLY TO CORPORATE ISSUERS:  Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Common Stock, par value $0.001  24,831,696 shares outstanding at September 30, 2005.  SEC 1296 (9-05)  Potential persons who are required to respond to the collection of information contained in this form are not required to respond unless the form displays a currently valid OMB number.   Powercold Corporation Form 10Q - September 30, 2005


INDEX  Page PART I.  FINANCIAL INFORMATION  Item 1: Consolidated Financial Statements  Consolidated Balance Sheets 3  Consolidated Statements of Operations 5  Consolidated Statements of Cash Flows 7  Condensed Notes to Consolidated Financial Statements 9  Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations. 16  Item 3: Quantitative and Qualitative Disclosures About Market Risk. 30  Item 4. Controls and Procedures. 30  PART II.   OTHER INFORMATION  Item 1. Legal Proceedings. 32  Item 2. Changes in Securities. 33  Item 3. Defaults Upon Senior Securities. 33  Item 4. Submission of Matters to a Vote of Security Holders. 33  Item 5. Other Information. 33  Item 6. Exhibits. 34  Signature 35


2    Powercold Corporation Form 10Q - September 30, 2005


PART I Item 1 - Consolidated Financial Statements   POWERCOLD CORPORATIONCONSOLIDATED BALANCE SHEETSSeptember 30,December 31,2005
(Restated)20042003ASSETSCURRENT ASSETSCash$1,459,865$1,206,416$374,678Restricted cash85,835100,000-Contracts and retentions receivable, net of allowance3,638,8775,411,1102,388,495Costs and estimated earnings in excesson contracts in progress--245,535Inventory136,334120,92611,156Prepaid expenses249,130141,790100,118Total Current Assets5,570,0416,980,2423,119,982OTHER ASSETSProperty and equipment, net273,575335,675135,858Patent rights and related technology, net1,355,0621,248,8051,306,731Securities available for sale--19,317Deposits12,47910,82810,828Total Other Assets1,641,1161,595,3081,472,734---TOTAL ASSETS$7,211,157$8,575,550$4,592,716             See accompanying condensed notes.


3    Powercold Corporation Form 10Q - September 30, 2005


POWERCOLD CORPORATIONCONSOLIDATED BALANCE SHEETSSeptember 30,December 31,2005
(Restated)20042003LIABILITIES AND STOCKHOLDERS' EQUITYCURRENT LIABILITIESAccounts and retentions payable$4,231,767$3,577,077$896,447Accrued expenses610,446189,387356,583Accrued interest20,039--Billings in excess of costs and estimated earningson contracts in progress380,873380,873947,807Commissions and royalty payable145,153252,9488,180Accounts payable, related party1,478,597172,236417,236Convertible debt, net of discounts2,000,0001,166,666334,014Notes payable, current portion48,30542,036-Current portion of capital lease payable--632Total Current Liabilities8,915,1805,781,2232,960,899LONG-TERM LIABILITIESConvertible note payable, net of current portion1,819,7622,755,590-Note payable, net of current portion7,8008,546-Capital leae payable, net of current portion--Total Long-term Liabilities1,827,5622,764,136-COMMITMENTS AND CONTINGENCIES-69,417STOCKHOLDERS' EQUITYConvertible preferred stock, Series A, $0.001par value; 5,000,000 shares authorized, noshares issued and outstanding---Common stock, $0.001 par value; 200,000,000shares authorized, 24,731,696; 21,576,750, and 18,442,066shares issued and outstanding, respectively24,83223,48621,578Additional paid-in capital22,069,51420,621,20717,384,460Accumulated deficit(25,625,931)(20,614,502)(15,862,955)Accumulated other comprehensive income--19,317Total Stockholders' Equity (Deficit)(3,531,585)30,1911,562,399TOTAL LIABILITIES ANDSTOCKHOLDERS' EQUITY$7,211,157$8,575,550$4,592,716  See accompanying condensed notes.


4    Powercold Corporation Form 10Q - September 30, 2005


POWERCOLD CORPORATIONCONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSSNine Months Ended September 30,2005
(Restated)20042003REVENUESContracts including equipment$3,413,325$7,348,302$-Equipment642,435-3,251,310Total Revenues4,055,7607,348,3023,251,310COST OF REVENUESDirect labor and equipment-contracts2,924,4255,750,312-Direct labor and material-equipment549,174-2,677,850Warranty expense273,184--Manufacturing supplies42,081--Shipping and handling20,157--Total Cost of Revenues3,809,0215,750,3122,677,850GROSS PROFIT (LOSS)246,7391,597,990573,460OPERATING EXPENSESSales, marketing and advertising928,555675,915100,081General and administrative2,061,3572,165,7181,205,402Research and development513,243--Legal and accounting200,833-Bad Debt2,021,122250,000Depreciation and amortization111,45082,35571,131Total Operating Expenses5,836,5593,173,9881,376,614LOSS FROM OPERATIONS(5,589,821)(1,575,998)(803,154)OTHER INCOME (EXPENSES)Interest income7,1654,500119Interest and financing  expense(976,925)(311,460)(1,195)Other income roylaties (expense)1,429,356Other income (expense)118,7965,423237,597Total Other Income (Expenses)578,392(301,537)236,521LOSS BEFORE INCOME TAX(5,011,429)(1,877,535)(566,633)INCOME TAX EXPENSE---LOSS FROM CONTINUING OPERATIONS(5,011,429)(1,877,535)(566,633)NET LOSS(5,011,429)(1,877,535)(566,633)OTHER COMPREHENSIVE INCOME (LOSS)Unrealized gain (loss) on investments--(19,483)COMPREHENSIVE LOSS$(5,011,429)$(1,877,535)$(586,116)NET LOSS PER COMMON SHARE:BASIC AND DILUTED$(0.20)$(0.09)$(0.03)WEIGHTED AVERAGE NUMBER OF COMMONSHARES OUTSTANDING, BASIC AND DILUTED24,798,36321,754,80519,102,066  See accompanying condensed notes.


5    Powercold Corporation Form 10Q - September 30, 2005


POWERCOLD CORPORATIONCONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSSThree Months Ended September 30,2005
(Restated)20042003REVENUESContracts including equipment$552,816$2,540,666$-Equipment123,864205,4242,138,976Total Revenues676,6802,746,0902,138,976COST OF REVENUESDirect labor and equipment-contracts579,3432,309,337-Direct labor and material-equipment173,700-1,758,372Warranty expense233,194--Manufacturing supplies17,487--Shipping and handling6,943--Total Cost of Revenues1,010,6672,309,3371,758,372GROSS PROFIT (LOSS)(333,987)436,753380,604OPERATING EXPENSESSales, marketing and advertising263,771149,4634,147General and administrative854,909565,272751,275Research and development176,290--Legal and accounting58,122--Bad Debt2,021,122250,000Depreciation and amortization47,50829,98646,063Total Operating Expenses3,421,721994,721801,485LOSS FROM OPERATIONS(3,755,709)(557,968)(420,881)OTHER INCOME (EXPENSES)Interest income2,3244,03359Interest and financing  expense(224,240)(2,211)(953)Other income royalties (expense)1,429,356Other income (expense)48,9124,049237,529Total Other Income (Expenses)1,256,3525,871236,635LOSS BEFORE INCOME TAX(2,499,357)(552,097)(184,246)INCOME TAX EXPENSE---LOSS FROM CONTINUING OPERATIONS(2,499,357)(552,097)(184,246)NET LOSS(2,499,357)(552,097)(184,246)OTHER COMPREHENSIVE INCOME (LOSS)Unrealized gain (loss) on investments---COMPREHENSIVE LOSS$(2,499,357)$(552,097)$(184,246)NET LOSS PER COMMON SHARE:BASIC AND DILUTED$(0.10)$(0.03)$(0.01)WEIGHTED AVERAGE NUMBER OF COMMONSHARES OUTSTANDING,  BASIC AND DILUTED24,798,36321,754,80519,202,066  See accompanying condensed notes.


6    Powercold Corporation Form 10Q - September 30, 2005


POWERCOLD CORPORATIONCONSOLIDATED STATEMENTS OF CASH FLOWSNine Months Ended September 30,2005
(Restated)20042003CASH FLOWS FROM OPERATING ACTIVITIES:Net loss$(5,011,429)$(1,877,535)$(402,078)Adjustments to reconcile net loss to net cashused in operating activities:Depreciation and amortization111,45082,35574,955Inpairment of Goodwill16,866Forgivness of Debt(196,324)Bad Debt Expense2,021,122250,000Amortization of discount on note payable527,636--Issuance of common stock for services500,000112,250145,800Options issued for services91,874--Warrants issued for financing fees168,365309,706-Warrants issued for serivces---(Increase) decrease in assets:76,000Accounts receivable(248,889)(4,767,437)(3,512,835)Cost in excess of Billings245,535Inventories(15,408)(105,273)(53,145)Prepaid expenses(107,340)(113,189)2,802Increase (decrease) in liabilities:Accounts payable and accrued expenses1,215,5181,034,1862,732,016Accrued interest20,039--Accounts payable, related party---Billings in excess of costs-1,220,702-Net cash used in operating activities(727,062)(3,532,700)(1,191,943)CASH FLOWS FROM INVESTING ACTIVITIES:Purchase of property and equipment(8,954)(307,861)(5,416)Paid Royalties(8,180)-Purchase of technology---Deposits(1,651)-(91,196)Net cash used in investing activities(10,605)(316,041)(96,612)CASH FLOWS FROM FINANCING ACTIVITIES:Principal payments on capital lease-(630)(1,195)Principal payments on loans(502,840)--Proceeds from issuance of shares under private placement422,940800,3092,287,078Proceeds from borrowings, related party1,807,060--Proceeds from short-term borrowings-4,358,5005,000Financing by closed segment(222,342)Repayment of short-term borrowings, related party(750,209)(210,704)(104,554)Net cash provided by  financing activities976,9514,947,4751,963,987Net increase (decrease) in cash239,2841,098,734675,432Cash at beginning of year1,306,416374,67893,372Cash at end of period$1,545,700$1,473,412$768,804  See accompanying condensed notes.


7    Powercold Corporation Form 10Q - September 30, 2005


POWERCOLD CORPORATIONCONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)SUPPLEMENTAL CASH FLOW INFORMATION:Interest paid$(976,925)$-$2,316Income taxes paid$-$-$-NON-CASH TRANSACTIONS:Unrealized gain (loss) on securities available for sales-(19,438)Issuance of common stock for prepaid consulting$500,000$-$187,800Issuance of common stock for debt$-$100,000$-Issuance of common stock for services$-$112,250$145,800Inventory exchanged for chiller technology460,000Commissions, AR and commitment and contingencies forgiven196,324Warrants issued for financing fees$168,365$309,706$-Issuance of options for services$91,874$-$-                              See accompanying condensed notes.


8    Powercold Corporation Form 10Q - September 30, 2005


POWERCOLD CORPORATION CONDENSED NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS SEPTEMBER 30, 2005  NOTE 1 BASIS OF PRESENTATION  The foregoing unaudited consolidated interim financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q as promulgated by the Securities and Exchange Commission.  Accordingly, these financial statements do not include all of the disclosures required by generally accepted accounting principles for complete financial statements.  These unaudited consolidated interim financial statements should be read in conjunction with the audited consolidated financial statements for the period ended December 31, 2004.  In the opinion of management, the unaudited consolidated interim financial statements furnished herein include all adjustments, all of which are of a normal recurring nature, necessary for a fair statement of the results for the interim period presented.  The preparation of financial statements in accordance with generally accepted accounting principles requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities known to exist as of the date the financial statements are published, and the reported amounts of revenues and expenses during the reporting period.  Uncertainties with respect to such estimates and assumptions are inherent in the preparation of the Company's financial statements; accordingly, it is possible that the actual results could differ from these estimates and assumptions that could have a material effect on the reported amounts of the Company's financial position and results of operations.  NOTE  2- CONTRACTS IN PROGRESS  For the nine months ended September 30, 2005 contract amounts, cost, estimated earnings, and the related billingsto date on completed contracts and contracts in progress were as follows:ContractContractGrossRevenueCostProfitTotal activity$3,413,325$2,924,425$488,900Contracts completed during the nine month period$3,413,325$2,924,425$488,900Contract in progress at September 30, 2005---Cumulative costs to date$2,924,425Cumulative gross profit to date$488,900Cumulative revenue earned$3,413,325Less progress bilings to date$3,794,198Net over billings$380,873Costs and estimated earning on contractin progrss in excess of billings-Billings in excess of costs and estimatedearnings on contracts in progress net over billings$380,873


9    Powercold Corporation Form 10Q - September 30, 2005


POWERCOLD CORPORATION CONDENSED NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS SEPTEMBER 30, 2005  NOTE  3  STOCK-BASED COMPENSATION AND STOCK OPTIONS  During the three months ended September 30, 2005, the Company granted 180,000 common stock options and recorded an expense of $30,141 for the three month period ended September 30, 2005 in accordance with SFAS 123R which was adopted by the Company on January 1, 2005.  On July 26, 2005 the Company issued 155,000 three year options to five employees to purchase common stock at $1.50 per shares exercisable on July 26, 2006 expiring on July 26, 2008. The fair value of the options was calculated at $27,373 using the Black Scholes Calculation at date of grant assuming a risk free interest of 4.25%, volatility of 35% and a term of three years. The securities in the foregoing offering were provided as compensation and issued under the 2002 Employee Stock Option Plan pursuant to an exemption to registration provided under Section 4(2) of the Securities Act of 1933.  On September 30, 2005 the Company issued 25,000 options for consulting services at $1.75 per share for a term of three years which will expire on September 30, 2008.  The fair value of the options was calculated at $2,768 using the Black Scholes Calculation at the date of grant assuming a risk free interest of 4.25%, volatility of 35% and a term of three years. The securities in the foregoing offering were originally provided as compensation for services rendered for us, and were offered pursuant to an exemption to registration provided under Section 4(2) of the Securities Act of 1933.  The Company previously used APB Opinion No. 25 in accounting for options and, accordingly, recognized no compensation cost for its stock options in 2004 and 2003.  Included in the net loss as reported at September 30, 2005 is the expense of options issued during the period from January 1, 2005 through September 30, 2005 of $91,874.  For comparative purposes to prior periods there would be no adjustment of the pro forma net loss per share if calculated under APB Opinion No. 25.


10    Powercold Corporation Form 10Q - September 30, 2005


POWERCOLD CORPORATION CONDENSED NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS SEPTEMBER 30, 2005  NOTE  3  STOCK-BASED COMPENSATION AND STOCK OPTIONS (continued)   Year Ended December 31, 2004Year Ended December 31, 2003Net loss as reported$(4,337,032)$(2,656,548)Adjustment required by SFAS 123(3,794,926)(492,597)Pro forma net loss$(8,131,958)$(3,149,145)Pro forma net loss per share,
basic and diluted$(0.40)$(0.16)   Number of Shares Under OptionWeighted Average Exercise PriceOutstanding and exercisable at January 1, 20034,095,891$1.06Granted712,7251.37Exercised(300,000)0.50Rescinded or expired(456,333)1.06Outstanding and exercisable at December 31, 20034,052,2831.16Granted
Exercised
Rescinded or expired3,075,799
(210,000)
(1,519,579)1.61
1.00
1.38Outstanding and exercisable at December 31, 20045,398,5031.36Granted
Granted; not exercisable
Exercised
Rescinded or expired705,000
(300,000)
(695,879)
(370,000)1.95
2.33
0.61
1.64Exercisable at September 30, 20054,737,624$1.47Weighted average fair value of options
granted during 2005$0.28


11    Powercold Corporation Form 10Q - September 30, 2005


POWERCOLD CORPORATION CONDENSED NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS SEPTEMBER 30, 2005  NOTE  4  -  COMMON STOCK  During the three months ended September 30, 2005, the Company issued 100,000 common stock shares for financial consulting services to David H Russell for the period from September 1, 2005 through August 31, 2006, for a total of $80,000 for consulting services.  The securities in the foregoing offering were originally provided as compensation for services rendered for the Company offered pursuant to an exemption to registration provided under Section 3(b), Regulation D, Rule 506 of the Securities Act of 1933.  NOTE  5 -  WARRANTS  No warrants were issued during the three month period ended September 30, 2005.  NOTE 6  NOTES PAYABLE  Long-Term Note Payable On July 29, 2004, the Company entered into a securities purchase agreement with Laurus Master Fund, Ltd., a Cayman Islands company (Laurus) for the purchase of a $5,000,000  convertible term note (note). Under the terms of the securities purchase agreement, the Company also issued common stock purchase warrants to Laurus to purchase 615,000 shares of common stock, exercisable for three years from the initial exercise date. The exercise prices of the warrants are $2.63 for 300,000 shares and $3.07 for the remaining shares.  The note, which matures on July 29, 2007, bears interest at the prime rate of interest plus 1 percentage point, with a minimum interest rate of 5% and a maximum rate of 8%.  The note is convertible into common stock with a conversion price of $1.87 on July 29, 2004, subject to conversion by Laurus as well as an automatic conversion.  The fixed conversion price of $1.87 per share is applicable when the PowerCold stock average closing price for the five days prior to the repayment is at or above 110% of the fixed conversion price.  Conversion at less than the fixed conversion price is set at 90% of the average of the five lowest trading days in the 22 trading days prior to the conversion date.  The fixed price cannot be less than $1.10 per share. The beneficial conversion feature of this note has been recorded as additional paid-in capital of $569,106 and as a discount to the note, amortizable over three years.  For the nine months ended September 30, 2005, $277,175 has been amortized.  The Company also retains the right to prepay the note at 125% of the unpaid balance for 12 months from July 29, 2004; 115% of the unpaid balance for 12-24 months from July 29, 2004; and 110% of the unpaid balance after 24 months from July 29, 2004. As consideration for investment banking services in connection with the securities purchase agreement, the Company paid 4.29% of the gross proceeds to Laurus Capital Management, LLC, (an affiliate of Laurus Master Fund, Ltd), for investment banking services in connection with the securities purchase agreement. Laurus Capital Management LLC is the entity that exercises voting and investment power on behalf of Laurus Master Fund, Ltd, the selling shareholder, 0.04% to Loeb & Loeb, LLP a California limited liability partnership as the escrow agent for the transaction and 8.5% of the gross proceeds to the Dragonfly Capital Partners, LLC (an affiliate of Oberon Group, LLC, a North Carolina Limited Liability Company).


12    Powercold Corporation Form 10Q - September 30, 2005


POWERCOLD CORPORATION NOTES TO FINANCIAL STATEMENTS SEPTEMBER 30, 2005  NOTE 6  NOTES PAYABLE (continued)  Laurus can convert to equity any portion of the principal balance and accrued but unpaid interest subject to the limitations of the 35% aggregate trading limit for the 22 days prior to redemption and the 4.99% total holdings limitation with the only exceptions being default and prior 75 day notification by Laurus that they will exceed the 4.99% ownership limitation but will be restricted to a 19.99% limitation not to exceed 4,457,995 shares. Monthly amortizing payments of the aggregate principal amount outstanding under the note begin on February 1, 2005 in the amount of $166,667 plus interest. The Company has recorded a discount on the note for deferred financing costs of $641,500 which will be amortized over the life of the loan.   Amortization expense at September 30, 2005 was $213,835.  The Company also agreed to file a registration statement within 45 days from July 29, 2004, registering the number of shares underlying the secured convertible term note and the warrants, and to have that registration statement declared effective with the Securities and Exchange Commission within 120 days from July 29, 2004.  In the event that the registration statement is not declared effective by the Securities and Exchange Commission by the required deadline, the Company is obligated to pay to Laurus Master Fund 1% of the original principal amount of the convertible note, for each 30-day period, or portion thereof, during which the registration statement is not effective.  The securities purchase agreement, secured convertible term note and the registration rights agreement with Laurus, all dated July 29, 2004, were amended on March 9, 2005 to reschedule the originally required effectiveness date (November 27, 2004) of the registration statement filed with the SEC to June 15, 2005, and to reschedule the initial principal payments due February, March, April and May 1, 2005 to April, May, June and July 1, 2007.For the amended rescheduled payments and new effective date the Company has agreed to issue a new warrant purchase agreement to Laurus for 665,000 shares for a term of five years at $1.70 per share.  The Company will take a fair market value charge of $125,302 for the issuance of 215,000 warrants for the rescheduled principal payments over the period from February 1, 2005, through August 1, 2007.   In addition the Company will take a fair market value charge of $262,260 for the issuance of 450,000 warrants as a result of  the registration statement filed with the SEC not being effective as of November 27, 2004 and being extended to June 15, 2005. On May 27, 2005 we issued common stock purchase warrants to Laurus to purchase 60,000 shares of common stock, exercisable for five years from the Initial Date of Exercise.  The exercise price of the warrants is $1.70.  These warrants were issued by us in connection with the amendment of the secured convertible term note and the registration rights agreement with Laurus, all dated July 29, 2004 and previously amended March 9, 2005, to reschedule the required effectiveness date (June 15, 2005) of the registration statement filed with the SEC to September 30, 2005 and to reschedule the principal payment of $166,666.67 due June 1, 2005 to August 1, 2007. The additional fair market value has been recognized as financing expense.  At September 30, 2005 the principal balance of the convertible note with Laurus was $4,500,000.  Future minimum principal payments on the note are as follows:    YearAnnual Maturity Amount2005$   500,0002006$2,000,0002007$2,000,000  Vehicle Loan During the year ended December 31, 2004, the Company purchased a truck for $23,421.  The note is secured by the vehicle and is for thirty-five months and no interest.  The monthly payment is $650.  At September 30, 2005, the note balance was $9,750.  Future principal payments are as follows:


13    Powercold Corporation Form 10Q - September 30, 2005


POWERCOLD CORPORATION NOTES TO FINANCIAL STATEMENTS SEPTEMBER 30, 2005  NOTE 6  NOTES PAYABLE (continued)  YearAnnual Maturity Amount2005$1,9502006$7,800  Current Notes Payable At September 30, 2005, December 31, 2004 and December 31, 2003, notes payable included a line of credit payable to Royal Bank of Canada for $34,014 U.S.  The Company made interest only payments on this line of credit which is unsecured.  During the year ended December 31, 2003, the Company discontinued making the interest payments and is disputing the loan which was in the name of Steven and Susan Clark and remains in dispute as of the date of this filing.  The Company has received funding on several occasions from Simco Group, Inc, (Simco), a separate legal entity wholly owned by the Company's chairman and chief executive officer. The Company received from Simco $196,760 in unsecured advances during 2002 and an additional $161,108 and $100,000 during 2003 and 2004, respectively.  The advances bear interest at 8% and are payable on demand.  No payments were made against the principal during 2002 or 2003 and $345,080 was repaid in 2004.  The debt was convertible to common stock as calculated at 50% of the bid price at the end of the quarter preceding conversion during 2003 and 2002. The loan made during 2004 is convertible at the fair market value of the stock at the date of conversion.  The beneficial conversion feature of these loans is recorded as additional paid in capital.  The interest expense, related to these loans, recorded in 2003 and 2002 is $218,979 and $195,538, respectively. On May 12, 2005, Frank Simola made a loan to us in the amount of $787,060 payable upon demand with an annual interest rate of prime, as published in the Wall Street Journal, plus 1%, not to exceed 8% and on September 1, 2005, Frank Simola made a loan to us in the amount of $750,000 payable upon demand with an annual interest rate of prime, as published in the Wall Street Journal, plus 1%, not to exceed 8%.  During 2005 Frank Simola was repaid $290,700. At September 30, 2005 the interest accrued for the loan from Frank Simola was $25,389. At September 30, 2005 the balance of the Notes payable to Related Party (Simco) was $1,418,597.  Effective May 1, 2005, in a minor acquisition, PowerCold Corporation acquired 100% of the assets of Sterling Mechanical, Inc. (SMI), an Englewood, Colorado based engineering and design firm that provides engineering and marketing supporting heating, ventilation and air conditioning (HVAC) systems and technologies.  SMI assets were transferred into PowerColds wholly owned subsidiary, PowerCold ComfortAir Solutions, Inc., formerly Ultimate Comfort Systems.  As consideration for the acquisition of assets valued at $384,975, which include contracts totaling $216,425 and all intellectual property including licenses and copyrights and the rights, title and interest in and to the name Sterling Mechanical, Inc., the Company paid the owners of SMI 200,000 shares of PowerCold common stock at the fair market value of $306,000.  In addition, PowerCold agreed to issue 150,000 options to the owners of SMI that will vest over a 3 year period.  At May 1, 2005, 50,000 common stock options were vested with a fair market value of $22,870 and the Company recorded a commitment of $56,105 for the future vesting of the remaining options. The acquisition was accounted for under the purchase method.  The three employees of SMI are currently employed by PowerCold ComfortAir supporting existing PowerCold business, existing SMI business and soliciting new business in the Western United States.  Finance Program On July 22, 2004 the Company agreed to a financing program with a major mortgage corporation.  The financing program may provide the Companys commercial customers with significant financing to purchase or lease HVAC systems from PowerCold ComfortAir Solutions, Inc.  The Company has no commitment or contingency related to this agreement.


14    Powercold Corporation Form 10Q - September 30, 2005


POWERCOLD CORPORATION NOTES TO FINANCIAL STATEMENTS SEPTEMBER 30, 2005   NOTE 7  RESTATEMENT AND CORRECTION OF ERROR  The accompanying consolidated interim financial statements for September 30, 2005 have been restated to correct information concerning revenue. The Company originally recognized revenue under the percentage-of-completion method of accounting for long-term contracts.  Revenue is recognized as work on contracts progresses, however, estimated losses on contracts in progress are charged to operations immediately. During the period ending September 30, 2005 the Company recognized $7,315,096 in revenue and related contract receivables, and $6,356,490 is contract payables and cost of revenues.  Subsequent to the issuance of the original financial statements for the quarter ended September 30, 2005, management discovered that a certain accounting position and information was not correct.  The financial statements have been restated to correct errors in revenue, contract receivables and payables, and related cost of revenues.  These corrections and restatements had increased the reported net loss from $4,261,845 to $5,011,429, and increased the reported net loss per share from $0.17 to $0.20.


15    Powercold Corporation Form 10Q - September 30, 2005


ITEM  2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.  Forward looking statements made herein are based on current expectations of the Company that involves a number of risks and uncertainties and should not be considered as guarantees of future performance. The factors that could cause actual results to differ materially include; interruptions or cancellation of existing contracts, impact of competitive products and pricing, product demand and market acceptance risks, the presence of competitors with greater financial resources than the Company, product development and commercialization risks and an inability to arrange additional debt or equity financing.  The following Managements Discussion and Analysis (MD&A) is intended to help the reader understand PowerCold  Corporation. MD&A is provided as a supplement to, and should be read in conjunction with, our financial statements and the accompanying notes (Notes).  Our financial statements for the year ended December 31, 2004, were audited by our independent certified public accountants, whose report includes an explanatory paragraph stating that the financial statements have been prepared assuming we will continue as a going concern and that we have incurred operating losses since inception that raise substantial doubt about our ability to continue as a going concern. The accompanying consolidated financial statements contemplate continuation of the Company as a going concern.  At September 30, 2005 we had an accumulated deficit of $25,625,931 and recurring losses from operations for each year presented.  Property, equipment, accounts receivables and intangibles comprise a material portion of the Company's assets. Net Accounts receivable as of September 30, 2005 are $3,638,877with reported revenue for the three month period and nine month period ended September 30, 2005 at $552,816 and $3,413,325 respectively. The recovery of these assets is dependent upon the collection of outstanding receivables and achieving profitable operations.  The ultimate outcome of these uncertainties cannot presently be determined.  We actively seek sufficient financing to support our growth and achieve profitability.  Realization of a major portion of the assets in the accompanying balance sheet is dependent upon continued operations of the Company and the success of its future operations.  Our plans for 2005 include concentrating on two specific proprietary applications: Central HVAC Air Condition Systems and Plastic Heat Exchange Products.  During 2004 we experienced a significant growth in revenue from the Central HVAC Air Conditioning Systems and higher gross margins from Plastic Heat Exchange Products.   We have expended considerable capital and manpower resources developing these applications over the last two years.  Subsequently, business opportunities from projects for Central HVAC Systems and Plastic Heat Exchange Products in 2005 support our plans going forward.  We plan to exploit the last two years of engineering development and to focus engineering, sales and marketing resources on the Companys proprietary Environmental Air Treatment System, which is our central HVAC air conditioning system for large commercial buildings, directing our efforts at the growth segments of the hospitality industry.  We also plan to expand our direct marketing efforts to corporate national account chain stores and restaurants with our proprietary HVAC system, and reduce custom bid spec marketing for retail stores and restaurants that have lower gross margins per project.  Secondly, we intend to capitalize upon our investment in the research and the development of our plastic products with the delivery of the plastic kits to four OEM fluid cooler companies.  Two fluid cooler OEM companies showed their proprietary products with PowerColds plastic components for the first time at the ASHRAE convention in early February 2005.  Recently, we have successfully developed and installed the first plastic fluid cooler that can be used for residential buildings and expanded to larger commercial buildings.  We expect added revenues and improved margins in products that use plastic coils in place of copper coils.  We are also focusing on cash management and addressing the past due accounts receivable through a rigorous collections policy. We attribute the high accounts receivable to the significant revenue growth rate and startup marketing growth pains during 2003 and 2004.  We directed our focus on the hospitality industry and plastic products in 2005 and away from bid spec jobs that have historically generated lower gross margins.  During the third quarter of 2005 we declined to accept $1,630,394 in approved contract offers on eighteen (18) bid spec retail chain store projects as the margins were insufficient to be profitable.  Weather related damage in Florida, Mississippi and Louisiana caused the cancellation of several projects and an increase in the reserve for bad debt due to the likelihood that certain projects in progress will not be completed. Other projects with completed engineering will not start construction in the foreseeable future.  We intend to raise capital through the licensing of our heat exchange technology in markets outside of North America with five and ten year licensing agreements that include annual renewal fees and royalties based on sales. Exploratory discussions with several companies are underway for long term (five


16    Powercold Corporation Form 10Q - September 30, 2005


to ten year) nonexclusive manufacturing rights and exclusive territorial distributions rights for our patented heat exchange technology outside of North America.  The basis of discussions involve a one time license fee and continuing royalty payments for the term of the license based upon units manufactured or revenue derived from sales through distribution.   Discussions are ongoing and no agreements have been finalized. We see this as an opportunity to capitalize upon the intellectual property of PowerCold and our ongoing R&D efforts regarding heat exchange technology for the HVAC industry.  The recent execution of five year exclusive purchase agreement with E.I. du Pont de Nemours for Caltel® plastic tubing for use in the HVAC field of Fluid Coolers and Fan Coil Heat Exchangers supports our plans to develop the plastic heat exchange OEM market through product licensing, new product development and commercial application of plastic heat exchangers for the retrofit fan coil market.  Projections regarding revenue, income, margins and cash flow should not be considered a certainty and in fact projections may not be met at all.  We believe that actions presently being taken to increase sales, collect receivables and obtain additional financing as needed provide the opportunity to continue as a going concern.  OVERVIEW  PowerColddesigns, develops and markets heating, ventilating and air conditioning systems (HVAC) and energy related products for commercial use. Air conditioning and refrigeration are two of the more energy intensive operational costs many businesses face.  Over the past few years we have acquired and developed various technologies related to the HVAC industry and employ experienced and qualified industry professionals. Our focus is to provide HVAC turnkey solutions that are designed to reduce energy consumption and provide a clean and comfortable indoor air environment.  PowerCold operations include four wholly owned subsidiary companies with respective operating divisions: PowerCold Products, Inc., (PCP) supports product development, engineering and manufacturing.  PowerCold ComfortAir Solutions, Inc., (PCS) supports sales and marketing offering turnkey HVAC solutions for commercial buildings, including major hotel chains, national restaurant and retail store chains, extended care facilities and office buildings  There are two operating divisions of PCS, Applied Building Technology (ABT) that supports related engineering and design build HVAC applications, andPowerCold Energy Systems (PES) that supports related energy products including generators and engine driven chillers.  PowerCold International, Ltd., (PCI), a new operating subsidiary company effective July 1, 2003, markets all company products and system applications worldwide through various alliances and marketing agencies.  PowerCold has also established alliances with various companies in the industry to market and manufacture related HVAC and Energy products. PowerCold Technology, L.L.C. was formed in February 2004 to hold and manage the intellectual property and patents owned by PowerCold Corporation and its subsidiaries and license the technology to the operating divisions and other entities.  On May 1, 2005, in a minor acquisition, we acquired the assets of Sterling Mechanical, Inc., a Colorado engineering and design firm that provides engineering and marketing services and supports heating, ventilation, and air conditioning (HVAC) systems and technologies. We issued 200,000 shares of common stock for purchase of assets from Sterling Mechanical, Inc on May 1, 2005 at the closing price of $1.53 on April 29, 2005, and 150,000 three year options to purchase common stock at $1.50 per shares exercisable for 50,000 options each at May 1, 2005, May 1, 2006 and May 1, 2007 expiring on May 1, 2008, May, 2009 and May 1, 2010 respectively.  We derive our revenues from four principal product line applications: The first is proprietary applications for the HVAC industry which includes a patented four pipe integrated piping system for large commercial buildings and turnkey HVAC systems for light commercial national chain store applications.  The second is a line of evaporative condensers, heat exchange systems and fluid coolers for the HVAC and refrigeration industry.  The third is the design and packaging of custom chiller systems for the HVAC and refrigeration industry. The fourth is energy products including generators, engine driven chillers and engineering services.  During 2003 we entered into a joint Development Agreement and a License Agreement with DuPont Canada, Inc. and E.I. duPont de Nemours relating to DuPont CaltrelÒ Fluid Energy Transfer System Applications that incorporates their engineered polymeric materials.  We selected fluid coolers as a project application per the Development Agreement for an exclusive three-year period.  The product is similar to our NauticonÒ Fluid


17    Powercold Corporation Form 10Q - September 30, 2005


Cooler, but will now use new plastic tubing material replacing the copper coils.  We applied to the U.S. Patent Office for a new modular design heat exchanger patent that features modular designed plastic components.  Our new proprietary PlexCoilTM fan coil air handlers, primarily used in commercial buildings for room air distribution, will be the first application for the new patent heat exchanger.  On October 11, 2005 we executed an agreement, effective October 1, 2005, with  DuPont which will continue for five years which include the exclusive purchase and supply of Caltrel® plastic tubing.  We have the exclusive right to purchase Caltrel® material for use in Fluid Coolers and Fan Coil Heat Exchangers for HVAC applications.  PowerCold ComfortAir, Inc. provides turnkey design build HVAC applications for new and retrofit construction projects for the hospitality industry, national retail chain stores, national restaurant chains, assisted care living facilities, and other facilities suitable for our product offerings. Our revenue is increasing as the result of our focus on turnkey design, equipment and project management for hospitality and other large HVAC customers. Our revenue is no longer solely derived from the sale of manufactured and repackaged equipment. We now offer design, equipment and project management integrated into a single proposal which is coordinated with allied general contractors, regional engineering firms and national and international HVAC equipment vendors to provide flexible, cost effective and reproducible proposals acceptable to major hotel chains, assisted care facilities and national retail accounts. The focus has changed from an equipment manufacturing orientated sales organization to a design, engineering and project management group marketing our equipment along with other select suppliers for integrated HVAC solutions.  Field testing and R&D continues with the PlexCoilTM polymeric heat exchange products including the newly designed wet/dry fluid cooler.  Initial field trials during 2004 and first quarter 2005 were successful and these new products will easily integrate with the turnkey HVAC design build program.  Additionally, the opportunity exists to provide the technology as basic components for assembly by OEMs around the world.  The corrosion resistant and light weight characteristics of the plastic along with the heat transfer properties present numerous opportunities to replace copper and aluminum in many fluid/air heat exchange applications.  The investment in this technology will continue for the next several years. Commercial products using plastic heat exchange tubing were first shipped in the fourth quarter of 2004. From January 1, 2005 through September 30, 2005, eighteen (18) units have been shipped..  Continued investment in the patented Nauticon® Evaporative Condensers and Fluid Coolers to increase capacity and refine system integration controls is necessary to expand the market potential for these products.  We have invested in control technology as it has become more important to the integration of various pieces of HVAC equipment to achieve proper operation and obtain maximum energy efficiency from the total system.  Effective May 1, 2005, in a minor acquisition, PowerCold Corporation acquired 100% of the assets of Sterling Mechanical, Inc. (SMI), an Englewood, Colorado based engineering and design firm that provides engineering and marketing supporting heating, ventilation and air conditioning (HVAC) systems and technologies.  SMI assets were transferred into PowerColds wholly owned subsidiary, PowerCold ComfortAir Solutions, Inc., formerly Ultimate Comfort Systems.  As consideration for the acquisition of assets valued at $384,975, which include contracts totaling $216,425 and all intellectual property including licenses and copyrights and the rights, title and interest in and to the name Sterling Mechanical, Inc., the Company paid the owners of SMI 200,000 shares of PowerCold common stock at the fair market value of $306,000.  In addition, PowerCold agreed to issue 150,000 options to the owners of SMI that will vest over a 3 year period.  At May 1, 2005, 50,000 common stock options were vested with a fair market value of $22,870 and the Company recorded a commitment of $56,105 for the future vesting of the remaining options. The acquisition was accounted for under the purchase method.  The three employees of SMI are currently employed by PowerCold ComfortAir supporting existing PowerCold business, existing SMI business and soliciting new business in the Western United States.   Future profitability is dependant upon improved gross profit margins to 30% or greater and execution of the companys sales and market plans to generate sufficient gross profit from sales to cover operating and financing expense.  The proper management of travel, administration, warranty, legal, accounting, regulatory and other controllable expenses within the constraints of the budget is necessary for sustained profits, however there is no guarantee that we will be able to achieve the budgeted gross margin, revenue and expense targets necessary for


18    Powercold Corporation Form 10Q - September 30, 2005


future profitability.  Sufficient cash may not be generated from operations due to the extended payment terms required for some of our sales in order to meet our operating needs.  Cash availability is a significant concern.  Revenue growth strains our resources as material must be purchased, salaries paid and operating and administrative overhead supported.   Future cash needs from debt or equity are dependant upon the collection of receivables and improved gross margins. Our primary focus is on revenue growth, improved gross margins and the timely collection of receivables. We have claims totaling $331,137 against payment bonds issued on the behalf of general contractors; are seeking $675,812 in litigation to recover past due receivables; pursuing a claim of $128,590 through arbitration, and others lawsuits are contemplated if collection efforts prove unsatisfactory. Approximately 70% of the bad debt allowance reported at year end involved claims against bonds, litigation or mediation/arbitration which we previously believed could be resolved in a reasonable period of time.  Upon detailed review and discussion with our outside attorneys during the fourth quarter it became obvious to us that resolution would not be achieved in a sixty to ninety day period and an appropriate charge was taken related to these issues.  A charge of $250,000 was taken in the third quarter of 2004 based upon the age of receivable and an additional charge of $279,389 was taken at the end of the fourth quarter.  Receivable are reviewed for impairment on a quarterly basis. In the past we didnt include retentions in the review of receivable aging as it is understood that retentions are not paid until the all releases are provided at project completion and any warranty related issues are resolved.  At year end we included a review of retentions and the likelihood of collection and will continue this review on a quarterly basis. No additional charge for bad debt was incurred in the first or second quarter of 2005.  We increased our allowance for bad debt during the third quarter of 2005 by $2,021,112 as weather related damage in Florida, Mississippi and Louisiana caused the cancellation of several projects and an increase in the reserve for bad debt due to the likelihood that certain projects in progress will not be completed and others with completed engineering will not start construction in the foreseeable future. The impairment of receivables is categorized as follows: $157,593 for uncollectible retentions and uncollectible receivables based upon and aging analysis; $495,368 for uncollected receivables related to lawsuits with general contractors and property owners which are not expected to be settled within the next sixty days; $1,525,754 for uncollected receivables related to projects that were damaged during Hurricanes Katrina, Rita and Wilma.  We intend to maximize our intangible assets with continued development and marketing of new and existing products based upon our intellectual property.  Accounts receivables and intangible assets comprise the material portion of our assets.  Continued emphasis on more effective collection effort and accelerated project completion are expected to improve cash flow and reduce future funding needs however there are no guarantees that we will be successful in these efforts.  Our continued existence is uncertain, as there may be insufficient cash to support operations for the next twelve months. We have secured a $5 Million convertible note with a term of three years. Accelerated collection of existing receivables will provide additional cash to fund operations but continued growth at the current pace will create a significant demand for limited funds.  At present there are no immediate plans to raise more capital beyond the senior debt offering, however the cash is monitored closely and future fund raising may be necessary at some time in the future.  Between May 12 and May 16, 2005, we received $1,210,000 from Francis. L. Simola through the exercise of 150,000 options issued on September 10, 2001 at $1.00 per share for $150,000; the exercise of 545,879 options issued on October 1, 2001 at $0.50 per share for $272,940, and a loan to us payable upon demand, in the amount of $787,060 with an annual interest rate of prime, as published in the Wall Street Journal, plus 1%, not to exceed 8%.  On September 1, 2005 Frank Simola made a loan to us in the amount of $750,000 payable upon demand with an annual interest rate of prime, as published in the Wall Street Journal, plus 1%, not to exceed 8%.  During 2005 Frank Simola was repaid $290,700. At September 30, 2005 the interest accrued for the loans from Frank Simola was $25,389. At September 30, 2005 the balance of the Notes payable to Frank Simola (Simco) was $1,418,597.  On September 30, 2005 we received $1,338,500 as a settlement on royalties due from an Agreement entered into between Wittcold Systems, Inc. (now known as Witt Corp.) and International Cryogenic Systems Corporation (now known as PowerCold Corporation) on or about May 1, 1996, relating to the purchase and sale of the stock in Realcold Systems, Inc.  As part of this agreement a minimum royalty was due to PowerCold in the amount of


19    Powercold Corporation Form 10Q - September 30, 2005


$2,000,000 less any royalties paid to PowerCold before May 1, 2006.  Since the execution of the agreement Wittcold paid approximately $217,449 in royalties per the agreement.  A dispute developed regarding the minimum future royalty due on May 1, 2006, and a compromise was reached to settle all claims for a payment on September 30, 2005, to PowerCold Corporation by Witt Corp.  Subsidiary Companies:  PowerCold Products, Inc.PowerCold Products (PCP) provides product research and development, engineering and manufacturing of patented evaporative condensers and heat exchange systems for the heating, ventilation and air condition (HVAC) and refrigeration industry.  PCP supports the Companys Nauticon® and EV ChillTM product lines with engineering design and packaging for its products.  PCP also supports custom refrigeration systems by designing, engineering and packaging special customer orders.  The Nauticon patented products are simple to manufacture.  They are used for evaporative condensers, fluid coolers, sub-coolers, commercial and industrial refrigeration system components, and custom refrigeration products for commercial and industrial applications.  Nauticon products can reduce power cost for air condition and refrigeration applications by up to 40% when used as a replacement for air cooled condensers.   The efficiency of water cooled condenser technology is well understood in the industry and is the preferred method in large central chiller plants reducing kW per ton of cooling for chilled water air conditioning from a typical 1.08 kW/ton at a suction temperature of 45 F and condensing temperature of 130 F for air cooled condensers to 0.67 kW/ton at a suction temperature of 45 F and condensing temperature of 95 F for evaporative (water) cooled condenser, a 38% reduction in kW demand.  Capacity and power consumption is estimated from data published in the ASHRAE 2004 Handbook, HVAC Systems and Equipment Handbook, Chapter 34.6, Fig. 2 Capacity and Power-Input curves for Typical Hermetic Reciprocating Compressor. PowerCold has continued to invest in and improve the Nauticon product line, expanding its product offerings ranging from a single 10-ton unit up to 300-ton or more multi-unit systems. The company has three patents related to the Nauticon product line.  PowerCold ComfortAir Solutions, Inc.  PowerCold ComfortAir Solutions, Inc., (PCS) supports sales and marketing for all U.S. operations offering high efficiency design build HVAC solutions for new and retro-fit commercial buildings, including major hotel chains, national restaurant and retail store chains, extended care facilities, and office buildings. PCS provides these national accounts with turnkey solutions for the design, engineering and installation of energy efficient HVAC solutions. The Companys services are specifically targeted toward large national accounts, such as hospitality providers and national retailers who standardize their HVAC systems across all of their properties.  In December 2000, PowerCold acquired the technology rights, patent rights, and a license agreement for integrated piping technology for a heating and air conditioning system. This acquisition gave the Company exclusive, non-transferable United States transfer rights to the technology and all related assets. In 2003, PowerCold filed for its own, exclusive, enhanced related patent, Environmental Air Treatment System, for worldwide use that supports all of the Companys HVAC technology including desiccant and solar energy systems.  The design build approach continues to grow in popularity within the construction industry and is expected to become the predominant method of project delivery for PowerCold ComfortAir Solution, Inc. by 2005.  In January 2004, the Company set up a National Contractors Alliance (NCA) program to provide additional revenue opportunities as the design build program gains momentum with its new alliance partners.  The NCA is a turnkey design build program that brings together a nationwide network of contractors, engineers, architects, subcontractors and equipment suppliers to design, build, and equip facilities with the Companys proprietary HVAC systems.  The turnkey design build approach offers a cooperative project management approach that can minimize cost overruns and delays.  PCS expects significant growth to come from this multi-market channel once the national account agrees to use PowerColds system in both new and existing locations. The Company currently has installed twenty-one of thelarge building systems in three major hotel chains and various extended care facilities and has installed more than eighty small systems at retail national chain accounts in the U.S.


20    Powercold Corporation Form 10Q - September 30, 2005


Applied Building Technology- In August 2002, the Company acquired all the assets of Applied Building Technology, a supplier of complete standardized heating, ventilation and air conditioning packages for commercial buildings.  This new acquisition gives the Company a major entrée into the vast market for small commercial HVAC systems for national chain accounts.  Increasing power costs and clean air regulations have motivated corporate management with chain store operations to focus on energy savings and indoor air quality.  The company introduced two new applications to support the national chain store business: The BreezeMaster system, designed for use by large chain retail and fast food stores, is a closed loop cooler that prevents moisture buildup that can lead to legionella and other respiratory diseases associated with standard evaporative condensers.  This product is designed for the high volume 10 to 30 ton commercial rooftop unit market where small footprint, weight and height are an issue. The other application is the new proprietary DesertMaster energy exchange fresh air system. The system uses cool or warm exhaust air being circulated out of a building to cool or heat incoming outside fresh air. The desiccant section is then used to remove the moisture from building and fresh air 24 hours per day seven days per week.  The DesertMaster energy recovery and desiccant system can reduce the required capacity of the air conditioning equipment by approximately 20% by transferring the latent cooling load to the desiccant system.  Latent cooling involves removing the moisture from the air by cooling below the dew point.  The dehumidified air may be uncomfortably cool and have to be reheated before it is returned the space being cooled.  Air conditioning systems are sized for a combination of two cooling loads: latent (air humidity) and sensible (cooling of space air). The latent cooling load can account for as much as 30% to 50% of air conditioning requirements. Conventional, refrigeration-based air conditioning is electrical-energy intensive. Desiccant dehumidification removes humidity from ventilation air. Therefore, air conditioning requirements are reduced to meet the demands of sensible cooling and smaller air-conditioning plants are required. Reducing humidity in the air handling system and the building spaces during the cooling season will improve indoor air quality by preventing condensation in equipment and reducing the growth and propagation of micro-organisms. Desiccant augmented cooling systems are energy efficient and environmentally benign.  Desiccant dehumidification could reduce total residential electricity demand by as much as 25% in humid regions, providing a drier, more comfortable, and cleaner air environment.  {National Renewable Energy Laboratory (NREL)(2000).  Advanced desiccant cooling and dehumidification program, http://www.nrel.gov/desiccant cool/intro.htm} PowerCold Energy Systems - The Company originally formed Alturdyne Energy Systems to support its natural gas engine driven chillers and its rotary engine generator business. The name was changed to PowerCold Energy Systems in November 2002.  In September 2002 the Company acquired an exclusive license from Alturdyne to manufacture, package, market, develop and use intellectual property for the natural gas engine driven chillers and the natural gas rotary engine gen-set for a period not to exceed ten years.  The Company pre-paid Alturdyne $400,000 in royalty payments against the first $8,000,000 in anticipated sales as part of an exclusive license.  In September 2003 Alturdyne purchased 63 rotary engines from PowerCold for $460,000. Subsequently, the prepaid royalty and the rotary engine receivable were combined and structured as an outright purchase of the engine driven chiller technology.  The installation of combined heat and power (CHP) technology has grown in use over the last ten years. The technology and intellectual property acquired by the Company will enhance the Companys ability to offer customers complete packaged solutions for their HVAC and power generation needs.  The engine driven chillers include standard and custom packaging of natural gas, electric and diesel-fueled engine driven chillers used for HVAC system applications.  PowerCold International Ltd.  The Company was incorporated as a new operating subsidiary effective July 1, 2003.  PowerCold International markets all company products and system applications worldwide through various alliances and marketing agencies.  Sales and marketing activities are coordinated from the Company


21    Powercold Corporation Form 10Q - September 30, 2005


offices in Largo, Florida.  Agents and alliances have been organized in various countries worldwide to market and support the companys products and application systems and new relationships are being developed.  PowerCold Technology, LLC - The Company was recently formed on February 12, 2004 pursuant to the LLC Act and other applicable laws of the State of Nevada. All assets of the Company related to patent rights, trade names, trademarks, copyrights, licenses, trade secrets, inventions, intellectual proprietary rights and know-how will be owned by PowerCold Technology, LLC, a wholly owned subsidiary company of PowerCold Corporation. PowerCold Technology will license assets to PowerCold subsidiary companies and other third party companys world wide on a non-exclusive basis.  Products: Nauticon Evaporative Condensers - The Company envisions worldwide market demand for its proprietary evaporative condensing systems used in air conditioning systems. The Nauticon patented products are simple to manufacture. They are used for evaporative condensers, fluid coolers, sub-coolers, refrigeration system components and custom refrigeration products for commercial and industrial use. Nauticon products can reduce power cost in the air condition and refrigeration industry by up to 40% compared to typical, standard air cooled condensers utilized on many refrigeration and air conditioning systems smaller than 200 ton capacity.  The efficiency of water cooled condenser technology is well understood in the industry and is the preferred method in large central chiller plants reducing kW per ton of cooling for chilled water air conditioning from a typical 1.08 kW/ton at a suction temperature of 45 F and condensing temperature of 130 F for air cooled condensers to 0.67 kW/ton at a suction temperature of 45 F and condensing temperature of 95 F for evaporative (water) cooled condenser, a 38% reduction in KW demand. Capacity and power consumption is estimated from data published in the ASHRAE 2004 Handbook, HVAC Systems and Equipment Handbook, Chapter 34.6, Fig. 2 Capacity and Power-Input curves for Typical Hermetic Reciprocating Compressor. Nauticons primary advantage is energy savings, yielding EER ratings as high as 18 even as the industry, through regulation, changes to lower efficiency refrigerants. Nauticon products provide a cost effective alternative to the less energy efficient air cooled condenser typically utilized on commercial roof top refrigeration and AC units.  Nauticon evaporative condenser units have beneficial features; they are free of water treatment chemicals, have self-cleaning coils that shed scale and are low-maintenance. Nauticons primary advantage is energy savings, yielding EER ratings as high as 18 even as the industry, through regulation, changes to lower efficiency refrigerants. The industry faces serious changes for the first time in years due to energy and environmental concerns worldwide.  HVAC Systems  PowerCold owns the exclusive U.S. technology rights for an integrated piping technology system for heating, ventilating and air conditioning systems (HVAC). The significant feature of the patented HVAC system is the use of the existing pipes, as the delivery system, to provide hot and chilled water to individual fan coil units. The proprietary technology is designed to utilize the fire sprinkler piping to circulate the cooling water around the building.  In addition, the domestic hot water lines also distribute heating energy.  The dual use of the piping systems provide cost effective heating and cooling from a central system with compressor-free guest rooms for the hospitality industry.  The PowerCold ComfortAir system provides the precise comfort control of four-pipe air conditioning at a lower capital cost.  Guess rooms offer the precise comfort of a typical four-pipe air conditioning/space heating system at a lower installed cost achieved through the dual purpose use of the fire sprinkler system to deliver chilled water and the domestic hot water system to deliver hot water for space heating to the fan coil units eliminating the need to install two additional pipes. Installation and construction costs are comparable to conventional through-the-window Package Terminal Air Conditioners (PTAC) units.The PowerCold ComfortAir System also avoids the discomfort of poor temperature/humidity control and sleepless nights from noisy compressor cycling. PowerColds HVAC system provides energy saving and operating advantages through the integration of energy recovery and other technologies to increase efficiency and reduce operating costs.  PowerColds Energy Efficient HVAC and Refrigeration Technologies Can Significantly Cut Peak Power Demand and Costs:  Deregulated electricity during the hot summer peak-power-demand-days can cost 10-100 times more than normal. Commercial customers demand-surcharges, which are based on their peak-power usage during the 20-30 days per year when temperatures soar to 95° + F, can represent 30-50% of their total electric bill in some parts of the country. Consequently, reducing peak power demand during these few days could significantly reduce or eliminate surcharge costs.  Commercial air conditioning and refrigeration


22    Powercold Corporation Form 10Q - September 30, 2005


(accounting for $7 billion of 2000s $37 billion in peak-power demand costs) are the Companys initial target markets. America is well entrenched with air condition and refrigeration systems, but there is a great niche market for the Company's evaporative condensers and chiller products. PowerCold and its related entities have the refrigeration engineering expertise and new products to reduce energy costs for an industry that hasn't seen many changes in the last 50 - 60 years.  Significant Events During the Third Quarter 2005:  JULY 28, 2005  PowerCold Corporation submitted a proposal which was accepted by the Department of Energy for an integrated HVAC/CHP (Heating, Ventilation, Air Conditioning/Combined Heat and Power) distributed energy system for the hospitality industry.  The Gas Technology Institute (GTI), Preventive Maintenance Services, Inc. (PMSI), Southwest Gas, and Nevada Power will be participating in a comprehensive program designed to test, verify and demonstrate integrated energy efficient technologies with a Combined Heat and Power (CHP) system at a new Wingate Inn and Suites Hotel in Henderson, Nevada.  The Department of Energy (DOE) is granting the funding for the design, engineering, installation, data monitoring and performance reporting of the CHP project. The facility is a demonstration site for the hospitality industry for Distributed Energy Systems/Combined Heat and Power (DES/CHP) integrated with energy efficient HVAC technology.  This is the third new Wingate Inn® Hotel to utilize PowerColds patented HVAC system. The Wingate Inn and Suites is a three story hospitality center that features a 100-room hotel, meeting rooms, restaurant, indoor swimming pool and hot tub. The hotel will utilize a combined heat and power plant to supply space heating, hot water, cooling and electric power to the facility, as well as integrate PowerColds four-pipe HVAC system.  PowerCold has provided a pre-engineered system design that includes a low-emission natural gas generator, domestic hot water station, chiller plant, and interconnecting ductwork. The proposed integrated energy system should reduce power consumption by approximately 700,000 kWh per year and reduce peak demand by 240 kWh in comparison to electric packaged terminal air conditioners (PTACs) which are commonly used for a hotel of this size.  PowerCold ComfortAir Solutions, Inc. (PCS) The cogeneration system is designed to provide hot water from the generators rejected waste heat to the hotel. The CHP system will also include a remote monitoring system that provides local and remote monitoring and control from the Internet.  The combined system has higher efficiency and lower operating costs than the more traditional separate power generation and HVAC systems. The integrated energy system is also designed with operational flexibility that allows both grid-connect mode and stand-alone capabilities. If there is a utility supplied power outage, the integrated energy system is capable of supplying power to the hotel for as long as the main grid is down. PowerColds equipment will conform to applicable utility interconnection rules, and air emission standards with state of the art equipment.  August 10, 2005 PowerCold ComfortAir Solutions, Inc. (PCS) has entered into a sales and marketing agreement with Domino’s Franchisee Association (DFA) to equip Domino’s Pizza stores with its DesertMasterTM total fresh air HVAC system.  The three-year Value Added Partner Program (VAPP) establishes PCS as an approved vendor for Dominos franchisees and provides opportunities to retrofit existing Dominos facilities with the DesertMaster desiccant dehumidification system.  Designed for humid climates, the energy efficient DesertMaster is a cost-effective supplemental cooling system that can reduce energy costs by up to 20 percent and eliminates the need for approximately 20 percent of additional air conditioning equipment.  The system improves indoor air quality and prevents moisture build up that can lead to respiratory problems.  The systems fresh air units will be equipped with plastic heat exchanger coils made of DuPont Caltrel® plastic.  Under the terms of DFAs Affinity Marketing Program, PCS will receive sales tools and marketing exposure, including press coverage, multimedia advertising, networking opportunities, Vendor Expos, DFA tradeshows, direct mail to DFA franchisees and a link to the DFA web site.


23    Powercold Corporation Form 10Q - September 30, 2005


The DFA is comprised of approximately 1,400 franchisees operating about 4,200 stores across the US.  The initial two installations will be monitored to provide statistics on the quantitative return on investment.  Findings will be publicized to DFA, various restaurant and retail organizations and the building community.  The first DesertMaster system was scheduled for installation by the end of August 2005 at a Dominos store located in Pearl, Mississippi but was rescheduled to mid December 2005, due to weather damage from Hurricane Katrina.  Subsequent Events:  October 11, 2005 PowerCold Corporationannounced a long-term business relationship with E.I. du Pont de Nemours and Company (NYSE: DD) for the exclusive purchase and use of Caltrel® Plastic Tubing in the HVAC field of Fluid Coolers and Fan Coil Heat Exchangers.  DuPont also granted an exclusive license for use of the DuPontTMCaltrel® trademark.  The Agreement, effective as of October 1, 2005, shall continue for a period of five (5) years, thereafter the parties will confer their mutual interest in any extension of the term of the Agreement. The Agreement supersedes any prior oral or written contracts, agreements, or arrangements between the parties.  Terms and conditions of the Agreement include the exclusive purchase and supply of Caltrel® plastic tubing.  For a period of five years, PowerCold® has the exclusive right to purchase Caltrel® material for use in Fluid Coolers and Fan Coil Heat Exchangers for HVAC applications.  For a period of at least two years, DuPont will sell and deliver, and PowerCold will purchase and accept from DuPont, Caltrel® plastic tubing.  PowerCold has the first option to purchase the DuPont Production Equipment to produce Caltrel® tubing, and agrees to purchase resins required for the production of the tubing solely from DuPont.  For the term of this Agreement, DuPont agrees not to develop or improve Equipment (or processes utilizing said Equipment) in collaboration with any third party specifically for use in the fields of Fluid Coolers and Fan Coils, and DuPont further agrees not to produce Caltrel® tubing for any such third party specifically in the aforementioned fields for this period.  In January 2003 PowerCold first announced collaboration with DuPont to test new plastic materials for air conditioning units, and entered into a joint Development Agreement and a License Agreement relating to DuPontTM CaltrelÒ Fluid Energy Transfer System Applications in May 2003.   PowerCold has applied to the U.S. Patent Office for a new modular design heat exchanger patent that features flexible designed plastic components.  PowerColds proprietary PlexCoil® fan coil air handler, primarily used in commercial buildings for room air distribution, was the first application designed for the new plastic heat exchanger. PowerCold has also developed and installed new unique Fluid Coolers of various sizes that incorporates CaltrelÒ plastic tubing.  OCTOBER20, 2005 PowerCold Corporation announced an agreement with Park Place Properties, LLC to provide a turnkey HVAC system including engineering, plumbing and fire sprinkler designed package for the new five-story 209-room Wingate Inn and Suites in Las Vegas, Nevada. The $2.8 million project will utilize PowerColds proprietary HVAC central system, including its patented closed loop evaporative condensers. Another new hotel project for $2.4 million (news release dated 7.19.05), the Wingate Inn and Suites in Henderson, Nevada is designed with PowerColds proprietary central HVAC system and a Combined Heat and Power (CHP) system to supply space heating, hot water, cooling and electric power to the facility. The unique PowerCold system recycles the hotel exhaust air and transfers the heating or cooling to the incoming outside air through its BreezeMasterTM plastic evaporative coolers. The individual guest rooms and common areas are furnished with clean, fresh air.  This system reduces the need for approximately 12 to 15 tons of air conditioning equipment for the hotel. The Department of Energy is granting the funding for the analysis of the CHP project. The facility is expected to be one of the most energy-efficient hotels ever built in the U.S. The PowerCold central system has been utilized in other Wingate Inn Hotel projects including the Wingate Inn, Bozeman, MT and the Wingate Inn and Suites, Greenwood Village, CO.  The Bozeman Wingate earned the ENERGY STAR label for commercial buildings in 2003 and the ENERGY STAR small business award in


24    Powercold Corporation Form 10Q - September 30, 2005


2004. The Greenwood Village Wingate opened just over a year ago and is expected to achieve similar energy savings and ENERGY STAR certification.  NOVEMBER2, 2005 PowerCold Corporation announced that it would furnish its proprietary central HVAC system, including engineering design services, equipment, plumbing and fire sprinkler system for Cottonwood Terrace, a new senior living facility in Gillette, WY.  Three other senior living facilities scheduled for installation in 2006 also plan to use PowerColds central HVAC system.  PowerColds central HVAC system design was selected because it provides significant benefits for both occupants and owners.  The system improves indoor air quality and creates non-toxic environments for patients with chemical sensitivities and environmental-related illnesses.  The owners of the senior living facilities benefit from higher performing facility operations that not only provide superior guest comfort but also conserve energy and reduce operating costs and risks.  Howard Construction Company has utilized PowerColds central system design in three other senior care facilities: Central Court Village, Billings, MT; Creekside Court, Sheridan, WY; and Bridger Peaks, Bozeman, MT.  NOVEMBER 8, 2005  PowerCold Corporation announced the start up of an E-Commerce sales order processing system.  The online system, designed to enhance direct product sales, is expected to improve productivity, resulting in annual cost savings; and improve customer service and product order and delivery processing.  Restaurant chains will be the first to have access to the new system.  PowerCold’s BreezeMasterTM evaporative cooler and DesertMasterTM desiccant clean air system are the initial products on the online system.  These supplemental cooling systems yield significant energy cost savings and are ideally suited for all restaurants, regardless of size, climate or geographic location. The HVAC systems package, marketed through a leasing program, includes installation and maintenance costs.  PowerCold® is an approved HVAC supplier for BK and a member of BKs National Franchisee Association (NFA).  BKs supply chain division, Restaurant Services Inc. (RSI), developed an Internet-based purchasing catalog to consolidate purchases, establish national account pricing, and keep franchisees informed about BK-approved equipment and suppliers. Other restaurant chains will soon be utilizing the sales order processing system.


25    Powercold Corporation Form 10Q - September 30, 2005


RESULTS OF OPERATIONS  Third Quarter 2005  The Company's Consolidated Statement of Operations for the third quarter ended September 30, 2005 compared to the third quarter ended September 30, 2004:  % Increase/
Decrease3 months ended 9/30/20053 months ended 9/30/2004% Increase/
Decrease9 months ended 9/30/20059 months ended 9/30/2004Total Revenue(305.8%)$676,680$2,746,090(44.8%)$4,055,760$7,348,302Cost of Revenue(228.2%)$1,010,667$2,309,337(33.8%)$3,809,021$5,750,312Gross Profit(230.7%)$      (333,987)$436,753(84.6%)$246,739$1,597,990Operating Loss673.1%($3,755,709)($557,968)251.2%($5,589,821)($1,575,998)Net Loss507.0%($2,499,357)($552,097)167.8%($5,011,429)($1,877,535)Net Loss
per Share233.0%($0.10)($0.03)122%($0.20)($0.09)  Total Revenue for the three-month period ended September 30, 2005 decreased 305.8% to $676,680 from $2,746,090 and for the nine month period ended September 30, 2005 decreased 44.8% to $4,055,760 from $7,348,302 in the comparable prior year periods. The decrease in revenue during the three month period is directly related to the rejection of contracts for plan and spec work for chain restaurant and retail store that dont meet the minimum gross margin requirements established by management during the third quarter. Product pricing has remained stable for the last few years although there was a spike in copper prices one year ago which impacted margins as price increases for Nauticon copper heat exchangers were minimal and Nauticon sales accounted for less than 10% of 2004 revenue. Inflation rates of 2.68%, 2.27% and 1.59% respectively for 2004, 2003 and 2002 (based upon the CPI Consumer Price Index) has had little or no impact on pricing for our products and services and did not contribute to revenue increase.  Commodity price increases for copper and polyethylene did reduce product margins for Nauticon products in the fourth quarter of 2003 and the first and second quarter of 2004.  Operating Loss for the three-month and nine month period ended September 30, 2005 increased $3,197,741 to ($3,755,709), a 574% increase from ($557,968) and increased $4,013,823 to ($5,589,821), a 251.2% increase from ($1,575,998) in the comparable prior year period respectively.  The Total Cost of Revenues decreased by $1,298,670 on lower revenue to (63%) of revenue as compared to 84.1% of revenue for the comparable three month period in the third quarter of 2004.  The Total Cost of Revenues increased by $1,941,291 to 94% of revenue as compared to 78.3% of revenue for the comparable nine month period in 2004. The cost of direct labor and equipment and direct labor and materials on contracts and equipment revenue decreased from 84.1% of revenue in the third quarter of 2004 to (150%) of revenue in the third quarter of 2005 and 94% of revenue for the nine month period ended September 30, 2005 from 78.3% of revenue for the nine month period ended September 30, 2004, due to competitive pricing pressure on contracts for plan and spec work for chain restaurants and retail stores.  Warranty cost recorded for the third quarter of 2005 was $233,194 and $273,184 for the nine month period ended September 30, 2005 with no recorded expenses in the comparable periods in 2004.  Recorded warranty expense is directly related to designs from 2003 and early 2004. Corrective action was implemented for all units in the field and product design changes initiated which have resulted in a temporary increase in direct labor and material costs for equipment.  Net Loss for the three-month and nine month periods ended September 30, 2005 increased to ($2,499,357), a 353% increase from ($552,097) and increased to ($5,011,429), a 167.8% increase from ($1,877,535) respectively from the comparable prior year periods ended September 30, 2004.  Operating Expense for Sales, Marketing and Advertising increased by $252,640 to 23% of revenue from 9.2% of revenue in the prior year nine month period ended September 30, 2004.  The significant portion of the increase was directly related to sales salary and sales expense related to efforts with the hospitality industry and national chain stores which included increases in travel related and show & meetings expense for the hospitality industry conventions.  General and Administrative expense decreased by $104,361, to 51% of revenue as compared to 29.5% of revenue for the comparable nine month period in 2004 with an increase in G&A expense recorder in the three month period ended September 30, 2005 of $289,637 to $854,909, 38.7% of revenue, as compared to the prior year period due to increased sales and travel expense.  R&D expense recorded for the nine month period was $513,243 at 6.4% of total revenue for continued work on plastic heat exchange products and new product development for the wet/dry fluid coolers.  Operating losses were higher than expected due to the significant portion of revenue attributed to the number of lower margin bid spec contracts for retail and restaurant chain accounts, $2,021,122 in bad debt expense recorded as an impairment to receivables as weather related damage in Florida, Mississippi and Louisiana caused the cancellation of several projects and an increase in the reserve for


26    Powercold Corporation Form 10Q - September 30, 2005


bad debt due to the likelihood that certain projects in progress will not be completed and others with completed engineering will not start construction in the foreseeable future, increases in R&D and Sales, Marketing & Advertising expenses for the period. Accounting and legal expense related to stock registrations and the defense of two lawsuits remain high at $58,122 and $200,833 for the three and nine month period ended September 30, 2005, and are expected to continue at the current rate until lawsuits are resolved and the registrations filed with the SEC become effective.  Margins in future periods should improve, as the Company reduces dependence on bid spec contracts and increases the number of hospitality contracts using our proprietary technology, however no guarantees can be made regarding the increase in HVAC hospitality business or the improvement of margins.  Net Loss Per Share for the three-month period ended September 30, 2005 increased to ($0.10) from ($0.03) for the same quarter of the prior year. Net loss per share was based on weighted average number of shares of 24,798,363 for the three-month period ended September 30, 2005 and 21,754,805 for the three month period ended September 30, 2004.   Net Loss Per Share for the nine-month period ended September 30, 2005 increased to ($0.20) from ($0.09) for the prior year. Net loss per share was based on weighted average number of shares of 24,798,363 for the nine-month period ended September 30, 2005 and 21,754,805 for the nine-month period ended September 30, 2004.   Interest and financing expense increased $126,690 to $128,901 as compared to the third quarter of 2004 and 87.7% to $584,625 for the nine month period ended September 30, 2005 in the prior year period due to interest expense on the $5 million convertible debt placed with Laurus on July 29, 2004 and the issuance of additional warrants to Laurus for the rescheduling of principal repayment and late effectiveness of a stock registration filed with the SEC.  The Companys sales and revenue declined in the three month period ended September 30, 2005 from the same three month period in the prior year.  Total revenue of $676,680 for the three months ended September 30, 2005 lagged third quarter revenue of $2,746,090 by $2,069,410 for 2004 and decreased from 2003 revenue of $2,138,976 by $1,462,296.  The Companys revenue for the nine month period ended September 30, 2005 was $4,055,760 as compared to the same period in 2004 and 2003 at $7,348,302 and $3,251,310 respectively. The majority of PowerCold ComfortAir Solutions engineering design proposals are for large commercial building projects that revolve over a nine to fifteen month contract cycle and are recognized as revenue on a percentage of completion basis. The Company expects to close new contract proposals at a 5% rate per quarter based upon historical performance however there is no guarantee that we will close new contracts at the rate that has occurred in the past.  Cost of revenue should decline from the recent historical high of 99% in the third quarter of 2005 as we reduce our dependence on low margin bid and spec work for retail and restaurant chain store and focus on proprietary HVAC design and engineering marketed directly to the national accounts. We anticipate reduced losses with increased revenue and lower cost of revenue but will not attain profitability in the fourth quarter of 2005 as it is unlikely that gross margins will improve significantly in the short term until hospitality business increases.  Projections regarding revenue and income should not be considered a certainty and in fact projections may not be met at all.  The market for commercial HVAC systems for retail national chain stores and restaurant accounts continues to expand with the recent addition of two new chains.  PowerCold Products production facility has continued to improve its operations with an emphasis on cost reduction programs and new sales initiatives focused on volume markets for Fluid Coolers and Evaporative Condensers.  Major new engineering and marketing programs related to the new plastic products have been implemented with direct emphasis on OEM companies. Newly designed wet/dry fluid coolers that use DuPonts CaltrelÒ plastic tubing have been shipped to a national restaurant chain and to several other sites including OEMs.   Some of the value and benefits of the new plastic tubing to OEM companies are: improved coil scale shedding over copper tubing, superior corrosion resistance of the coil compared to copper construction, lower water usage, and lower maintenance cost. Since plastic products first shipped in the fourth quarter of 2004 our bid submittals for Nauticon products with plastic coils has increased steadily.  The Company's Consolidated Balance Sheet as of the third quarter ended September 30, 2005 compared to year ending December 31, 2004:  For the third quarter ended September 30, 2005, total current assets decreased 21% to $5,570,041 from $6,980,242 and total assets decreased 16% to $7,211,157 from $8,575,550 for the year ending December 31, 2004.  Total Current Liabilities increased 55% to $8,915,180 for the third quarter ended September 30, 2005 compared to $5,781,223 for the year ending December 31, 2004. The current ratio is 0.63 to 1.  Total liabilities


27    Powercold Corporation Form 10Q - September 30, 2005


at September 30, 2005 increased to $10,742,742 with a resultant negative total stockholders' equity of ($3,531,585), a decrease of $3,501,394 as compared to $30,191 for the year ending December 31, 2004 due to an 19% increase in accounts payable to $4,231,767, a 223% increase in accrued expenses to $610,446 and a 758.5% increase in accounts payable to a related party to $1,478,597.  The decrease in assets was mainly due to a decrease of $1,772,233 in Accounts Receivable on $3,413,325 in revenue. Accounts Receivable, net of allowance, currently lag Accounts Payable, Accrued expenses and Billings in excess of costs and estimated earnings on contracts in progress by $994,433 and has decreased by $413,489 from the previous quarterly reporting period of $9,005,119 at the quarter ended June 30, 2005.  Inventory increased by $15,408 to $136,334 from investment in material for plastic heat exchange products and prepaid expenses increased by $107,340 to $249,130 primarily related to our insurance policies while cash increased by $239,284 to $1,545,700 as compared $1,306,416 at the year ended December 31, 2004.  Patent rights and related technology decreased by $106,257.  Accounts Payable increased by $654,690 from the year end 2004 in part as a result of several new contracts and orders from chain stores, increased spending on R&D, legal and accounting expense related to lawsuits and pending registration with the SEC and increased sales and marketing expense. The increase in receivables continues to put significant pressure upon the cash flow. A substantial reduction in Accounts Receivables and increased cash flow from completed installations is necessary for the continued operation of the company.  The increase in liabilities since December 31, 2004 was mainly due to the increase in payables and accrued expenses related to hospitality contracts and a loan from a related party.  During the three months ended September 30, 2005, the Company issued 100,000 common stock shares for financial consulting services at $0.80 per share.  During the three months ended September 30, 2005, the Company granted 180,000 stock options.  We issued 155,000 three year options to purchase common stock at $1.50 per shares exercisable on July 26, 2005, expiring on July 26, 2008 to employees from the 2002 Employee Stock Option Plan. The fair value of the options was calculated at $27,373 using the Black Scholes Calculation at date of grant assuming a risk free interest of 4.25%, volatility of 35% and a term of three years.  On September 30, 2005 we issued 25,000 options for consulting services at $1.75 per share for a term of three years which will expire on September 30, 2008.  The fair value of the options was calculated at $2,768 using the Black Scholes Calculation at the date of grant assuming a risk free interest of 4.25%, volatility of 35% and a term of three years. We recorded an expense of $30,141 for the three month period ended September 30, 2005 and $91,874 for the nine month period ended September 30, 2005, in accordance with SFAS 123R which was adopted by the Company on January 1, 2005.  In the three months ended September 30, 2005, no options were exercised for common stock.   In the three months ended September 30, 2005, 250,000 common stock options expired unexercised or were cancelled.  During the three months ended September 30, 2005, no common stock warrants were issued.  Liquidity and Capital Resources:  At September 30, 2005, the Companys working capital decreased by $2,146,120 to ($3,345,139) from $1,199,019 at December 31, 2004 primarily as the result of the increase in accounts payable, accounts payable to related party and accrued expenses which in total increased of $2,382,110 exceeding the combined increase accounts receivable, inventory, cash and prepaid expenses by $362,032 which in total increased by $2,020,078.  Total cash increased from $1,306,416 at year-end to $1,545,700 as of September 30, 2005. We received $1,960,000 from Francis. L. Simola through the exercise of 150,000 options issued on September 10, 2001 at $1.00 per share for $150,000; the exercise of 545,879 options issued on October 1, 2001 at $0.50 per share for $272,940.  Frank Simola also made a loan to us payable upon demand, in the amount of $787,060 with an annual interest rate of prime, as published in the Wall Street Journal, plus 1%, not to exceed 8%. On September 1, 2005, Frank Simola also made a loan to us payable upon demand, in the amount of $750,000 with an annual interest rate of prime, as published in the Wall Street Journal, plus 1%, not to exceed 8%.  On September 30, 2005 we received $1,338,500 as a settlement on royalties due from an Agreement entered into between Wittcold Systems, Inc. (now known as Witt Corp.) and International Cryogenic Systems Corporation (now known as PowerCold Corporation) on or about May 1, 1996, relating to the purchase and sale of the stock in Realcold Systems, Inc.  As part of this agreement a minimum royalty was due to PowerCold in the amount of $2,000,000 less any royalties paid to PowerCold before May 1, 2006.  Since the execution of the agreement Wittcold paid approximately $217,449 in royalties per the agreement.  A dispute


28    Powercold Corporation Form 10Q - September 30, 2005


developed regarding the minimum future royalty due on May 1, 2006, and a compromise was reached to settle all claims for a payment on September 30, 2005, in the amount of $1,388,500 to PowerCold Corporation by Witt Corp.  Inventory increased 12.7% to $136,334 from the year ended December 31, 2004 due to increased demand for Nauticon Fluid Coolers, Evaporative Condensers and the new Plastic coil product ramp up.  Purchasing agreements with suppliers, coupled with the use of common parts throughout the product lines should minimize further growth in inventory levels and at the same time reduce the cost of  product sold, improving the gross profit margin.  Status of Operations: We intend to continue to utilize and develop our intangible assets.  At September 30, 2005, intangible assets comprised 9% of our total assets.  The recovery of these intangible assets is dependent upon achieving profitable operations. Its our opinion that the cash flow generated from current intangible assets is not impaired, and that recovery of its intangible assets, upon which profitable operations will be based, will occur.  We believe that our working capital is insufficient to support its growth plans for 2005. We received $5 million in convertible debt financing on July 30, 2004.  The Company plans to raise additional capital to support 2006 operations.  The Company recently applied to the U.S. Patent Office for a new modular design heat exchanger patent that features superior modular and flexible designed plastic components.  Utilizing polymeric materials provides additional value and innovation to PowerColds portfolio of products.  Plastic components create a new platform for PowerCold to deliver energy efficient and cost-effective HVAC solutions for its customers.  A new patent application (third Nauticon® patent) which was filed in 2002 was recently submitted for an international filing as an enhanced evaporative condenser. A new patent application for the Compact Heat Exchanger with High Volumetric Air Flow was filed on February 24, 2005 claiming priority from and benefit of U.S. provisional patent application 60/400,609 filed August 2, 2002, which is incorporated by reference herein as if fully set forth in its entirety.  We believe that the additional development cost related to the new patent application will protect the companys intellectual property and improve opportunities for increased revenues and profits for our Nauticon product line. Patents and acquired technology are amortized on a straight line basis over a 15 year life commencing with the beginning of product sales.  ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK  The company, at the present time, has no exposure to market risk sensitive instruments entered into for trading purposes and instruments related to interest rate risk, foreign currency exchange rate risk, commodity price risk, and other relevant market risks, such as equity price risk.  ITEM 4.  CONTROLS AND PROCEDURES  The Company maintains disclosure controls and procedures designed to ensure that information required to be disclosed in reports filed under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the specified time periods.  CEO and CFO CERTIFICATIONS  Appearing immediately following the Signatures section of this Quarterly Report there are two separate forms of "Certifications" of the CEO.  The second form of Certification is required in accord with Section 302 of the Sarbanes-Oxley Act of 2002 (the Section 302 Certification).  This section of the Quarterly Report, which you are currently reading is the information concerning the Controls Evaluation referred to in the Section 302 Certifications and this information should be read in conjunction with the Section 302 Certifications for a more complete understanding of the topics presented.  DISCLOSURE CONTROLS AND INTERNAL CONTROLS.  Disclosure Controls are procedures that are designed with the objective of ensuring that information required to be disclosed in our reports filed under the Securities Exchange Act of 1934 (Exchange Act), such as this Quarterly Report, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's (SEC) rules and forms.  Disclosure Controls are also designed with the objective of ensuring that such information is accumulated and communicated to our management, including the CEO and CFO, as appropriate to allow timely decisions regarding required disclosure. Internal Controls are procedures which are designed with the objective of providing reasonable assurance that (1) our transactions are properly authorized; (2) our assets are safeguarded against unauthorized or improper use; and (3) our transactions are properly recorded and reported, all to permit the preparation of our financial statements in conformity with generally accepted accounting principles. Our disclosure controls and procedures are designed to provide reasonable assurance of achieving their objectives, Our CEO and CFO have concluded that our disclosure controls and procedures were not effective at that reasonable assurance level for the period stated.  LIMITATIONS ON THE EFFECTIVENESS OF CONTROLS.  The Company's management, including the CEO and CFO, does not expect that our Disclosure Controls or our Internal Controls will prevent all error and all fraud.  A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met.  Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs.  Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected.  These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control.  The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed achieving its stated goals under all potential future conditions; over time, control may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.  PowerCold ComfortAir Solutions, Inc.  During management's internal audit concluded late October 2005 (by its CFO and CAO) of its subsidiary company PowerCold ComfortAir Solutions, Inc., prior to the year-end Independent Audit, management discovered that PowerCold ComfortAir Solutions, Inc. was not following its Corporate Controls and Procedures that were in effect at that time.  The management of the Company's subsidiary was providing inappropriate accounting information concerning the recognition of sales and corresponding expenses under a


29    Powercold Corporation Form 10Q - September 30, 2005


method, which was not in compliance with percentage of completion accounting.  Sales were being recognized when made not when the proceeds of the sale were earned. After management discussed the matter with its Independent Registered Accountants and the non compliance of the subisidiary with the Companys internals controls and procedures, management decided that the operations of PowerCold ComfortAir Solutions, Inc. were no longer an appropriate business activity of the Company and that the subsidiary would be sold to its existing management.  PowerCold ComfortAir Solutions was sold to its employees.  In late October 2005, based upon the failure of PowerCold Comfort Air Solutions to follow established corporate controls and procedures, PowerColds management concluded that its disclosure controls and procedures over this subsidiary was not effective as of September 30, 2005.  PowerCold Corporation has since restructured the company, merging the remaining subsidiary companies into the parent and restructuring the management and accounting controls, thus eliminating further risk of non-compliance with corporate policies.As a result of the discovery of PowerCold Comfort Air Solutions failure to follow established corporate controls and procedures in late October 2005, PowerColds management concluded that its disclosure controls and procedures for the entire company were not effective as of September 30, 2005.   CONCLUSION  In accord with SEC requirements, the CEO and CFO note that, as of the period ended 12/31/05covered by this report, there were significant deficiencies and material weaknesses in our Internal Controls. Although the Company's management must deem that the controls over financial reporting were not effective for this period in 2005, since this problem has been identified, relative to its subsidiary PowerCold ComfortAir Solutions, Inc., the Company's management team has reviewed internal procedures and has established controls, which are now deemed to be effective. The effectiveness of these controls are under the continuing review of the Company's CEO, CFO and CAO.  In addition, management has begun its project to comply with the requirements of Section 404 of the Sarbanes-Oxley Act of 2002.  Management anticipates that this effort will also help to more formally document, communicate, and comply with the Company's accounting policies and procedures, as well as to identifying and rectifying any residual disclosure or reporting process control issues that may exist but, at this time, are unknown to management. There were no other changes in our internal controls over financial reporting.  We previously filed on April 17, 2006, a report on Form 10-K for the period ended December 31, 2005. In that Report, Management concluded that at that time and for such period, that with respect to the effectiveness of our disclosure controls and procedures as of the end of the period covered by the report, Management  concluded that, subject to stated limitations, our Disclosure Controls were effective to ensure that material information relating to PowerCold Corporation, Inc. and its subsidiaries was made known to management, and that our Internal Controls were effective to provide reasonable assurance that our financial statements were fairly presented in conformity with generally accepted accounting principles. We have modified and clarified such disclosure to reflect that there were significant deficiencies and material weaknesses in our Internal Controls.Our original assessment was based solely upon a review of our controls and procedures and not those of our subsidiaries. During an internal audit prior to year-end of our subsidiary company PowerCold ComfortAir Solutions, Inc., Management discovered that PowerCold ComfortAir Solutions, Inc. was not following its Corporate Controls and Procedures that were in effect.  Management discussed the matter with its independent Auditors, and subsequently discontinued operations of PowerCold Comfort Air Solutions, Inc. and sold the business to its employees. This Report reflects the revised assessment of our CEO and CFO for the period stated.


30    Powercold Corporation Form 10Q - September 30, 2005


PART II. OTHER INFORMATION  Item 1.  Legal Proceedings.  Two of our subsidiaries, namely PowerCold Products, Inc. and PowerCold ComfortAir Solutions, Inc.  f/k/a Ultimate Comfort Systems Inc., are named as  Third-Party Defendants. The plaintiff is ERA Refrigeration Company, Inc., and the named Defendants are Nicholas Ladopoulos, et al. The third party plaintiffs are Yahara Crossing, LLC; Windsor Commons, LLC; Progressive Designs, LLC; All Star Properties and all of the third party defendants are Steve Clark, PowerCold Products, Inc., Total Comfort Solutions, Inc. and PowerCold ComfortAir Solutions, Inc. The lawsuit is based on a 1999 third-party design of two HVAC systems installed by a local third-party mechanical contractor.  The Third Party Plaintiffs are asking for unspecified damages, costs and attorneys fees.  The suit was filed on February 2, 2004. (Dane County, Wisconsin, Circuit Court Branch 9. Case Code No. 03-CV-3452). As of   As of August 13, 2005 the defendant, and all four third party defendants have agreed to a settlement pending execution of mutual releases from future claims by all parties.  PowerColds portion of the settlement is $52,500, of which $26,250 was paid by our liability insurance carrier and $26,250 was paid by PowerCold.  PowerCold ComfortAir Solutions, Inc., is also named as a Defendant in an action for recovery of $16,170 in fees, costs and attorneys fees, claimed by the Plaintiff Big Sky Plumbing & Heating, a mechanical contractor. Big Sky seeks such fees for the installation of a third party designed cooling system. PowerCold ComfortAir Solutions inherited this installation from a previous licensed technology application. We believe that Big Sky Plumbing & Heating submitted fraudulent invoices to PowerCold ComfortAir Solutions in excess of amounts authorized for services.  The suit was filed on March 30, 2004. We have filed a counterclaim against Plaintiff for unspecified damages, costs, and attorneys fees.  As of June 20, 2005 the plaintiff has failed to respond to discovery requests by the due date.  A jury trial date has been set for December 12, 2005 with a pretrial court ordered settlement conference, with a neutral third party settlement master, no later than May 13, 2005.  (Montana First Judicial District Court, Lewis & Clark County, Cause No. ADV-2004-151).  The settlement conference has not been rescheduled.  As of July 17, 2005 we have filed a motion with the court to compel the production of discovery.  As of September 14, 2005 we have filed a Motion to Dismiss for failure of the plaintiff (Big Sky) to comply with the production of discovery and requested an order of Dismissal with Prejudice from the court regarding the claim against us. PowerCold has filed a counter claim against Big Sky Plumbing.  On September 30, 2005 PowerCold made a final offer to settle for $6,500 to conclude this matter to avoid the cost of mediation and litigation as Big Sky filed discovery responses at the final hour.  PowerCold ComfortAir Solutions and PowerCold Products is also named as a Defendant in an action for recovery of $37,708.25 in a suit filed by Nicksons Machine Shop against Alturdyne Energy Systems (a California company) for repair work for two engine drive chiller sold by Alturdyne to Grapetech Winery Solutions a division of Nicksons Machine Shop.  PowerCold Products provided materials and packaging.  The contract for the equipment purchase was between Alturdyne Energy Systems and Grapetech Winery Solutions.  PowerCold is negotiating an equitable settlement for a release from this action by Nicksons Machine Shop. The suit was filed on January 25, 2005 in the Superior Court of California, County of Santa Barbara, Santa Maria, CA, Cook Division, Case No. 1171633. Service was acknowledged on February 7, 2005 for PowerCold ComfortAir Solutions and February 17, 2005 for PowerCold Products, Inc.  As of July 8, 2005 a settlement offer has been proposed.  As of September 12, 2005 a settlement offer of $31,500 has been accepted ($21,000 from PowerCold and $10,500 from Alturdyne) pending acceptable release from each of the involved parties.  PowerCold ComfortAir Solutions, Inc., filed suit against Compass Group, Inc.  (a General Contractor), Centennial Insurance Company, Florida Community Bank and Sea-Wall Motor Lodge, Inc in the Circuit Court, Seventh Judicial Circuit for St. Johns County, Florida  Case No.CA04-525 Division 55 on October 11, 2004; for damages for breach of bond contract including cost overruns for change orders and failure to pay for equipment and services provided in excess of $15,000 and attorneys fees.  In addition PowerCold has placed a construction lien on the property seeking payment of $91,675.80 in unpaid and past due receivables on a contract of $285,579.00 after the first change order.  Additional sums may become due in the future.


31    Powercold Corporation Form 10Q - September 30, 2005


PowerCold ComfortAir Solutions, Inc., filed suit against Takagi USA, Inc. for damages related to defective products sold to PowerCold ComfortAir Solutions, Inc. in Circuit Court in Pinellas County, Florida  Case No. 04-7819-CI-13 on November 2, 2004 for damages in excess of $160,000 and attorneys fee. As of August 13, 2005 discovery between the parties is proceeding and mediation has been scheduled with the court on October 12, 2005.  On September 22, 2005, the attorney for Takagi has requested a delay in mediation until November 15, 2005 to complete their discovery.  PowerCold ComfortAir Solutions, Inc. has a suit pending, to be filed against Pat Cook Construction in the County Court of the Twelfth Judicial Circuit in and for the County of Sarasota, Florida for damages in the amount of $11,017.10, an unpaid balance due for work completed, plus interest and attorneys fees pending written confirmation from the project developer that Pat Cook Construction has been paid in full for the products provided by PowerCold ComfortAir Solutions, Inc.  As of October 18, 2005 the attorney for Pat Cook Construction offered to settle for damages in the full amount of $11,017.10 pending an acceptable release.  Mediation scheduled for October 19, 2005 was cancelled in anticipation of the settlement.  PowerCold ComfortAir Solutions, Inc. had filed a claim with Mid-Continent Casualty Company against Bond No.BD-89172 for the Project: CO; Wingate Inn, Principal: TDC/Bass Joint Venture, LLC in the amount of $195,882.10 which was acknowledged on September 24, 2004.  As of April 25, 2005 no resolution regarding payment has been reached and PowerCold is moving forward with mediation, arbitration or litigation in the appropriate venue in Colorado.  PowerCold Corporation produced a demand letter on February 25, 2005, through its attorney, in the amount of $128,589.50 due by March 15, 2005, regarding claims against Industrias Polaris, S.A. for costs incurred for defective product, the return of advance payments for product never delivered and $2,000 for attorney fees in regards to the material breach of the manufacturing agreement between PowerCold and Polaris. Polaris has engaged counsel in Texas and initiated discussions.  Pending failure to comply with the demand for payment or an appropriate settlement offer, arbitration as stipulated in the manufacturing agreement, will be pursued.  Prior to July 26, 2005 Polaris had agreed to a settlement proposal but has failed to execute the agreement.  We have instructed our attorney to proceed with binding arbitration in Texas.  The matter has been submitted to the International Centre for Dispute Resolution.  Responses from the parties are due at the ICDR on or before September 21, 2005.  It is the opinion of management that the three matters in which PowerCold is a defendant will not have a materially adverse effect on the Company as third party engineering designs are believed to be the cause of the problems and not our equipment.  We are vigorously defending these matters, however the company has reserved $64,000 for settlement in the unresolved actions where PowerCold is the defendant.  Item 2.  Changes in Securities None.  Item 3.  Defaults Upon Senior Securities. None.  Item 4.  Submission of Matters to a Vote of Security Holders. None.  Item 5.  Other Information. None.


32    Powercold Corporation Form 10Q - September 30, 2005


Item 6.  Exhibits.  (a)   Exhibits  No. Description  Exhibit 31.1 Certification of Francis L. Simola, President and Chief Executive Officer pursuant to 18 U.S.C. 1350. Exhibit 31.2 Certification of Grayling Hofer, Chief Accounting Officer and Principal Financial Officer pursuant to 18 U.S.C. 1350. Exhibit 32.1 Certification of Francis L. Simola, President and Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. Exhibit 32.2 Certification of Grayling Hofer, Chief Financial Officer and Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.


33    Powercold Corporation Form 10Q - September 30, 2005


SIGNATURES  In accordance with the requirements 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.    POWERCOLD CORPORATION   /S/ Francis L. Simola Francis L. Simola President and CEO  Dated: August 1, 2006


34