I figured it out using an example from this page..
http://thefirstsql.com/2010/06/09/using-sqlcmd-from-powershell/
Here is my example that worked...
#Powershell script
#Parameters that must be set:
$DBServer = "localhost"
$database = "DB_POWERSHELL"
$CITY = "KANSAS CITY"
$STATE = "MO"
$COUNTRY = "USA"
$DBScriptFile = "C:\Users\Administrator\Downloads\DATABASE\INSTALL\XX\AddCity.sql"
[System.Reflection.Assembly]::LoadWithPartialName("Microsoft.SqlServer.Smo") | out-null
$sqlSrv = New-Object 'Microsoft.SqlServer.Management.Smo.Server' ($server)
$DBParam1 = "CITY=" + $CITY
$DBParam2 = "STATE=" + $STATE
$DBParam3 = "COUNTRY=" + $COUNTRY
$DBParams = $DBParam1, $DBParam2, $DBParam3
Invoke-Sqlcmd -InputFile $DBScriptFile -Variable $DBParams -Serverinstance $DBServer -Database "$database"
#SMALL SECTION OF CODE FROM ADDCITY.SQL
INSERT #CITY VALUES
('$(CITY)', '$(STATE)', '$(COUNTRY)');
Thanks for your help!