**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      DC 20549**





**FORM
      10-QSB**





x
      Quarterly Report
      pursuant to Section 13 or 15(d) of the Securities Exchange Act of
      1934





For
      the
      quarterly period ended **March
      31, 2006**





o
      Transition Report
      pursuant to 13 or 15(d) of the Securities Exchange Act of 1934





For
      the
      transition period ______________ to ______________





Commission
      File Number 0-26709





**ECUITY,
      INC.**





(Exact
      name of small Business Issuer as specified in its charter)


Nevada
              98-0201259(State
                  or other jurisdiction ofincorporation or organization)
              (IRS
                  Employer Identification No.)





2001
      Sixth Avenue, Suite 3302, Seattle, WA 98121





(Address
      of principal executive offices)





(425)
      562-2900





Issuer's
      telephone number, including area code





Former
      address: 800 Bellevue Way NE, Suite 600, Bellevue, WA 98004





(Former
      name, former address and former fiscal year, if changed since last
      report)





Check
      whether the issuer (1) 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 issuer was required to file such reports),
      and
      (2) has been subject to such filing requirements for the past 90 days x Yeso
      No





State
      the
      number of shares outstanding of each of the issuer's classes of common stock,
      as
      of the latest practicable date: 284,184,853 shares of $0.001 par value common
      stock outstanding as of May 19, 2006.











**PART
      I - FINANCIAL INFORMATION**





**PART
                  I - FINANCIAL INFORMATION**Item
                  1.
              
              Consolidated
                  Financial Statements:Consolidated
                  Balance Sheetas
                  of March 31, 2006 (unaudited)
              
              1Consolidated
                  Statements of Operationsfor
                  the 3-month and 9-month periods endedMarch
                  31, 2006 and 2005 (unaudited)
              
              3Consolidated
                  Statements of Cash Flowsfor
                  the 9-month periods endedMarch
                  31, 2006 and 2005 (unaudited)
              
              4Consolidated
                  Statements of Changes in Shareholders' Deficitfor
                  the year ended June 30, 2005and
                  the 9-month period ended March 31, 2006 (unaudited)
              
              5Notes
                  to Consolidated Financial Statements (unaudited)
              
              6Item
                  2.
              
              Management's
                  Discussion and Analysis ofFinancial
                  Condition and Results ofOperations
              
              10Item
                  3.
              
              Quantitative
                  and Qualitative Disclosures About Market Risk
              
              15Item
                  4.
              
              Controls
                  and Procedures
              
              15**PART
                  II.**
              
              **OTHER
                  INFORMATION**
              
              16Item
                  1.
              
              Legal
                  Proceedings
              
              16Item
                  2.
              
              Changes
                  in Securities
              
              16Item
                  3.
              
              Defaults
                  Upon Senior Securities
              
              17Item
                  4.
              
              Submission
                  of Matters to a Vote of Security Holders
              
              17Item
                  5.
              
              Other
                  Information
              
              17Item
                  6.
              
              Exhibits
              
              17Signatures
              
              17Certifications
              
              17










**ECUITY,
      INC. AND SUBSIDIARIES**


**CONSOLIDATED
      BALANCE SHEET**


**March
      31, 2006**


**(unaudited)**





March
                31, 2006ASSETSCurrent
                Assets:Cash
                and cash equivalents
            
            $
            66,732Accounts
                Receivable, net of allowance of $ 95,481 at March 31, 2006
            
            
            400,613Prepaid
                expenses
            
            
            24,557Inventory
            
            
            800Total
                Current Assets
            
            
            492,702Deposits
            
            
            116,129Property
                and equipment, net
            
            
            348,871Acquired
                customer list, net of amortization
            
            
            869,381Total
                Assets
            
            $
            1,827,083





The
      Accompanying Notes are an integral part of the unaudited Consolidated Financial
      Statements.




1




**ECUITY,
      INC. AND SUBSIDIARIES**


**CONSOLIDATED
      BALANCE SHEET (continued)**


**March
      31, 2006**


**(unaudited)**





March
                31, 2006**LIABILITIES
                AND SHAREHOLDERS’ DEFICIT**Current
                Liabilities:Bank
                overdraft
            
            $
            61,754Loans
                payable
            
            
            1,372,074Loans
                payable - related parties
            
            
            1,224,371Short-term
                portion of derivative instruments liability
            
            
            1,798,065Current
                portion of capital lease obligation
            
            
            15,766Accounts
                payable and accrued liabilities
            
            
            4,209,271Deposits
                and advance billings
            
            
            136,186Total
                Current Liabilities
            
            
            8,817,487Long-Term
                Liabilities:Notes
                payable
            
            
            1,250,000Long-term
                portion of derivative instruments liability
            
            
            2,966,840Total
                Liabilities
            
            
            13,034,327SHAREHOLDERS’
                DEFICITShare
                Capital:
              Authorized:
                400,000,000 common shares, par value $0.001 per shareIssued
                and outstanding:
              271,413,944
                common shares outstanding at March 31, 2006
            
            
            271,414Additional
                paid-in-capital
            
            
            12,855,176Additional
                paid-in-capital stock options issued
            
            
            211,378Deficit
            
            
            (24,545,212
            )Total
                Shareholders’ Deficit
            
            
            (11,207,244
            )Total
                Liabilities and Shareholders’ Deficit
            
            $
            1,827,083





The
      Accompanying Notes are an integral part of the unaudited Consolidated Financial
      Statements.




2




**ECUITY,
      INC. AND SUBSIDIARIES**


**CONSOLIDATED
      STATEMENTS OF OPERATIONS**


**For
      the 3- and 9-month periods ended March 31, 2006 and 2005**


**(unaudited)**




Three
                Months Ended
            
            Nine
                Months EndedMarch
                31
            
            March
                312006
            
            2005
            
            2006
            
            2005Revenues
            
            $
            582,020
            
            
            664,859
            
            
            1,847,327
            
            
            2,320,421Cost
                of Revenues
            
            
            390,171
            
            
            399,759
            
            
            1,207,249
            
            
            1,551,534Gross
                Margin
            
            
            191,849
            
            
            265,100
            
            
            640,078
            
            
            768,887Operating
                Expenses:Selling
                Expenses
            
            
            78,236
            
            
            117,409
            
            
            297,361
            
            
            379,483General
                and Administrative Expenses
            
            
            621,013
            
            
            1,608,927
            
            
            1,928,125
            
            
            3,918,714Depreciation
                and amortization
            
            
            33,469
            
            
            33,064
            
            
            99,378
            
            
            99,192Amortization
                of Customer List
            
            
            78,216
            
            
            78,216
            
            
            234,648
            
            
            234,648Total
                Operating Expenses
            
            
            810,934
            
            
            1,837,616
            
            
            2,559,512
            
            
            4,632,037Operating
                loss
            
            
            (619,085
            )
            
            (1,572,516
            )
            
            (1,919,434
            )
            
            (3,863,150
            )Other
                income (expense):Gain
                on extinguishment of debt
            
            
            253,030
            
            
            0
            
            
            372,225
            
            
            0Other
                miscellaneous income (expense)
            
            
            0
            
            
            0
            
            
            15,585
            
            
            0Loss
                  on change in fair value of derivativeinstruments
            
            
            (142,029
            )
            
            0
            
            
            (142,029
            )
            
            0Interest
                expense
            
            
            (1,743,784
            )
            
            256,934
            
            
            (2,152,848
            )
            
            (145,540
            )Total
                other income (expense)
            
            
            (1,632,783
            )
            
            256,934
            
            
            (1,907,067
            )
            
            (145,540
            )Net
                Loss
            
            $
            (2,251,868
            )
            
            (1,315,582
            )
            
            (3,826,501
            )
            
            (4,008,690
            )Basic
                (loss) per share(a)
            
            $
            (0.01
            )
            $
            (0.01
            )
            $
            (0.01
            )
            $
            (0.03
            )Weighted
                Average Number of Common Shares Outstanding
            
            
            271,413,944
            
            
            148,672,383
            
            
            270,767,860
            
            
            148,672,383





**(a)**
            The
                calculation for fully diluted loss per share is not made, as the
                result
                would be anti-dilutive.





The
      Accompanying Notes are an integral part of the unaudited Consolidated Financial
      Statements.




3




**ECUITY,
      INC. AND SUBSIDIARIES**


**CONSOLIDATED
      STATEMENTS OF CASH FLOWS**


**For
      the 9-month periods ended March 31, 2006 and 2005**


**(unaudited)**




Nine
                Months EndedMarch
                312006
            
            2005Cash
                Flows from Operating Activities:Net
                loss
            
            $
            (3,826,501
            )
            
            (4,008,690
            )Adjustments
                To Reconcile Net Loss To Net Cash From Operating
                Activities:Depreciation
                and amortization
            
            
            334,026
            
            
            333,840Stock
                issued for services and debt
            
            
            56,599
            
            
            1,190,551Stock
                cancelled for non-performance of services
            
            
            (34,812)
            
            
            0Derivative
                instruments liabilities
            
            
            1,671,213
            
            
            0Deferred
                compensation
            
            
            0
            
            
            9,444Changes
                in assets and liabilities:Decrease
                in accounts receivable, net
            
            
            24,288
            
            
            158,348Increase
                in deposits
            
            
            (20,000)
            
            
            (78,093
            )Decrease
                in stock issuances due
            
            
            0
            
            
            (170,000
            )Increase
                in inventory
            
            
            0
            
            
            (800
            )(Increase)
                decrease in prepaids
            
            
            (3,030
            )
            
            8,426Increase
                in accounts payable
            
            
            386,838
            
            
            444,300Stock
                options outstanding
            
            
            0
            
            
            2,080Decrease
                in deposits on advance billings
            
            
            (98,374
            )
            
            (55,573
            )(1,509,754
            )
            
            (2,166,167
            )Cash
                Flows from Investing Activities:Purchase
                of property and equipment
            
            
            (14,557
            )
            
            (48,029
            )(14,557
            )
            
            (48,029
            )Cash
                Flows from Financing Activities:Proceeds
                from loans and capital leases
            
            
            1,723,691
            
            
            1,279,957Repayments
                of loans and capital leases
            
            
            (199,176)
            
            
            (2,181,286)Issuance
                of common stock for loan reductions
            
            
            0
            
            
            2,422,933Proceeds
                from issuance of common stock
            
            
            0
            
            
            588,000Repurchases
                of common stock
            
            
            (50,000
            )
            
            01,474,515
            
            
            2,109,604Net
                Increase (Decrease) In Cash and Cash Equivalents
            
            
            (49,796
            )
            
            (104,592
            )Cash
                and Cash Equivalents, Beginning of Period
            
            
            116,528
            
            
            107,695Cash
                and Cash Equivalents, End of Period
            
            $
            66,732
            
            
            3,103Interest
                  paid during the periods
            
            $
            73,942
            
            
            136,924




The
      Accompanying Notes are an integral part of the unaudited Consolidated Financial
      Statements .




4




**ECUITY,
      INC. AND SUBSIDIARIES**


**CONSOLIDATED
      STATEMENTS OF CHANGES IN SHAREHOLDERS’ DEFICIT**


**For
      the year ended June 30, 2005 and the 9 months ended March 31, 2006
      (unaudited)**




SHARES
              
              AMOUNT
              
              ADDITIONAL
                  PAID-IN-CAPITAL
              
              PAID-IN
                  CAPITAL STOCK OPTIONS ISSUED
              
              DEFICIT
              
              TOTALBalance,
                  June 30, 2004
              
              
              113,260,948
              
              $
              113,261
              
              
              8,601,184
              
              
              199,856
              
              
              (15,742,867
              )
              
              (6,828,566
              )Shares
                  for debt extension
              
              
              1,000,000
              
              
              1,000
              
              
              169,000
              
              
              
              
              
              
              
              
              170,000Sale
                  of common stock (cash)
              
              
              33,530,414
              
              
              33,530
              
              
              554,470
              
              
              
              
              
              
              
              
              588,000Sale
                  of common stockCredit
                  Line/debentures
              
              
              85,080,894
              
              
              85,081
              
              
              2,406,851
              
              
              
              
              
              
              
              
              2,491,932Vested
                  options
              
              
              
              
              
              
              
              
              
              
              
              9,442
              
              
              
              
              
              9,442Stock
                  options issued
              
              
              
              
              
              
              
              
              
              
              
              2,080
              
              
              
              
              
              2,080Shares
                  issued for services
              
              
              30,947,954
              
              
              30,948
              
              
              1,159,478
              
              
              
              
              
              
              
              
              1,190,426Shares
                  issued for Collateral
              
              
              3,900,000
              
              
              3,900
              
              
              (3,900
              )
              
              
              
              
              
              
              
              -Net
                  loss
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (4,975,844
              )
              
              (4,975,844
              )Balance,
                  June 30, 2005
              
              
              267,720,210
              
              
              267,720
              
              
              12,887,083
              
              
              211,378
              
              
              (20,718,711
              )
              
              (7,352,530
              )Shares
                  cancelled for non-performance
                  of services
              
              
              (381,266
              )
              
              (381
              )
              
              (34,431
              )
              
              
              
              
              
              
              
              (
                  34,812
              )Debt
                  converted to stock
              
              
              325,000
              
              
              325
              
              
              6,274
              
              
              
              
              
              
              
              
              6,599Shares
                  issued for services
              
              
              5,000,000
              
              
              5,000
              
              
              45,000
              
              
              
              
              
              
              
              
              50,000Shares
                    repurchased and cancelled
              
              
              (1,250,000
              )
              
              (1,250
              )
              
              (48,750
              )
              
              
              
              
              
              
              
              (50,000
              )Net
                  loss (9 months)
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (3,826,501
              )
              
              (3,826,501
              )Balance,
                  March 31, 2006
              
              
              271,413,944
              
              $
              271,414
              
              
              12,855,176
              
              
              211,378
              
              
              (24,545,212
              )
              
              (11,207,244
              )





The
      Accompanying Notes are an integral part of the unaudited Consolidated Financial
      Statements.





5


**ECUITY,
      INC. AND SUBSIDIARIES**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**MARCH
      31, 2006**


**(Unaudited)**





**1.**
            **Basis
                of Presentation**





The
      unaudited consolidated financial statements as of March 31, 2006 and for the
      3-
      and 9-month periods ended March 31, 2006 and 2005 included herein have been
      prepared by Ecuity, Inc. (“Ecuity”, or “Company”) and include all normal and
      recurring adjustments which are, in the opinion of management, necessary for
      a
      fair presentation of the financial position at March 31, 2006 pursuant to the
      rules and regulations of the Securities and Exchange Commission. Because a
      precise determination of many assets and liabilities is dependent upon future
      events, the preparation of consolidated financial statements for a period
      necessarily involves the use of estimates which have been made using careful
      judgment. The consolidated financial statements include the accounts of Ecuity,
      Inc. and its wholly-owned subsidiaries. All material intercompany accounts
      and
      transactions have been eliminated. Some items in the March 31, 2005 financial
      statements have been reclassified to conform to the presentation in the March
      31, 2006 financial statements.





This
      Quarterly Report on Form 10-QSB is qualified in its entirety by the information
      included in the Company's Annual Report to the SEC on Form 10-KSB for the period
      ended June 30, 2005.


**2.**
              **LOANS
                  AND OTHER CONTRACTUAL OBLIGATIONS
                  PAYABLE**


March
                  31, 2006Loan
                  due to bank - defaulted in year 2001 (unsecured)
              
              $
              155,666Unsecured
                  loans, payable on demand, with interest at 12% to 18% per annum
                  - non
                  related parties
              
              
              977,882Related
                  parties - with interest ranging from 4% to 18%
              
              
              468,071Related
                  party - convertible demand notes to Digitaria(1)
              
              
              756,300Short-term
                  portion of note payable to Fox Communications
              
              
              200,000Contract
                  for advance against lock box receipts
              
              
              38,526Total
                  current loans payable
              
              $
              2,596,445Short-term
                  portion of derivative instruments liabilities(1,
                  2)
              
              $
              1,798,065Currentportion of capital
                  lease obligation
              
              $
              15,766Long-term
                  portion of note due to Fox Communications
              
              $
              1,250,000Long-term
                  portion of derivative instruments liabilities(2)
              
              
              2,966,840Total
                  long-term debt
              
              $
              4,216,840





(1)
            -
                Digitaria Communication Networks, LLC (“Digitaria”) is entitled, at its
                option, to convert, and sell all or any part of the principal amount
                of
                the demand notes, plus accrued interest thereon, into shares of the
                Company’s common stock at the price per share equal to either (a) the
                closing share price on the day the Note was entered into or (b) the
                closing share price on the day that notice of exercise of Option
                to
                Convert is given to the Company. The convertible notes accrue interest
                at
                10% per annum.




6




The
      computed fair value at issuance of the options to convert (“Derivative
      Instruments Liability”), amounting to $756,119, has been recorded as a
      short-term liability in the Consolidated Balance Sheet at March 31, 2006, with
      the remainder of $181 ascribed to the carrying value of the Convertible Demand
      Notes. Since the notes are callable on demand, the difference between the
      carrying amount and the face amount of the Convertible Demand Notes, amounting
      to $756,119, was immediately recorded as an adjustment to the carrying amount
      in
      the Consolidated Balance Sheet and recorded as interest expense in the
      Consolidated Statement of Operations.





At
      March
      31, 2006, an adjustment was made to record the change in fair value of the
      short-term Derivative Instruments Liability related to the Digitaria notes,
      resulting in a Loss on Change in Fair Value of Derivative Instruments of
      $142,029 in the Consolidated Statement of Operations.




(2)
            -
                On March 30, 2006,the
                Companyentered into a Securities Purchase Agreement (the “SPA”) with Cornell
                Capital Partners, LP (“Cornell”), pursuant to which the Company issued to
                Cornell secured convertible debentures, convertible into shares of
                the
                Company’s common stock, par value $0.001, (a) in the principal amount of
                $2,921,192,issued
                to consolidate the outstanding amounts of principal on prior fundings,
                amounting to $2,605,578, plus accrued and unpaid interest to date
                of
                $315,614, and (b) in the principal amount of $172,500, issued to
                provide
                new funding to the Company (the “Convertible Debentures”). The Convertible
                Debentures are secured by substantially all of the Company’s assets, have
                maturity dates of December 31, 2008, and accrue interest at 6% per
                annum.




Cornell
      is entitled, at its option, to convert, and sell all or any part of the
      principal amount of the debentures, plus accrued interest thereon, into shares
      of the Company’s common stock at the price per share equal to the lesser of (a)
      $0.00713 (the “Fixed Conversion Price”) or (b) eighty percent (80%) of the
      lowest Closing Bid Price of the Common Stock during the 30 trading days
      immediately preceding the Conversion Date as quoted by Bloomberg,
      LP.





The
      computed fair value at issuance of the options to convert (“Derivative
      Instruments Liability”), amounting to $3,866,757, has been recorded as a
      liability in the Consolidated Balance Sheet at March 31, 2006. Based on an
      estimate of the conversion activity over the next 12 months, $899,917 has been
      recorded as a current liability at March 31, 2006, with the remaining $2,966,840
      recorded as a long-term liability. The excess of the fair value over the face
      amount of the Convertible Debentures, amounting to $773,065, was recorded as
      Interest Expense in the Consolidated Statement of Operations. Beginning in
      April
      2006, a monthly accretive charge to Interest Expense will be recorded over
      the
      outstanding term of the Convertible Debentures to recognize the face value
      of
      the debentures.




The
      Company may redeem a portion or all outstanding principal amounts plus accrued
      interest due and outstanding under the Convertible Debentures prior to their
      maturity dates. The redemption price is equal to 120% of the principal amount
      of
      the Convertible Debentures being redeemed.




In
      Addition to the table above:


The
      Company signed an employment contract with Mr. Andrew Buffmire to be the
      Company’s CEO on May 20, 2005. The contract stipulated the starting annual wage
      to be $180,000. Subsequently an Amendment was signed on July 24, 2005 that
      reduced Mr. Buffmire’s annual **** salary
      to
      $144,000 until the Company reaches positive cash flow from operations, at which
      time the salary would revert back. Mr. Buffmire resigned as CEO effective
      November 30, 2005. As the Company was able to only partially pay Mr. Buffmire
      his full or reduced salary, he is owed $50,250 in accrued salary as of March
      31,
      2006.




7




The
      Amendment also stated that if the Company is unable to fully pay his salary
      at
      this new level within 30 days of the due date of that salary, Mr. Buffmire
      shall, in lieu of any such shortfall, receive fifty percent (50%) of such
      shortfall in the form of shares of stock in the Company at a value equal to
      the
      closing price of the Company’s common stock on the date of the execution of the
      Amendment. Mr. Buffmire will also be issued warrants equal to the number of
      shares issued at the same closing price. As of March 31, 2006, Mr. Buffmire
      is
      owed 1,526,781 shares and an equal number of warrants. The issuance of these
      shares and warrants is contingent upon the shareholder’s approval of the
      increase in the Company’s authorized shares.





**3.
      Earnings Per Share** ****





Statement
      of Financial Accounting Standards No. 128, "Earnings per Share" requires the
      presentation of basic earnings per share and diluted earnings per share. Basic
      and diluted earnings per share computations presented by the Company conform
      to
      the standard and are based on the weighted average number of shares of Common
      Stock outstanding during the periods presented.





**4.
      Capital Assets**





The
      following table sets forth the capital assets of the Company and its
      wholly-owned subsidiaries.





**March
      31, 2006**


Description
                  of Asset
              
              Value
                  after
                ImpairmentComputers
                  andEquipment
              
              $
              323,558Computer
                  Software
              
              
              81,921Switch
                  Equipment
              
              
              152,698Leasehold
                  Improvements
              
              
              25,488Office
                  Equipment
              
              
              31,894615,559Accumulated
                  Depreciationand
                  Amortization
              
              
              (266,688
              )Net
                  Book Value
              
              $
              348,871





8





**ECUITY,
      INC. AND SUBSIDIARIES**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS (continued)**


**MARCH
      31, 2006**





**5.
      Acquired Subscriber Base**




The
      following table presents the components of the Company’s acquired definite life
      intangible assets and goodwill and other indefinite life intangible assets
      included in the accompanying Consolidated Balance Sheet as of March 31,
      2006:


Carrying
                  Value after Impairment
              
              Reduction
                  for sale of Conference Calling
              
              Accumulated
                  Amortization
              
              Net
                  Carrying ValueAcquired
                  CustomerList
                  forTelephony
                  andISPs
              
              $
              1,864,000
              
              
              260,707
              
              
              733,912
              
              
              869,381





**6.
      Income Taxes**




At
      March
      31, 2006, the Company had net operating loss carryforwards for Federal tax
      purposes of approximately $27,806,000. These carryforwards begin to expire
      in
      2020. A valuation allowance has been established to reflect the uncertainty
      of
      generating future taxable income necessary to utilize available tax loss
      carryforwards. ****




**7.
      Subsequent Events**




On
      April
      26, 2006, Cornell Capital Partners executed a Conversion Notice in the amount
      of
      Fifty-six Thousand One Hundred Ninety-two dollars ($56,192), representing a
      conversion under the terms of the Convertible Debenture dated March 30, 2006.
      This resulted in the sum of Twelve Million Seven Hundred Seventy Thousand Nine
      Hundred Nine (12,770,909) restricted common stock shares being issued in
      certificate form in the name of Cornell Capital Partners, LP.





Since
      April 1, 2006 to May 19, 2006, Ecuity has raised an additional $138,000 from
      Digitaria Communications Networks in the form of Convertible Demand Notes.





**8.
      Going Concern**





Since
      inception, the Company has suffered recurring losses and net cash outflows
      from
      operations. The Company expects to continue to incur substantial losses to
      complete the development of its business. Since its inception, the Company
      has
      funded operations through common stock issuances and related party loans in
      order to meet its strategic objectives. Management is pursuing sufficient
      funding to meet its business objectives, including anticipated cash needs for
      working capital, and is currently evaluating several financing options. In
      order
      to sustain operations and meet debt service obligations, the Company needs
      to
      raise a minimum of $600,000 over the next 6 months or renegotiate the terms
      of its current debt obligations, which may result in a lesser amount being
      required. While it was expected that the Company would be able to raise these
      funds largely through it channel partner, Digitaria Communication Networks,
      LLC
      and to a lesser degree through its Equity Line of Credit Agreement with Cornell
      Capital Partners, LLC under which it may obtain up to $20,000,000 in equity
      financing, the Company’s current stock price may effectively preclude this
      alternative, requiring the need to raise funds through additional debt
      instruments or pursuant to a merger, restructuring or other strategic change
      in
      corporate structure. Additionally, without a substantial amount of financing
      within the next three (3) months, the Company may have to curtail or cease
      operations. However, there can be no assurance that the Company will be able
      to
      obtain sufficient funds to continue the development of and the sale of its
      products. As a result of the foregoing, there exists substantial doubt about
      the
      Company’s ability to continue as a going concern. These consolidated financial
      statements do not include any adjustments that might result from the outcome
      of
      this uncertainty.




9




The
      $600,000 will provide for our short-term obligation to reduce some of our debt,
      pay certain obligations as they become due and provide working capital, until
      such time as net profits from operations are sufficient to maintain a positive
      cash flow and allow sufficient time to implement our business plan for ongoing
      operations. The Company is continuing its efforts to obtain long-term funding
      through equity or debt sources to obtain this $600,000 that management estimates
      necessary for ongoing operations. The receipt of additional equity will require
      shareholder action.





There
      can
      be no assurance, however, that the Company will be able to obtain sufficient
      funds to continue the development of and the sale of its products.





**Item
      2. Management’s Discussion and Analysis of Financial Condition and Results of
      Operations**





**Overview**




ECUITY
      is
      a facilities-based telecommunication carrier providing Voice over Internet
      Protocol (“VoIP”) service offerings as well as legacy telecommunication
      services. ECUITY currently provides VoIP services over FTTP including fiber
      to
      residences and businesses, VoIP over WiFi (VoWiFi), and Business VoIP
      Services including IP-PBX and IP-Centrix solutions.





The
      Company has implemented its VoIP service and has been able to provide VoIP
      services to several hundred end-users over various broadband pathways, including
      wireline broadband, broadband over wireless (WiFi) and Fiber-to-the-Premises
      (FTTP).  VoIP service offerings from the Company include business-related
      offerings such as hosted PBX replacement solutions for small business (IP-PBX),
      hosted IP trunking solutions (IP-Centrix), Remote Office and Mobile Worker
      solutions, with single or multi-line residential offerings for home offices
      and
      basic residential services.  The Company has been able to establish
      distribution relationships for the delivery of VoIP services through a variety
      of partnerships, including wholesale and retail channel relationships with
      Internet Service Providers (ISP) and telecommunications services resellers,
      a
      bundled services offering with a telecommunications equipment manufacturer,
      a
      voice over WiFi provider with city-wide high speed broadband deployments, and
      a
      community-wide VoIP over FTTP service to a large residential development in
      a
      suburb of Seattle, Washington.





The
      ECUITY service offerings are increasingly comprised of its Voice over Internet
      Protocol (“VoIP”) service offering and high speed broadband Internet
      services.  Ecuity’s traditional Web-hosting, DSL and dial up Internet
      services continue to be a source of revenue to Ecuity with adequate margin
      to
      justify the delivery of such services. The ECUITY legacy service business
      includes 800
      service, 1 Plus (long distance) services, Internet Dial-Up Services, Web-Hosting
      and Digital Subscriber Line (DSL) broadband internet services. Ecuity can
      currently deliver telecommunications services over virtually any broadband
      platform and over the PSTN as well as over almost any device.




10




·
            Ecuity’s
                sales and marketing efforts have primarily targeted four markets:


o
            Small
                and medium sized business market through both direct sales and channel
                partners.


o
            Fiber
                optic cable networks to the premise to large scale master planned
                communities, apartment and condominium developments and commercial
                office
                buildings.


o
            Wholesale
                voice and data services to WiFi providers to large scale city and
                community wide WiFi deployment.


o
            Wholesale
                to independent ISP providers.





**Plan
      of Operations**





In
      January, 2006 management adopted a formal turn around plan in order to 1)
      dramatically cut the negative burn rate, 2) get to cash flow break even as
      quickly as possible, and 3) focus on those core areas of our business that
      provide higher margins and growth. To do this we are in the process
      of:





·
            Downsizing
                the Company in order to cut monthly operating cost and achieve
                profitability as quickly as possible; we have already made cuts and
                we are
                in the process of making additional cuts to operating
                costs.


·
            Focusing
                on our core business of VoIP telephone and high-speed Internet services,
                which are highly profitable.


·
            Increasing
                sales and marketing efforts by 1) focusing on resellers with whom
                we have
                a current relationship, 2) increasing focus on direct sales efforts
                with
                faster time to revenue, and 3) only developing new channel partners
                and
                potential joint venture arrangements that do not require extended
                marketing efforts.


·
            Restructuring
                the balance sheet and overall financial structure of the Company
                in
                cooperation with its largest
                creditors.


·
            Raising
                additional cash through channel partners, joint venture partners
                and
                senior debt holders in order to sustain the business operations through
                to
                cash flow break-even.


·
            Achieve
                a self-sustaining positive cash flow not later than the beginning
                of
                calendar Q4 2006.





Since
      the
      adoption of the turn around plan, the Company has achieved the
      following:





1.
      It has
      raised $655,800 in operating loans from Digitaria Communication Networks, LLC,
      with whom it has an agreement to be the exclusive provider of VoIP telephone
      services and high speed broadband data services for Digitaria’s fiber to the
      premises business to master planned communities and apartment and condominium
      properties. This money has been used to initiate substantial cost cutting
      measures and to negotiate further restructuring of Ecuity’s financial
      obligations. The money was raised through convertible demand promissory notes.





2.
      It has
      achieved a fifteen percent (15%) reduction in the recurring operating expenses
      from the previous quarter.





3.
      It has
      moved its corporate headquarters to smaller, less expensive office
      space.





11




On
      March
      30, 2006, the
      Company entered
      into a Securities Purchase Agreement (the “SPA”) with Cornell Capital Partners,
      LP (“Cornell”), pursuant to which the Company issued to Cornell secured
      convertible debentures, convertible into shares of the Company’s common stock,
      par value $0.001, (a) in the principal amount of $2,921,192,  issued
      to
      consolidate the outstanding amounts of principal on prior fundings, amounting
      to
      $2,605,578, plus accrued and unpaid interest to date of $315,614, and (b) in
      the
      principal amount of $172,500, issued to provide new funding to the Company
      (the
“Convertible Debentures”). The Convertible Debentures are secured by
      substantially all of the Company’s assets, have maturity dates of December 31,
      2008, and accrue interest at 6% per annum.




Cornell
      is entitled, at its option, to convert, and sell all or any part of the
      principal amount of the debentures, plus accrued interest thereon, into shares
      of the Company’s common stock at the price per share equal to the lesser of (a)
      $0.00713 (the “Fixed Conversion Price”) or (b) eighty percent (80%) of the
      lowest Closing Bid Price of the Common Stock during the 30 trading days
      immediately preceding the Conversion Date as quoted by Bloomberg,
      LP.




The
      Company may redeem a portion or all outstanding principal amounts plus accrued
      interest due and outstanding under the Convertible Debentures prior to their
      maturity dates. The redemption price is equal to 120% of the principal amount
      of
      the Convertible Debentures being redeemed.





In
      light
      of Ecuity’s current financial situation with overhead higher than our revenues
      can support, a change in organizational and reporting structure was required.
      Ecuity now operates as a flat organization with its management team taking
      on
      additional responsibilities, and has appointed a turn around Director.


Our
      current objectives are short term in nature. These objectives are:





·
            Preserve
                a positive cash balance


·
            Set
                up a sustainable business model


·
            Return
                Company to a positive EBITDA position by the end of calendar
                2006





In
      order
      to accomplish these objectives we are doing the following: reduction of the
      general overhead, discontinuing unprofitable product lines, reduction of head
      count, complete a reorganization of the staff, and re-focusing our sales
      efforts.





Based
      on
      our analysis, our legacy business is becoming less profitable and volumes are
      on
      a steady decline. Focusing on VOIP provides us with our best opportunity for
      growth. We have also initiated routing some legacy business over new carriers,
      which has allowed us to effect recurring reductions in our network costs and
      thus increase our profit margin in this legacy business.





We
      are
      focusing our efforts on expanding our Voice over IP subscriber base through
      our
      existing channel partners and service providers. We have already invested a
      great deal of time, money and other resources into these current relationships. We
      will
      not however pursue any new channel partners, which will require extended
      marketing efforts at this time. Instead our sales efforts have shifted to a
      direct model selling to the small and medium business market. Our belief is
      that
      through this plan we can shorten the sales cycle and therefore time to cash
      collections.





Although
      the next few quarters will be difficult, if we have a solid funding plan to
      get
      us through our cash shortfall, we can continue to grow the business and get to
      the point where we are self sustaining. Our funding requirement on a move
      forward basis is a minimum of $600,000 **.** Digitaria Communication Networks, LLC has already provided $914,300 operating
      cash to the Company since October 2005, in return for convertible demand notes,
      $655,800 of which has been advanced to the Company since January 1, 2006. Funds
      collected to date have been used to bring critical vendors current and to fund
      the operational shortfall. The Company estimates the additional funds of
      $600,000 will be used to increase sales and marketing efforts to capture market
      share, for maintenance and improvements on our Network Operating Center (“NOC”),
      for the addition of technical support and customer service staff, and to
      continue to fund monthly shortfall until operating profitability is
      reached.




12




Ecuity
      and Digitaria have agreed that Ecuity will provide VoIP and other
      telecommunications services under an exclusive services agreement to provide
      services to Fiber-to-the Premise (FTTP) communities that may be developed by
      or
      through Digitaria. It is the understanding of the Company that the principals
      of
      Digitaria include a number of individuals and entities experienced in real
      estate and land development.





We
      anticipate that a minimum of $600,000 will be required to sustain existing
      operations for the next 6 months from the balance sheet date and to sustain
      corporate operations, which are segregated from its Ecuity Advanced
      Communications (EAC) subsidiary operations. Currently, revenue in EAC is
      insufficient to provide for all operating costs, including payroll, rent,
      selling expenses and costs of sales. Net operating losses for the 3-month period
      indicate that EAC requires an amount in excess of $100,000 per month as
      additional funds to support the continued retirement of past due vendor debt
      and
      to cover the negative monthly operating costs. This shortfall has partially
      been
      offset by advances from Ecuity, Inc, (the Corporate holding company) along
      with
      the increase in liabilities associated with EAC. Ecuity, Inc. has no direct
      income, therefore unless subsidiary revenues are available to use by Corporate,
      there is approximately a $10,000 per month shortfall for cash to pay corporate
      administrative expenses.





Completion
      of our plan of operation is subject to obtaining adequate financing. This
      includes the debt service requirements for corporate obligations as well as
      the
      debt obligation of EAC to Fox Communications as a result of the assets
      purchased. We cannot assure investors that adequate financing will be obtained.
      In the absence of increased revenues, we may be unable to proceed with our
      plan
      of operation. Without significant revenues and cash inflows from debt or equity
      funding within the next six months, we anticipate we will not be able to
      continue with our present operating structure **.**




The
      foregoing represents our best estimate of our cash needs based on current
      planning and business conditions. The exact allocation, purposes and timing
      of
      any monies raised in subsequent private financings may vary significantly
      depending upon the exact amount of funds raised and status of our business
      plan.





**Results
      of Operations**





The
      unaudited financial statements presented herein include the Consolidated
      Statements of Operations for the three-
      and nine-month periods ended March 31, 2006 and 2005, and the Consolidated
      Balance Sheet at March 31, 2006. Our financial statements are prepared on a
      consolidated basis and all intercompany transactions have been eliminated.





In
      the
      3-month period ended March 31, 2006, we incurred an operating loss of $619,085
      and a net loss of $2,251,868 compared to an operating loss of $1,572,516 and
      a
      net loss of $1,315,582 for the same period in 2005. The Company’s revenue from
      long distance and Internet service decreased to $582,020 in the current 3-month
      period compared to $664,859 in the same period in 2005 due to the loss of
      customers and related revenue, as well as legacy Internet dial-up customers
      moving to cable and DSL service providers. The
      decreased operating loss in the 3-months ended March 31, 2006 compared to the
      operating loss in the 3-months ended March 31, 2005 resulted primarily from
      reduced operating expenditures for salaries, rent, and advertising in the
      current year. In addition, no expense for issued stock for services was incurred
      in 2006 compared to $756,600 for the same 3-month period in 2005. Interest
      expense in the 3-month period ended March 31, 2006, includes the excess value
      assigned to the derivative instruments liabilities in the Company’s convertible
      debt and calculated in accordance with Statement of Financial Accounting
      Standards No. 133 “Accounting for Derivative Instruments and Hedging
      Activities”, amounting to $773,065. Total interest expense was $1,743,784 for
      the three months ended March 31, 2006 compared to $(256,934) for the three
      months ended March 31, 2005, primarily due to reversal of interest charges
      on
      the Fox Communications notes in 2005 and $756,119 of additional interest charges
      related to the derivative instruments liabilities on the Digitaria demand notes.
      The Company recognized a loss of $142,029 in the 3-months ended March 31, 2006,
      related to the change in the fair value of the Digitaria derivative
      instruments.




13




In
      the
      9-month period ended March 31, 2006, we incurred a net loss of $3,826,501
      compared to a net loss of $4,008,690 for the same period in 2005. The
      Company’s revenue for long distance and Internet service decreased to $1,847,327
      in the current 9-month period compared to $2,320,421 in the same period in
      2005
      due to the ongoing loss of customers and related revenue. The lower revenues
      were offset by lower costs paid to carriers, resulting in an increase in gross
      profit percentage to 34.65% in the current 9-month period compared to 33.14%
      for
      the same period in 2005. The
      decreased operating loss of $1,919,434 in the 9-months ended March 31, 2006
      compared to a loss of $3,863,150 in the 9-months ended March 31, 2005 resulted
      primarily from reduced expenditures for salaries, rent, and advertising in
      the
      current year. In addition, no expense for issued stock for services was incurred
      in 2006 compared to $1,190,551 for the same 9-month period in 2005. Interest
      expense in the 9-month period ended March 31, 2006, includes the excess value
      assigned to the derivative instruments liabilities in the Company’s convertible
      debt and calculated in accordance with Statement of Financial Accounting
      Standards No. 133 “Accounting for Derivative Instruments and Hedging
      Activities”, amounting to $773,065. Total interest expense was $2,152,848 for
      the nine months ended March 31, 2006 compared to $145,540 for the nine months
      ended March 31, 2005, primarily due to reversal of interest charges on the
      Fox
      Communications notes in 2005 and $756,119 of additional interest charges related
      to the derivative instruments liabilities on the Digitaria demand notes. The
      Company recognized a loss of $142,029 in the 9-months ended March 31, 2006,
      related to the change in the fair value of the Digitaria derivative instruments




Since
      incorporation, we have funded our operations through private loans and equity
      financings. At March 31, 2006, our total assets were $1,827,083, consisting
      of
      cash of $66,732, accounts receivable, net of $400,613, other current assets
      of
      $25,357, property and equipment of $348,871, non-current deposits of $116,129
      and the purchased subscriber list of Fox Communications in the amount of
      $869,381 (net of amortization of $733,912 and a reduction from the sale of
      the
      conferencing services of $260,707). Total liabilities amounted to $13,034,327,
      consisting primarily of a bank overdraft of $61,754, accounts payable and
      accrued liabilities of $4,209,271, deposits on advanced billings of $136,186,
      loans and notes payable and capital lease obligations of $3,706,545, liabilities
      for derivative instruments of $4,764,905, and a defaulted bank loan payable
      of
      $155,666. Total liabilities of $890,884, including the defaulted bank loan
      payable of $155,666, are liabilities of the Company’s inactive subsidiary, Y3K,
      Inc.





**LIQUIDITY
      AND CAPITAL RESOURCES**





The
      working capital deficit increased to $8,324,785 at March 31, 2006 from a deficit
      of $7,523,191 as of June 30, 2005, primarily as a result of restructuring the
      Cornell debt and the liabilities for short-term derivative instruments. In
      the
      9-month period, cash decreased by $49,796, net accounts receivable decreased
      by
      $24,288, accounts payable increased by $386,838, and deposits on advance
      billings to customers decreased by $98,374.





In
      the
      9-month period ended March 31, 2006, we incurred a net loss of $3,826,501
      compared to a loss of $4,008,690 for the same period in 2005. The Company’s
      revenue for long distance and Internet service decreased in the current 9-month
      period compared to the same period in 2005 due to the ongoing loss of customers
      and related revenue. The lower revenues were offset by lower costs paid to
      carriers, resulting in an increase in gross profit percentage to 34.65% in
      the
      current 9-month period compared to 33.14% for the same period in 2005. The
      decreased operating loss of $1,919,434 in the 9-months ended March 31, 2006
      compared to a loss of $3,863,150 in the 9-months ended March 31, 2005 resulted
      primarily from reduced expenditures for salaries, rent, and advertising in
      the
      current year. In addition, no expense for issued stock for services was incurred
      in 2006 compared to $1,190,551 for the same 9-month period in 2005. Interest
      expense in the 9-month period ended March 31, 2006, includes the excess value
      assigned to the derivative instruments liabilities in the Company’s convertible
      debt and calculated in accordance with Statement of Financial Accounting
      Standards No. 133 “Accounting for Derivative Instruments and Hedging
      Activities”, amounting to $773,065. Total interest expense was $2,152,848 for
      the nine months ended March 31, 2006 compared to $145,540 for the nine months
      ended March 31, 2005, primarily due to reversal of interest charges on the
      Fox
      Communications notes in 2005 and $756,119 of additional interest charges related
      to the derivative instruments liabilities on the Digitaria demand notes. The
      Company recognized a loss of $142,029 in the 9-months ended March 31, 2006,
      related to the change in the fair value of the Digitaria derivative
      instruments.




14




Revenues
      from the Fox asset purchase are recognized by our wholly-owned subsidiary,
      Ecuity Advanced Communications, Inc. (“EAC”). EAC’s business is primarily
      related to VoIP telephone voice and data services as well as traditional
“legacy” long distance, dial tone, dial up and broadband internet data services,
      and web hosting. The ISP hosting line is sold on a monthly, quarterly and annual
      subscription basis with fees for services billed to the customer and paid in
      advance. This cash is received and recorded to deferred income on the balance
      sheet to be applied as the monthly sales revenues are earned and recognized
      on a
      pro-rata basis. As the cash is received, it is used to pay current operating
      expenses. The Company’s VoIP and long distance services are billed in arrears
      based on monthly subscriber income and actual usage based on agreed upon service
      plans. Appropriate Federal, state and other fees are added to the service
      minutes and are billed to the customer using an automated billing
      system.





All
      of
      the Company's sales revenues from billed services flow through accounts
      receivable.





**Recent
      Accounting Pronouncements**





In
      December 2004, the FASB issued SFAS No. 123 (revised 2004), "Share-Based
      Payment" (SFAS No. 123R), which replaces SFAS No. 123, "Accounting for
      Stock-Based Compensation" (SFAS No. 123) and supersedes APB Opinion No. 25,
      "Accounting for Stock Issued to Employees." As a small business issuer, SFAS
      No.
      123R requires all share-based payments to employees, including grants of
      employee stock options and employee stock purchase plans to be recognized in
      the
      financial statements based on their fair values, beginning with the first
      interim or annual period of the Company's first fiscal year beginning after
      December 15, 2005, with early adoption encouraged. In addition, SFAS No. 123R
      will cause unrecognized expense related to unvested options granted prior to
      the
      date of initial adoption to be recognized as a charge to results of operations
      over the remaining vesting period. The Company is required to adopt SFAS No.
      123R in the first quarter of 2007, beginning July 1, 2006. Under SFAS No. 123R,
      the Company must determine the appropriate fair value model to be used for
      valuing share-based payments, the amortization method for compensation cost
      and
      the transition method to be used at the date of adoption. The transition
      alternatives include the modified prospective and retrospective adoption
      methods. Under the modified retrospective methods, prior periods may be restated
      either as of the beginning of the year of adoption or for all periods presented.
      The modified prospective method requires that compensation expense be recorded
      for all unvested stock options and share awards as of the beginning of the
      first
      quarter of adoption of SFAS No. 123R, while the modified retrospective methods
      would record compensation expense for all unvested stock options and share
      awards beginning with the first period restated. The Company is evaluating
      the
      requirements of SFAS No. 123R and has not yet determined whether the adoption
      of
      SFAS No. 123R will have a material impact on the consolidated results of
      operations, earnings per share and consolidated statement of cash flows. The
      Company has not determined the method of adoption or the effect of adopting
      SFAS
      No. 123R.





**Item
      3** **.** **Quantitative
      and Qualitative Disclosures About Market Risk** ****





At
      the
      present time the Company does not have any investments in securities and
      therefore there would not be cause for any material impact on the financial
      statements in the event of a drastic change in interest rates or other factors
      that could influence the stability of investment securities.





**Item
      4.********Controls
      and Procedures**




15




**(a)**
            **Evaluation
                of Disclosure Controls and
                Procedures:**


As
      of the
      end of the period covered by this Report, the Company carried out an evaluation,
      under the supervision and with the participation of the Company’s Principal
      Executive Officer and Principal Accounting Officer, of the effectiveness of
      the
      design and operation of the Company’s disclosure controls and procedures. The
      Company’s disclosure controls and procedures are designed to produce a
      reasonable level of assurance of achieving the Company’s disclosure control
      objectives. The Company’s Principal Executive Officer and Principal Accounting
      Officer have concluded the Company’s disclosure controls and procedures were, in
      fact, adequate and effective to ensure that material information relating to
      the
      Company that is required to be disclosed by the Company in reports that it
      files
      or submits under the Securities Exchange Act of 1934, as amended, is recorded,
      processed, summarized and reported within the time periods specified in the
      rules of the SEC and accumulated and communicated to the Company’s management,
      including its Principal Executive Officer and Principal Accounting Officer,
      to
      allow timely decisions regarding required disclosure.





**(b)**
            **Changes
                in Internal Controls Over Financial
                Reporting:**





In
      connection with the evaluation of the Company’s internal controls during the
      Company’s last fiscal quarter, the Company’s Principal Executive Officer and
      Principal Accounting Officer have determined that there are no changes to the
      Company’s internal controls over financial reporting that have materially
      affected, or reasonably likely to materially effect, the Company’s internal
      controls over financial reporting.





**PART
      II- OTHER INFORMATION**





**Item
      1. Legal Proceedings:** ****





The
      lawsuit Jordan Shapiro vs. Ecuity, Inc. was settled in May 2006 for Fifty
      Thousand Dollars ($50,000) to be paid out in five monthly payments beginning
      May
      2006.





The
      lawsuit Stern and Company vs. Ecuity, Inc. was settled in May 2006 for Fifteen
      Thousand Dollars ($15,000) to be paid out in three monthly payments beginning
      June 2006.




In
      April
      2006, a judgment was filed against the Company by the former landlord, Novell
      Inc., for $187,439.




Other
      than the above, there has been no change in legal proceedings since the filing
      of the 10-QSB for the quarter ended December 31, 2005.





**Item
      2. Changes in Securities:**





During
      the 9-month period, a (3,693,734) net issuance of shares of common stock
      were issued (and canceled) as follows:





Person/Class
            
            #
                of Shares Issued
            
            Consideration
                (Value of Service)
            
            Date
                of Transaction
            
            Description
                of Services RenderedShares
                canceled
            
            
            (381,266
            )
            $
            (34,812
            )
            
            September
                1, 2005
            
            
            Consulting
                fees not renderedIndividual
            
            
            325,000
            
            
            6,599
            
            
            July
                6, 2005
            
            
            Conversion
                of debtFox
                Communications
            
            
            (1,250,000
            )
            
            (50,000
            )
            
            July
                to Nov. 2005
            
            
            Repurchase
                of shares held by FoxCornell
              Capital
            
            
            5,000,000
            
            
            50,000
            
            
            September
                1, 2005
            
            
            Loan
                fee for Lease Transaction





16





**Item
      3. Defaults Upon Senior Securities -**  **None.**





**Item
      4. Submission of Matters to a Vote of Security Holders - None.**





**Item
      5. Other Information -**  **None.**





**Item
      6. Exhibits**




**Index
      to Exhibits:**


99.1
              Certification
                  Pursuant to the 18 U.S.C. Section 1350, as Adopted Pursuant to
                  Section 906
                  of the Sarbanes-Oxley Act of 200299.2
              Certification
                  Pursuant to the 18 U.S.C. Section 1350, as Adopted Pursuant to
                  Section 906
                  of the Sarbanes-Oxley Act of 200299.3
              Certification
                  by M. Shane Smith99.4
              Certification
                  by King Wm. S. Cole





SIGNATURES





In
      accordance with the requirements of the Exchange Act, the registrant caused
      this
      report to be signed on its behalf by the undersigned, thereunto duly
      authorized.




ECUITY, INC.Date: May 21, 2006
            
            /s/ M.
SHANE
              SMITHM.
              Shane Smith, CEO and Chairman of the Board




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