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 SEPTEMBER 30, 2004

|_|   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 of              (IRS Employer Identification No.)
 incorporation or organization)

               800 Bellevue Way NE, Suite 600, Bellevue, WA 98004
               --------------------------------------------------
                    (Address of principal executive offices)

                                 (253) 284-2935
                               -------------------
                 Issuer's telephone number, including area code

                                       N/A
              ----------------------------------------------------
              (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| Yes |_| No

State the number of shares outstanding of each of the issuer's classes of common
stock, as of the latest practicable date: 195,518,426 shares of $0.001 par value
common stock outstanding as of October 28, 2004.

<PAGE>

PART I - FINANCIAL INFORMATION

     Item 1.    Financial Statements

                Unaudited Consolidated Balance Sheet...........................1

                Unaudited Consolidated Statements of Operations
                for the Three Months Ended
                September 30, 2004 and September 30, 2003......................3

                Unaudited Consolidated Statements of
                Cash Flows for the Three Months Ended
                September 30, 2004 and September 30, 2003. ....................4

                Unaudited Consolidated Statement of Changes in
                Stockholders' (Deficit) for the year ended June 30, 2004
                and the 3 months ended September 30, 2004......................5

                Notes to the Unaudited Consolidated
                Financial Statements...........................................6

     Item 2.    Management's Discussion and Analysis of
                Financial Condition and Results of Operations.................18

    Item 3.     Quantitative and Qualitative Disclosures About Market Risk....23

    Item 4.     Controls and Procedures ......................................23

PART II.        OTHER INFORMATION ............................................23

Item 1.         Legal Proceedings  ...........................................23

Item 2.         Changes in Securities  .......................................23

Item 3.         Defaults Upon Senior Securities...............................24

Item 4.         Submission of Matters to a Vote of Security Holders  .........24

Item 5.         Other Information  ...........................................25

Item 6.         Exhibits   ...................................................25

Signatures....................................................................25

Certifications................................................................26
<PAGE>

                          ECUITY, INC. AND SUBSIDIARIES

                      UNAUDITED CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                    September 30, 2004    June 30, 2004
-------------------------------------------------------------------------------------------------------
<S>                                                                     <C>                <C>
ASSETS
Current
     Cash and cash equivalents                                          $   10,569         $  107,695
      Accounts Receivable, net of allowance of $179,300 at June
           30, 2004 and $161,045 at September 30, 2004                     575,372            541,231
      Notes Receivable                                                      25,000                 --
      Prepaid expenses                                                      21,887             29,884
      Inventory                                                                800
           Total Current Assets                                            633,628            678,810
                                                                        -----------------------------
Deposits                                                                   119,658             43,722
Property and equipment, net                                                497,814            499,346
Acquired customer list, net of amortization                              1,338,677          1,677,600
                                                                        -----------------------------

     Total Assets                                                        2,589,777          2,959,534
=====================================================================================================
</TABLE>

The  Accompanying  Notes  are an  Integral  part of the  Unaudited  Consolidated
Financial Statements


                                       1
<PAGE>

                          ECUITY, INC. AND SUBSIDIARIES

                      UNAUDITED CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                        September 30, 2004     June 30, 2004
-----------------------------------------------------------------------------------------------------------
<S>                                                                         <C>                <C>
LIABILITIES AND SHAREHOLDERS' DEFICIT

Current

     Accounts payable and accrued liabilities                               $  3,290,751       $  2,954,559

     Loans payable                                                             6,263,862          5,887,061

     Stock to be issued for services and sales                                   167,000            167,000

     Deposits and advance billings                                               273,821            329,253

     Capital lease obligations - current portion                                 104,331            104,331
                                                                            -------------------------------
         Total Current Liabilities                                            10,099,765          9,442,204
                                                                            -------------------------------
Long Term Liabilities

      Convertible Debentures                                                     200,000            200,000
      Capitalized Leases-net of current portion                                  118,045            145,896
                                                                            -------------------------------
           Total Liabilities                                                  10,417,810          9,788,100
                                                                            -------------------------------

SHAREHOLDERS' DEFICIT

     Share Capital:
     Authorized: 200,000,000 common shares, par value $0.001 per share

           Issued and outstanding:

      142,518,902  common shares outstanding at September 30, 2004 and           142,519            113,261
      113,260,948 common shares at June 30, 2004

      Additional paid-in capital                                               9,114,427          8,601,184
      Additional paid-in-capital stock options issued
                                                                                 209,298            209,298

      Less deferred compensation                                                  (4,721)            (9,442)

      Deficit                                                                (17,289,556)       (15,742,867)
                                                                            -------------------------------

      Total Shareholders' Deficit                                             (7,828,033)        (6,828,566)
                                                                            -------------------------------

     Total Liabilities and Shareholders' Deficit                            $  2,589,777       $  2,959,534
                                                                            ===============================
</TABLE>

The  Accompanying  Notes  are an  Integral  part of the  Unaudited  Consolidated
Financial Statements


                                       2
<PAGE>

                          ECUITY, INC. AND SUBSIDIARIES

                 UNAUDITED CONSOLIDATED STATEMENT OF OPERATIONS

<TABLE>
<CAPTION>
                                                                Three Months Ended
                                                                    September 30
                                                                    ------------
                                                               2004                2003
                                                          -------------       -------------
<S>                                                       <C>                 <C>
Revenues                                                  $     731,042                  --

Cost of revenues                                                578,390                  --
                                                          ---------------------------------

Gross margins                                                   152,652

Operating expenses
      Selling expenses                                          172,394                  --
      Amortization of Customer List                              78,216                  --
      Depreciation                                               33,064               1,184
      General and administrative                              1,338,319             215,364
                                                          ---------------------------------

Total operating expenses                                      1,621,993             216,548
                                                          ---------------------------------

Operating (loss)                                             (1,469,341)           (216,546)

Other  (expense)
     Interest (expense)                                         (77,348)             (9,998)
                                                          ---------------------------------

Total other (expense)                                           (77,348)             (9,998)
                                                          ---------------------------------

Net  (loss)                                               $  (1,546,689)           (226,546)
                                                          =================================

Basic (loss) per share                                    $       (0.01)      $       (0.01)

Weighted Average Number of Common Shares Outstanding
                                                            126,338,848          54,485,225

Diluted (loss) per share                                  $       (0.01)                N/A

Diluted weighted average
  shares outstanding                                        148,178,774                 N/A
</TABLE>

The  Accompanying  Notes  are an  Integral  part of the  Unaudited  Consolidated
Financial Statements


                                       3
<PAGE>

                          ECUITY, INC. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENT OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                         Three Months Ended
                                                                            September 30
                                                                     2004              2003
-----------------------------------------------------------------------------------------------
<S>                                                               <C>               <C>
Cash Flows From Operating Activities
     Net loss                                                     $(1,546,689)      $  (226,546)
Adjustments To Reconcile Net Loss To Net Cash From Operating
  Activities
     Depreciation and amortization                                    111,280             1,184
     Stock issued for other than cash                                 412,500           143,844
     Deferred compensation                                              4,721                --
     Changes in assets and liabilities:                                    --
     Decrease in accounts receivable, net                             286,621                --
     Increase in deposits                                             (75,936)               --
     Increase in inventory                                               (800)               --
     Decrease (increase) in prepaid expenses                            7,997            (3,165)
     (Decrease) increase in payable and accrued liabilities           336,192            (7,980)
     Decrease in deposits on advanced billings                        (55,432)               --
                                                                  -----------------------------
      Cash used by operating activities                              (519,546)          (92,663)
                                                                  -----------------------------

Cash Flows From Investing Activities
     Purchase of property and equipment                               (31,530)               --
     Acquisition of Notes Receivable                                  (25,000)               --
                                                                  -----------------------------
     Cash from investing activities                                   (56,530)               --
                                                                  -----------------------------

Cash Flows From Financing Activities
     Proceeds from loans payable                                      510,134            67,000
     Payments on loans payable                                       (133,333)               --
     Sale of common stock for cash                                    130,000            49,390
     Payments for capitalized leases                                  (27,851)               --
                                                                  -----------------------------
      Cash provided (used) by financing activities                    478,950           116,390
                                                                  -----------------------------

Net Increase (Decrease) In Cash                                       (97,126)           23,727
Cash  And Cash Equivalents, Beginning Of Year                         107,695               653
                                                                  -----------------------------
Cash  And Cash Equivalents, End Of Year                           $    10,569       $    24,380
===============================================================================================

      Interest paid during the periods                            $    19,802       $         0
</TABLE>

Supplementary non cash activity:

During the quarter ended  September 30, 2004, the company sold its  conferencing
division for the carrying  amount of $260,707.  Such amount has been included in
the receivables total.

The  Accompanying  Notes  are an  Integral  part of the  Unaudited  Consolidated
Financial Statements


                                       4
<PAGE>

                          ECUITY, INC. AND SUBSIDIARIES
          CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' (DEFICIT)
                      FOR THE YEAR ENDED JUNE 30, 2004 AND
                THE THREE MONTH PERIOD ENDED SEPTEMBER 30, 2004

<TABLE>
<CAPTION>
                                    COMMON STOCK
                               ---------------------------------------                  ADDITIONAL
                                                         SHARE          ADDITIONAL      PAID-IN CPITAL
                                                         SUBSCRIPTIONS  PAID-IN         STOCK
                               SHARES         AMOUNT     RECEIVABLE     CAPITAL         OPTIONS ISSUED    DEFICIT        TOTAL
                            ------------------------------------------------------------------------------------------------------
<S>                           <C>          <C>             <C>          <C>             <C>            <C>            <C>
Balance, June 30, 2003        52,050,605   $     52,050    $ (571)      $  2,741,023    $          0   $ (4,490,148)  $ (1,697,646)
Stock options issued                                                                         209,298                       209,298
Deferred compensation                                                                         (9,442)                       (9,442)
Issue of common stock
 for services                 12,402,006         12,402                    1,417,162                                     1,429,564
Issue of common stock
For options exercised          6,482,319          6,482                      203,965                                       210,447
Sale of common stock
                               2,264,799          2,265       571            167,404                                       170,240
Sale of common stock
   Credit Line/debentures     10,307,747         10,308                      839,692                                       850,000
Common shares issued
   For acquisitions           29,753,472         29,754                    3,231,938                                     3,261,692
Net loss                                                                                                (11,252,719)   (11,252,719)
                            ------------------------------------------------------------------------------------------------------
Balance, June 30, 2004
                             113,260,948        113,261                    8,601,184         199,856    (15,742,867)    (6,828,566)
Deferred compensation
                                                                                               4,721                         4,721
Issue of common stock for
services                      12,257,954         12,258                      400,243                                       412,501
Issue of common stock for
Collateral on loan             5,000,000          5,000                       (5,000)                                            0
Sale of common stock
                              12,000,000         12,000                      118,000                                       130,000
Net Loss for Period                                                                                      (1,546,689)    (1,546,689)
                            ------------------------------------------------------------------------------------------------------
Balance September 30
                             142,518,902   $    142,519    $    0       $  9,114,427    $    204,577   $(17,289,556   $ (7,828,033)
                            ======================================================================================================
</TABLE>

The  Accompanying  Notes  are an  Integral  part of the  Unaudited  Consolidated
Financial Statements


                                       5
<PAGE>

                          ECUITY, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                               SEPTEMBER 30, 2004
                                   (UNAUDITED)

1.    BASIS OF PRESENTATION

      The unaudited  consolidated  financial statements as of September 30, 2004
      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 September  30, 2004 and 2003  pursuant to the rules
      and   regulations  of  the  Securities   and  Exchange   Commission.   The
      consolidated financial statements include the accounts of Ecuity, Inc. and
      its wholly  owned  subsidiaries.  All material  intercompany  accounts and
      transactions have been eliminated.

      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 ending June 30, 2004.

2.    ACQUISITION OF ASSETS AND SUBSIDIARIES

      Effective  March 22, 2002,  Ecuity,  Inc.  acquired 100% of the issued and
      outstanding  shares  of Y3K  Incorporated  by  issuing  13,100,000  common
      shares. In addition,  the former shareholders of Y3K Incorporated received
      an additional 4,981,374 common shares in a separate transaction.

      A summary of the transaction is as follows:

      The  outstanding   shares  of  Ecuity,   Inc,   formerly  Zeballos  Mining
      ("Zeballos")   prior  to  the  acquisition  was  27,688,500.   Y3K,  Inc.,
      shareholders  had common  shares of  12,789,792  and  preferred  shares of
      5,291,582  for a total  conversion  of  common  shares  from  Zeballos  of
      18,081,374.  In order for Y3K, Inc.,  shareholders  to receive  18,081,374
      shares of  Zeballos,  13,100,000  newly  issued  shares  were  issued  and
      4,981,374 shares were received from existing issued and outstanding shares
      (part of the 27,688,500  common shares issued and  outstanding to Zeballos
      shareholders) of Zeballos common shares.

      The transaction  resulted in the Zeballos  shareholders holding a total of
      22,707,126,  or  56%  of  the  total  issued  and  outstanding  shares  of
      40,788,500 and Y3k, Inc.,  shareholders  having a total of 18,081,374,  or
      44% of the total  issued  and  outstanding  shares  after the close of the
      acquisition.  Even  though  Ecuity  shareholders  ended up with 44% of the
      total  issued and  outstanding  shares  after the  acquisition  the former
      shareholders  of Y3K  Incorporated  did have  control as outlined in items
      (b), (c), and (d) of paragraph 17 of SFAS 141.

      -     the existence of a large  minority  voting  interest in the combined
            entity

      -     control of the board of the combined entity

      -     domination of the senior management of the combined entity


                                       6
<PAGE>

                          ECUITY, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                               SEPTEMBER 30, 2004

2.    ACQUISITION OF ASSETS AND SUBSIDIARIES (CONTINUED):

      Accordingly,  the  transaction,   which  is  referred  to  as  a  "reverse
      take-over",  has been treated for accounting purposes as an acquisition by
      Y3K Incorporated of the net assets and liabilities of Ecuity, Inc.

      Ecuity,  Inc.  had  a  net  asset  deficiency  at  the  acquisition  date,
      therefore, the 13,100,000 shares issued on acquisition were issued at fair
      value of $0 with the net asset  deficiency of $25,743  charged to deficit.
      Y3K  Incorporated  is deemed to be the purchaser for accounting  purposes.
      Accordingly, its net assets are included in the consolidated balance sheet
      at their previously recorded amounts.

      The acquisition is summarized as follows:

      Current Liabilities
           Accounts payable                                      $ 25,743
                                                                 --------

      Net Asset Deficiency                                       $(25,743)
                                                                 ========

      Fox Communications,  Corporation - Effective January 2, 2004, Ecuity, Inc.
      through  its  wholly  owned  subsidiary  Ecuity  Advanced   Communications
      (Initially  incorporated  under  the  name  "Ecuity  Holdings,  Inc."),  a
      Washington  corporation  ("EAC"),  purchased a substantial  portion of the
      assets  ("Assets")  of  Fox  Communications,   Corporation,  a  Washington
      corporation  ("Fox").  The purchase (the "Transaction") was pursuant to an
      Asset Purchase Agreement ("Purchase Agreement") dated January 14, 2004.

      Fox Communications Corporation formerly Phonelink, Inc. is in the business
      of providing  business and residential  long distance  telephone  service,
      conference  calling,  internet dial up, and web hosting services.  Fox was
      incorporated in the state of Washington on January 5, 1989.

      The  acquisition  was based on cash,  common  shares and a Note Payable as
      follows:

      $3,775,000  in a note  payable by Ecuity and  6,722,722  shares of Ecuity,
      Inc.'s  common  stock.  Based on the closing  bid price for the  Company's
      common stock on January 14, 2004 of $.17 per share,  the shares  issued to
      Fox in connection  with the asset purchase have been valued at $1,151,882.
      The total  transaction  has been valued at $4,926,882 of which  $1,781,221
      consisted of net assets acquired. The Company has paid $300,000 toward the
      cash portion of the purchase  price and the balance of $3,475,000 is to be
      paid pursuant to the terms of a promissory  note ("Note") issued to Fox by
      Ecuity.  The  original  note called for  payments  that were in default on
      their  initial  due date of  March  5,  2004.  Subsequently,  the  Company
      negotiated  a revised  note  payment  schedule,  which  called for a total
      payoff  on or  before  December  1, 2004 of the  $3,475,000  balance  plus
      accrued interest.  The terms of the asset purchase  agreement provide that
      the final  payment may be reduced by an amount  representing  the total of
      accounts  receivable,  less the sum of the accounts payable,  accruals and
      deferred  income  balances.  However,  as a  result  of the  note  payment
      extension,  this offset to the note balance amount has now been limited to
      $450,000.


                                       7
<PAGE>

                          ECUITY, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                               SEPTEMBER 30, 2004

2.    ACQUISITION OF ASSETS AND SUBSIDIARIES (CONTINUED):

      Payment  of the Note is secured by all of the Assets and by the issued and
      outstanding shares of Ecuity, all of which shares are held by the Company.
      In addition,  the Company is a guarantor of the Note  pursuant to a Parent
      Guaranty  agreement  between the  Company and Fox.  The Company and Ecuity
      expect to finance the Note payments through  additional equity investments
      into the Company including invested capital it anticipates it will receive
      under a Standby Equity Distribution Agreement (formerly the Equity Line of
      Credit Agreement) with Cornell Capital Partners, L.P.

      The assets acquired by Y3K include the competitive  local exchange carrier
      ("CLEC")  consisting of a customer base of 18,000 residential and business
      customers,  conferencing and ISP operations,  voice over internet protocol
      services,  fully  functioning  customer service and billing  capabilities.
      Additionally,  the  Transaction  included  the recently  upgraded  Network
      Operation  Center  ("NOC")  that allows for the  significant  expansion of
      unified end-to-end  communication  solutions through the addition of voice
      over IP (VoIP).  In  addition to the growth of the  unified  products  and
      services,  Y3K believes that the new NOC increases  efficiencies,  reduces
      costs and has a positive impact on operating revenue.  The Assets acquired
      by the Company include:

            o  Certain  fixed  assets  and  equipment,  as  well  as any and all
      permits, licenses, consents and approvals held by Fox which are assignable
      to Ecuity. All such fixed assets and equipment,  which Fox had used in its
      operation  as a  converged  internet  content  provider  and  producer  of
      affinity portals, shall be used in a similar manner by Ecuity.

            o All of Fox's  right,  title  and  interest  in and to a number  of
      websites,  including  foxinternet.com,  as well as any other  tangible  or
      intangible  assets  of Fox used or useful  in the  joint  operations  that
      existed prior to the Transaction,  but excluding  certain assets listed in
      the Purchase Agreement.

            As part of the Transaction,  those Fox employees that are associated
      with the  operation  and  management  of the business  represented  by the
      Assets  became  employees  of Ecuity and the former  President of Fox, Mr.
      Lonnie Benson, became a consultant to Ecuity.

      KARUNGA  TECHNOLOGIES,  INC. - At a Board of Directors meeting on February
      22,  2004,  Ecuity,  Inc.,  voted  to  complete  the  purchase  of the ICS
      Technology  from Karunga  Technologies,  Corporation  ("Karunga"),  a Utah
      Corporation.  The technology  acquisition was completed effective June 15,
      2004.

      The Agreement to purchase all assets and liabilities related  specifically
      to the  ICS  Technology,  its  development  and  deployment,  (hereinafter
      Purchased Technology or ICS),  including all intellectual  property rights
      associated with ICS was completed  pursuant to a Technology Asset Purchase
      Agreement  ("Purchase  Agreement")  dated  February  22,  2004,  which was
      ratified  by the Board of  Directors  of  Karunga  on June 15,  2004.  The
      acquisition was based on the issuance of commons shares, the assumption of
      certain  obligations  of Karunga,  the granting of options and warrants as
      follows:


                                       8
<PAGE>

                          ECUITY, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                               SEPTEMBER 30, 2004

2.    ACQUISITION OF ASSETS AND SUBSIDIARIES (CONTINUED):

      The issuance of 23,030,750 shares of common stock, the issuance of 750,000
      options to purchase common shares at prices ranging from $.10 per share to
      $.25 per share, the issuance of 433,438 warrants to purchase common shares
      at $.50 on a 1 to 1 basis, the assumption of $70,000 in general bills from
      Karunga and the issuance of a new  convertible  promissory note to a third
      party in the principal amount of $492,165, bearing interest at the initial
      rate of 7% per annum rising to 14% on any defaults.  The newly issued note
      replaces the note wherein the Company had acted as a guarantor of the note
      issued by Karunga to the third party in the amount of $400,000  (which was
      expensed for the year ended June 30, 2003).  In addition,  the convertible
      note has warrants attached that provide for the issuance of 333,333 common
      shares at the price of $.20 per share.  Additionally,  the  beneficiary of
      the new note is contractually entitled to one million common shares of the
      Company's common stock, which has been expensed as additional interest, in
      consideration  for extending the due date of the note as well as providing
      for a payment schedule  extending  through December 31, 2004. These shares
      have not yet been issued and  accordingly  are  classified  as a liability
      until  the  transfer  agent  actually   issues  said  shares.   The  total
      transaction was valued at $2,280,994.

      An  employment  agreement  was provided to Shane Smith,  a key employee of
      Karunga, who is now acting as the Company's Chairman of the Board and CEO.
      Mr.  Cedric Griss was also  retained by the Company on an ongoing basis as
      the key  developer  of the  ongoing  upgrades  of ICS  without any written
      contract.  Mr.  Smith's  contract  provides  for salary,  benefits,  stock
      options and a defined length of employment.

3.   LOANS AND OTHER OBLIGATIONS PAYABLE

<TABLE>
<CAPTION>
                                                                                  September 30
                                                                                     2004
                                                                                   ----------
<S>                                                                                <C>
      a) Loan due to bank - defaulted in year 2001 (unsecured)                     $  155,666

      b) Unsecured loans, payable on demand, with interest ranging from 10%
           to18% per annum                                                            874,756

      c) Promissory note payable bearing interest at 7% per annum with a default      466,165
           rate of 14%

      d) Promissory notes to Cornell Capital at 12% per annum                       1,255,717

      e) Contract for advance lock box receipts                                        48,400

      f) Note due to Fox Communications, Inc.                                       3,463,158
                                                                                   ----------

            Total Loans Payable                                                    $6,263,862
                                                                                   ==========
</TABLE>


                                       9
<PAGE>

                          ECUITY, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                               SEPTEMBER 30, 2004

3.    LOANS AND OTHER OBLIGATIONS PAYABLE (CONTINUED):

      a)    This note was  originally  due to a bank  based on a line of credit.
            The  line  was  not  paid  off on the due  date  and  the  loan  was
            subsequently  transferred to a collection agency.  There has been no
            contact from that agency over the past year.

      b)    There  are  five  private  parties  comprising  the  aggregate  loan
            amounts.  The single  largest party who has a loan, in the amount of
            $322,500,  is one of the  Company's  original  investors and a large
            shareholder. He is non-related third party who is also an accredited
            investor.  The next largest  lender is a private  individual  with a
            loan in the  amount  of  $110,000.  He is also a  non-related  third
            party.  The  remaining  loans are from  private  individuals  in the
            amounts  ranging  from  $5,000 to  $65,000.  These  individuals  (or
            entities) are non-related parties.

      c)    The  promissory  note  payable  arises  as a result  of the  Company
            converting  a previous  guarantee  of the  indebtedness  of an arm's
            length  company  with whom the Company has entered into an agreement
            to develop,  license and market software, in exchange for a new note
            which was  executed  after the  Company  purchased  the  Karunga ICS
            technology.

      d)    Cornell  Capital  Partners  issued a note with an initial  principal
            amount of $350,000  and also issued a note in the initial  principal
            amount of  $1,000,000.  Both notes were paid down by  $150,000  each
            from the sale of common  stock under the terms of the Equity Line of
            Credit.  Since the Company's stock has declined  significantly  from
            the date of the initial  loan,  Cornell  believed it would not be in
            their or the Company's best interest to continue to sell shares into
            the  marketplace  to repay the debt and have held off selling shares
            into  the  marketplace  for an  undetermined  period.  Additionally,
            Cornell paid off a note to ADP in the  principal  amount of $133,333
            plus  accrued  interest.  The new note to Cornell  was issued in the
            principal amount of $205,717, which included a $4,000 loan fee.

      e)    EAC  contracted  with the bank that controls the lock box system for
            the  collection on those  accounts  that pay by mail.  The agreement
            provides that portions of the daily cash receipts are applied to the
            loan. The loan interest is estimate at an annual rate of 26%

      f)    The note was issued by Ecuity Advanced  Communications is guaranteed
            by all of its assets.  Additionally Ecuity Advanced  Communications,
            Inc.'s note to Fox is guaranteed by Ecuity,  Inc. The note calls for
            payment of principal and accrued interest on December 1, 2004.

      Capital Lease Obligation (Judgment)-

During  the year ended June 30,  2001,  the  Company's  subsidiary,  Y3k,  Inc.,
defaulted under certain  equipment lease obligations and the leased property was
repossessed.  The lessor has obtained a judgment in the amount of $121,565 which
has been recorded in full in the accounts.


                                       10
<PAGE>

                          ECUITY, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                               SEPTEMBER 30, 2004

3.    LOANS AND OTHER OBLIGATIONS PAYABLE (CONTINUED):

      CONVERTIBLE DEBENTURES

      Convertible debentures due to Cornell Capital, Inc. bearing interest
        at 5% per annum all due and payable January 7, 2007             $200,000
                                                                        ========

            o Convertible  debentures  were initially  issued at a face value of
      $350,000,  less an initial  discount of 10%, less attorney  fees.  Cornell
      Capital Partners purchased all of the debentures.  The Company has filed a
      SB-2 registration  statement in order to register 60,000,000 common shares
      that may be  issued  under the terms  and  conditions  of the  convertible
      debentures.  Under the terms of the agreement,  Cornell  Capital  Partners
      sold common shares sufficient to reduce the debt by $150,000.  The Company
      has the option to pay the debentures plus accrued interest on the due date
      above, or at the option of the holder of the  convertible  debentures they
      may be  converted  to common  stock of the Company at the option  price of
      either 120% of the stock market price at the date of the  execution of the
      Convertible  Note,  or at any time  based on 80% of the 5 day price of the
      stock prior to the  conversion  date  election,  at a price  whichever  is
      lower.

      STANDBY EQUITY DISTRIBUTION AGREEMENT

      On February 2, 2004 the Company  filed a SB-2  registration  statement  in
      order to register 60,000,000 common shares under the Equity Line of Credit
      and a revised  SB-2  registration  statement  was filed March 15, 2004 and
      became effective May 12, 2004.

      The  revised  Equity  Line of  Credit  (now  called  the  "Standby  Equity
      Distribution   Agreement"  or  "SEDA")   provides  that  we  may,  at  our
      discretion, periodically issue and sell to Cornell Capital Partners shares
      of common stock for a total purchase  price of $20 million.  The amount of
      each advance is subject to a maximum  advance  amount of $280,000,  and we
      may not submit any advance within seven trading days of a prior advance.

4.    OPERATING SEGMENTS

      Statement of Financial  Accounting  Standards No. 131,  "Disclosures about
      Segments of an Enterprise and Related Information"  establishes  standards
      for reporting  information about operating  segments in interim and annual
      financial  statements,  including  segments  by product  and  service,  by
      geographic  area,  by legal  entity  and by type of  customer.  Further  a
      reportable segment shall be segregated if it represents 10 percent or more
      of combined revenue.  All sales of the Company are in the United States as
      of the three months ended  September  30, 2004 and for all prior  periods.
      The Company currently operates in one segment.


                                       11
<PAGE>

                          ECUITY, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                               SEPTEMBER 30, 2004

5.    INCOME TAXES

      Deferred tax assets and liabilities are recognized for the expected future
      tax  consequences  of  events  that have been  reported  in the  Company's
      financial  statements  or tax returns.  At June 30, 2004,  the Company had
      available net operating loss carryforwards for federal income tax purposes
      of $15,742,867,  which expires beginning in 2020.  Because of the inherent
      uncertainty of the Company  generating  sufficient taxable income prior to
      the expiration of the loss  carryforward,  a valuation  allowance has been
      provided for the entire deferred tax asset.

      Deferred tax assets
           Net operating losses carried forward   $ 5,300,000
           Less:  Valuation allowance              (5,300,000)
                                                  -----------

                                                  $        --
                                                  ===========

      A valuation  allowance reflects the unrecognized U.S. and foreign tax loss
      carryforward.  State taxes in  Washington  State are paid as Business  and
      Occupancy taxes and are based on gross revenues.

6.    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 year. At September
      30, 2004 the Company had remaining stock options (26,430,558) and warrants
      (10,936,325)  totaling  37,366,883  common shares that has been granted to
      various  employees,  directors,  consultants and lenders at prices ranging
      from $.02 to $.75 per share.  At September  30, 2004 there were a total of
      19,406,647  options and 10,561,325  warrants  vested for totaled vested of
      29,967,972.


                                       12
<PAGE>

                          ECUITY, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                               SEPTEMBER 30, 2004

7.    CAPITAL ASSETS

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

SEPTEMBER 30, 2004

Description of Asset                                               Value after
                                                                    Impairment
--------------------------------------------------------------------------------
Computers and Equipme                                                 321,258

--------------------------------------------------------------------------------
Computer Software                                                      60,390
--------------------------------------------------------------------------------
Switch Equipment                                                      143,220
--------------------------------------------------------------------------------
Leasehold Improvements                                                 25,042
--------------------------------------------------------------------------------
Office Equip.                                                          15,973
--------------------------------------------------------------------------------

                                                                      565,883
--------------------------------------------------------------------------------
Accumulated Depreciation                                              (68,069)
--------------------------------------------------------------------------------
Net Book Value                                                        497,814
--------------------------------------------------------------------------------

Note (a) The initial  values that were set for the Fixed Assets  purchased  from
Fox Communications,  Inc., based on internal valuations of said assets. Further,
the Company was  provided a detailed  list of assets by Fox  Communications  for
which a number  of items  could  not be  specifically  identified.  The  Company
engaged  an outside  valuation  firm to provide  values  necessary  to price the
transferred assets, however, there were a substantial amount of "unvalued" items
since they could not assess  value.  The Company then  proceeded to identify the
assets that were  physically on hand after the Fixed Assets were  transferred to
the new  operating  facility  as well as those  that  were  identifiable  at the
Company's  network  operating  center ("NOC").  The values placed on these items
were  primarily   those  items  that  were   specifically   identified   with  a
corresponding  lease  obligation.  In addition,  the current  items also include
assets  purchased  subsequent to January 2, 2004. The valuations above are after
the impairment  charge to the carrying  values at June 30, 2004 and include post
June 30, 2004 acquisitions.

8.    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  Sheets as of September 30,
2004 which have been impacted by the impairment charge at June 30, 2004:


                                       13
<PAGE>

                          ECUITY, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                               SEPTEMBER 30, 2004

8.    ACQUIRED SUBSCRIBER BASE (CONTINUED):

<TABLE>
<CAPTION>
                                                     REDUCTION FOR
                                                        SALE OF                                        NET
                               CARRYING VALUE          CONFERENCE            ACCUMULATED             CARRYING
                              AFTER IMPAIRMENT        CALLING (A)           AMORTIZATION              VALUE
                              ----------------        -----------           ------------              -----
<S>                                 <C>            <C>                           <C>                  <C>
      Acquired Customer
         List for
         Telephony and
         ISPs                       $ 1,864,000    260,707                       264,616              1,338,677
</TABLE>

(a) The Company sold its  conference  calling a portion of which was included in
the initial  carrying  valuation of the Customer  List.  The sale price has been
reflected as a reduction in the carrying  value of the Customer  List and future
amortization will be adjusted to reflect to lower carrying values.

During the year ended June 30, 2004,  the acquired  Customer List decreased as a
result of the costs of the assets purchased from the Fox  Communications,  Inc.,
in excess of what was identified based on an outside  valuation at $1,864,000 as
of the  date  of  purchase.  The  amortization  of the  acquired  customer  list
purchased from Fox is being amortized over its projected useful life of five (5)
years commencing January 2, 2004.

Acquisition-related  amortization in the  Consolidated  Statements of Operations
for the year ended  represents  the  amortization  of definite  life  intangible
assets.  The Company's definite life intangible assets consist of customer lists
and other  assets  that are not  deemed to have  indefinite  lives  acquired  in
conjunction  with the  purchases of  businesses  and  subscribers  of ISPs,  but
exclude any acquired hardware and software.  Generally, definite life intangible
assets are amortized on a  straight-line  basis over five years from the date of
their respective acquisitions.  Since there has been a reduction in the carrying
value of the  Customer  List due to the sale of the  conferencing  feature,  the
amortization  for the remaining  future  periods will be adjusted to reflect the
lower  carrying  value and the  revised  quarterly  amortization  charge will be
$78,216 through June 30, 2009 as follows:

         Year Ending June 30, 2005                             $312,864
         Year Ending June 30, 2006                             $312,864
         Year Ending June 30, 2007                             $312,864
         Year Ending June 30, 2008                             $312,864
         Year Ending June 30, 2009                             $165,437


                                       14
<PAGE>

                          ECUITY, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                               SEPTEMBER 30, 2004

9.    LEASE COMMITMENTS

      The Company is currently leasing two office spaces as follows.

      The prior corporate  offices at 108 Stewart St, Puyallup,  WA were vacated
      and there is no further lease obligation.

      As part of the xSides  Agreement,  effective  September  3, 2003,  Y3K has
      subleased  office  space to  accommodate  employees  of xSides and provide
      housing for Y3K's  network  equipment.  The office space is located at 100
      South King Street,  Suite 525,  Seattle,  WA 98104 and comprises 2,302 sq.
      ft.  of  rentable  space.  The  lease is for one year  with a base rent of
      $3,165 per month.  The Company  terminated  the lease without  renewal and
      vacated the premises at the lease termination date.

      Effective  February 1, 2004 the Company obtained new corporate  offices at
      800 Bellevue Way, Suite 600,  Bellevue,  WA 90004.  These new offices were
      leased (as a sub-lease) to accommodate the space  requirements  for Ecuity
      personnel  (formerly the  personnel  associated  with Fox  Communications,
      Inc.) as well as the new corporate offices of the Company.

      The lease is for 11,046 sq. ft.  with an  expiration  date of October  31,
      2007  with an  initial  lease  rate of  $9,205  per  month  with  periodic
      increases through the lease termination date.

      The  lease  commitments  through  the  lease  terms of all  leases  are as
      follows:

                           Year 2005                $142,566
                           Year 2006                 160,172
                           Year 2007                 176,736
                           Year 2008                  60,752
                                                    --------
                                       Total        $540,226
                                                    ========

10.   STOCK-BASED COMPENSATION

      In December 2002, the Financial Accounting Standards Board ("FASB") issued
      Statement No. 148,  "Accounting for Stock-Based  Compensation,  Transition
      and  Disclosure"  ("FAS  148").  FAS 148 provides  alternative  methods of
      transition  for a voluntary  change to the  recognition of the cost of the
      options  in the  statement  of  operations.  FAS 148  also  requires  that
      disclosures  of the pro forma  effect of using  the fair  value  method of
      accounting  for  stock-based  employee   compensation  be  displayed  more
      prominently  and in a  tabular  format.  Additionally,  FAS  148  requires
      disclosure of the pro forma effect in interim  financial  statements.  The
      transition and annual  disclosure  requirements  of FAS 148 were effective
      for fiscal years ended after  December 15,  2002.  The interim  disclosure
      requirements of FAS 148 are effective for interim periods  beginning after
      December 15, 2002.  The adoption of the provisions of FAS 148 did not have
      an impact on the Company's consolidated financial statements.


                                       15
<PAGE>

                          ECUITY, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                               SEPTEMBER 30, 2004

10.   STOCK-BASED COMPENSATION (CONTINUED):

      The Company follows the provisions of FASB Statement No. 123,  "Accounting
      for Stock-Based Compensation" ("FAS 123"). The provisions of FAS 123 allow
      companies to either  expense the estimated  fair value of stock options or
      to continue to follow the  intrinsic  value method set forth in Accounting
      Principles  Board  Opinion  No.  25,   "Accounting  for  Stock  Issued  to
      Employees"  ("APB 25"),  but disclose the pro forma  effects on net income
      (loss) had the fair value of the options been  expensed.  YTHK has elected
      to continue to apply APB 25 in accounting  for its stock option  incentive
      plans.

      In  accordance  with  APB 25  and  related  interpretations,  compensation
      expense for stock options is recognized in income based on the excess,  if
      any,  of the  quoted  market  price of the stock at the grant  date of the
      award or other  measurement  date over the amount an employee  must pay to
      acquire the stock. The Company's policy is to grant the exercise price for
      stock  options to  employees  at or in excess of the fair market  value of
      YTHK's  common  stock  at the  date  of  grant,  thereby  resulting  in no
      recognition  of  compensation  expense by the  Company.  For  awards  that
      generate  compensation  expense  as  defined  under  APB 25,  the  Company
      calculates the amount of  compensation  expense and recognizes the expense
      over the vesting period of the award.

11.   SUBSEQUENT EVENTS

      The Company issued  50,000,000  shares of Common Stock to Cornell  Capital
      Partners,  LLC in  October  2004.  These  shares  were  issued in order to
      provide additional interim funding.

12.   GOING CONCERN

      As reflected  in the  accompanying  financial  statements,  the  Company's
      cumulative  losses,  its working  capital  deficiency,  and  stockholders'
      deficiency  raise  substantial  doubt  about its  ability to continue as a
      going  concern.  The ability of the Company to continue as a going concern
      is dependent on the Company's ability to raise additional capital, through
      equity or debt  financing,  and implement its business plan. The financial
      statements do not include any  adjustments  that might be necessary if the
      Company is unable to continue as a going concern.


                                       16
<PAGE>

                          ECUITY, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                               SEPTEMBER 30, 2004

      Management  believes that sufficient  funding may become available to meet
      its  business  objectives,  including  anticipated  cash needs for working
      capital,  and is currently  evaluating several financing options. In order
      to sustain  minimum  operations  and meet debt  service  obligations,  the
      Company needs to raise a minimum of $5,000,000 over the next 12 months.

      Further,  until the price of the stock is at a higher  value,  the Company
      does not  anticipate  utilizing its Equity Line of Credit  Agreement  with
      Cornell Capital Partners,  LLC under which it may obtain up to $20,000,000
      in equity financing.

      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.


                                       17
<PAGE>

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS

Effective January 2, 2004 we completed our acquisition of selected assets of Fox
Communications,  Inc.  through  our wholly  owned  subsidiary,  Ecuity  Advanced
Communications,  Inc.  (Formerly  "Ecuity  Holdings,  Inc.").  These  assets are
associated with the business lines as follows:  The  competitive  local exchange
carrier  ("CLEC")  consisting  of a  customer  base of  18,000  residential  and
business  customers,  conferencing  and  ISP  operations,  voice  over  internet
protocol services,  fully functioning customer service and billing capabilities.
Additionally,  the Transaction  included the recently upgraded Network Operation
Center ("NOC") that allows for the significant  expansion of unified  end-to-end
communication  solutions  through the  addition  of voice over IP (VoIP).  Other
assets  include:  Certain  fixed  assets and  equipment,  as well as any and all
permits,  licenses,  consents and approvals  held by Fox which are assignable to
Ecuity. All such fixed assets and equipment, which Fox had used in its operation
as a converged internet content provider and producer of affinity portals, shall
be used in a similar manner by Ecuity. All of Fox's right, title and interest in
and to a number of websites,  including  foxinternet.com (for designated terms),
as well as any other tangible or intangible  assets of Fox used or useful in the
joint  operations that existed prior to the Transaction,  but excluding  certain
assets  listed  in the  Purchase  Agreement.  Prior to the  consummation  of the
Transaction,  the Company  and Fox had been  operating  under a Joint  Operating
Agreement  the parties  entered into in  September  2003.  In December  2003 the
Company and Fox began  joint  development  and  marketing  operations  for their
emerging  line of secure  communication  solutions for the consumer and small to
medium size  business  markets.  The Assets  acquired by Y3K under the  Purchase
Agreement were principally those Fox Assets that were necessary for the complete
integration of Fox's business into the Company's.

Effective  June 15,  2004  the  Company  completed  its  acquisition  of the ICS
technology from Karunga Technologies Corporation.

Our plan of  operations  for the next twelve months is to complete the following
objectives within the time period specified, subject to our obtaining additional
financing for the continued development of the Company's business:

      o     We plan to undertake an advertising,  marketing,  and sales campaign
            to market the bundled services of EAC which include:

      o     A VoIP product ("V-`Tone") which is "best-of-breed", conferring true
            business/carrier class voice communication quality and functionality
            for an  enterprise  which is  perceived  as being  comparable  to or
            better than legacy Telco hard-wire telephony offerings;

      o     Integration  of the  V-Tone  VoIP  product  into  a  very  powerful,
            server-based  Communication System ("ECS"). The ECS should favorably
            compete   with  the   constituent   offerings   of  numerous   other
            communication companies in terms of functionality and performance;

      o     MarketPortal  and  Automated   Tracking  Program  software  allowing
            enterprise users to securely access, monitor,  transport, manage and
            use relevant data files.

      o     ICS allows  users to securely  instant  message,  file  transfer and
            e-mail re-direction in a virtual private network ("VPN").

      o     We plan to purchase and lease additional equipment for our business.

      o     With  adequate  funding,  we  anticipate  our  monthly  revenues  to
            substantially  exceed our  monthly  operating  costs.  The  revenues
            previously generated from conferencing calling services have reduced
            this. The Company sold off that portion of the business since it was
            based  on  traditional  landline  services  and did not fit into our
            platform  of  utilizing  our VoIP  technology,  which  will  also be
            available  for  use  in  broader  base  conferencing  services.  The
            business  was making a small  profit  which  allowed us to sell this
            portion of our business at a profit. We anticipated,  however,  that
            we would soon  depart  from  providing  such a service  and that the
            margins  would  continue  to  decline  until  there was little or no
            further land line based  conferencing  business  that would fit into
            our new platform.


                                       18
<PAGE>

With  additional  revenues,  we plan to retain  staffing  levels  sufficient  to
achieve our goals. This additional  staffing may include full-time and part-time
employees, and consultants.

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.  Management  believes that the
sources  of  potential  funds  needed to  maintain  current  operations  will be
available  to us  during  the  year,  however,  if this  amount  of  funding  is
unavailable to cover our debt obligations and ongoing deficit spending,  we will
not be able to continue operations.

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.

LIQUIDITY AND CAPITAL RESOURCES

The working capital deficit increased to $9,466,137 at September 30, 2004 from a
deficit  of  $8,703,339  as of June  30,  2004,  primarily  as a  result  of the
following:  a decrease  in cash of $97,126,  an increase in accounts  payable of
$336,192, and an increase in short term debt of $376,801.

The Company had a  consolidated  operating net loss of $1,546,689  for the three
months ended  September 30, 2004 compared to a net loss of $226,546 for the same
period last year.  The  substantial  increase  between  the 3 month  periods are
primarily as follows:  The operating  loss for Ecuity  Advanced  Communications,
Inc., was $758,568 this year and there was no operating comparison for last year
as the  acquisition  of the Fox assets was not  effective  until  January  2004.
Further,  this  reporting  period has issued stock for services in the amount of
$412,500 as compared to $143,844 for the three month period last year.  Finally,
interest  for this  period was  $77,348  compared  to $9,998 for the three month
period last year.

Revenues from the Fox asset purchase are recognized our wholly owned subsidiary,
Ecuity Advanced  Communications,  Inc. Ecuity's business is primarily related to
long distance services,  Internet server provider (ISP), conference calling, 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 long distance and  conferencing  services are billed in
arrears  based on 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.


                                       19
<PAGE>

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

The  Company  has an  Equity  Line  of  Credit,  that at our  discretion  we may
periodically issue and sell to Cornell Capital Partners L.P.  ("Cornell") shares
of common stock for a total purchase  price of up to $20 million.  The amount of
each advance is subject to a maximum advance amount of $280,000,  and we may not
submit any advance within seven trading days of a prior advance.

Since our stock  price has been at a very low  trading  level  over the past few
months, it has taken a substantial  amount of stock issuances to Cornell just to
keep  nominal  amounts of funding to the  Company.  A more  substantial  funding
mechanism  is  necessary  to allow the  Company to draw down funds  without  the
continued dilution of the common shares.

We anticipate  that a minimum of  $5,000,000  to $7,000,000  will be required to
sustain  existing  operations for the next 12 months from the balance sheet date
to sustain  Corporate  operations  which are segregated  from its EAC subsidiary
operations  and  satisfy the note  obligation  to Fox  Communications,  accounts
payable and existing debt obligations to Cornell.  Currently,  revenue in EAC is
insufficient to provide for all operating costs including payroll, rent, selling
expenses  and costs of sales.  The  Company  has taken  measures  to reduce  the
operating  costs by $1.2  million per annum.  This is a result of  lowering  the
payroll,  outside consulting and network costs. This will reduce the ongoing net
operating  losses for EAC by  approximately  $100,000 per month.  The  remaining
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 about a $50,000 per month shortfall for
cash to pay salaries and administrative expenses.

Our plan of  operations  for the next twelve months is to complete the following
objectives  within the time  period  specified,  some  items are  subject to our
obtaining  additional  financing  for  the  continued  development  of  Ecuity's
business:

            o     We plan to  undertake  an  advertising,  marketing,  and sales
                  campaign upon raising adequate funding. We anticipate that the
                  aggressive  marketing  campaign  we plan on  undertaking  will
                  involve advertising, marketing, and a sales campaign to market
                  the bundled  services of our subsidiary  (EAC) from the assets
                  purchased  from  Fox  and the ICS  technology  purchased  from
                  Karunga Technologies,  Corp. The monthly minimum out of pocket
                  we anticipate to market these bundled  services is $100,000 to
                  $300,000 until such time as increased  revenues are sufficient
                  to offset the additional  costs  associated with the marketing
                  of these products.

            o     Set up our relationship  with channel partners to allow faster
                  implementation of our market  penetration as well as a greater
                  market reach for our products.

            o     We plan to purchase and lease additional  office equipment for
                  our business at an approximate cost of $50,000.


                                       20
<PAGE>

            o     In the event that we are able to obtain  funds from  equity or
                  long term financing, this will allow us to operate without the
                  continued short term funding that has only provided short term
                  solutions.

Completion of our plan of operation is subject to obtaining adequate  financing.
However, we cannot assure investors that adequate financing will be obtained. In
the absence of our projected revenues, we may be unable to proceed with our plan
of operation.  Without significant revenues or substantial funding over the next
few weeks, the Company will default on its note obligation to Fox Communications
and should Fox use its remedy to  foreclose  on all the assets that were subject
to the original purchase, all telephony revenues will terminate.  If the Company
is successful in its endeavor to market its VoIP and ICS services,  it will have
to start  with the set up of a new CLEC and NOC which will  require  substantial
capital outlay.

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.
In the event we are not  successful  in reaching  our initial  revenue  targets,
additional  funds may be required  and we would then not be able to proceed with
our business plan for the development and marketing of the our core products and
services.  Should  this occur,  we would  likely seek  additional  financing  to
support the continued operation of our business.

RESULTS OF OPERATIONS

During the year ended June 30, 2002, we completed our  acquisition  of Y3K, Inc.
Since these transactions  resulted in the former shareholders of Y3K Inc. owning
the  majority  of the  issued  shares of  Ecuity,  Inc.  (formally  "Y3K  Secure
Enterprise Software, Inc.", the transaction,  which is referred to as a "reverse
take-over",  has been treated for  accounting  purposes as an acquisition by Y3K
Incorporated  of the net  assets and  liabilities  of  Ecuity,  Inc.  Under this
purchase  method of  accounting,  the results of operations of Ecuity,  Inc. are
included in the consolidated financial statements.

During the year ended June 30, 2004 the Company completed the acquisition of the
assets of Fox  Communications,  Inc., through its wholly owned subsidiary Ecuity
Advanced Communications,  Inc. (initially formed as "Ecuity Holdings, Inc.") and
the acquisition of the ICS technology from Karunga Technologies, Inc.

The financial  statements  presented herein compares the statement of operations
for the three-month  periods ended September 30, 2004 and September 30, 2003 the
balance  sheets at  September  30, 2004 and our year end of June 30,  2004.  Our
financial  statements are prepared on a consolidated  basis and all intercompany
transactions have been eliminated. In the three-month period ended September 30,
2004, we incurred a net loss of $1,546,689 as compared to a loss of $226,546 for
the same period last year.

The substantial  increase  between the 3 month periods are primarily as follows:
The operating loss for Ecuity Advanced  Communications,  Inc., was $758,568 this
year and there was no operating  comparison for last year as the  acquisition of
the Fox assets was not effective  until January 2004.  Further,  this  reporting
period we issued  stock for  services  in the amount of  $412,500 as compared to
$143,844 for the three-month period last year. Finally, interest for this period
was $77,348 compared to $9,998 for the three-month  period last year. During the
three-month  period,  we realized  gross  revenues of $731,042  all of which was
associated with Ecuity Advanced Communications, Inc.


                                       21
<PAGE>

Since  incorporation,  we have funded our operations  through  private loans and
equity  financings.  As at September 30, 2004, our total assets were recorded at
$2,589,777 consisting of cash $10,567,  accounts receivable,  net $575,372 which
includes  $250,000  balance  owing  for the sale of the  conferencing  services,
prepaids  $21,887,  capital assets $565,883  deposits $119,658 and the purchased
subscriber  list of Fox in the  amount of  $1,338,677  (net of  amortization  of
$279,601  and a  reduction  from  the  sale  of  the  conferencing  services  of
$264,616).  Our total liabilities totaled  $10,417,810,  consisting primarily of
$3,290,751  in accounts  payable and accrued  liabilities,  deposits on advanced
billings  of  $273,821,  loans  payable  to the  seller  of the  Fox  assets  of
$3,475,000,  convertible  debentures of $200,000,  two notes to Cornell totaling
$1,050,000  a  defaulted  bank loan  payable of  $155,666  and  equipment  lease
obligations of $222,376.

NEW ACCOUNTING PRONOUNCEMENTS

      In April 2002, the FASB issued SFAS 145, Rescission of FASB Statements No.
4, 44, and 64,  Amendment of FASB  Statement No. 13, and Technical  Corrections.
SFAS 145  rescinds  the  provisions  of SFAS No. 4 that  requires  companies  to
classify  certain gains and losses from debt  extinguishments  as  extraordinary
items,  eliminates  the  provisions  of SFAS No. 44 regarding  transition to the
Motor  Carrier Act of 1980 and amends the  provisions  of SFAS No. 13 to require
that certain lease modifications be treated as sale leaseback transactions.  The
provisions of SFAS 145 related to  classification of debt  extinguishments  were
effective for fiscal years  beginning  after May 15, 2002. We do not believe the
adoption  of  this  standard  will  have a  material  impact  on  our  financial
statements.

      In July 2002, the FASB issued SFAS No. 146,  "Accounting for Restructuring
Costs." SFAS 146 applies to costs  associated  with an exit activity  (including
restructuring)  or with a disposal of long-lived  assets.  Those  activities can
include  eliminating  or  reducing  product  lines,  terminating  employees  and
contracts and  relocating  plant  facilities  or personnel.  Under SFAS 146, the
Company will record a liability for a cost  associated  with an exit or disposal
activity when that liability is incurred and can be measured at fair value. SFAS
146 will require the Company to disclose information about its exit and disposal
activities,  the related  costs,  and changes in those costs in the notes to the
interim and annual financial statements that include the period in which an exit
activity  is  initiated  and in any  subsequent  period  until the  activity  is
completed.  SFAS 146 is effective  prospectively for exit or disposal activities
initiated after December 31, 2002, with earlier adoption encouraged.  Under SFAS
146, a company cannot restate its previously issued financial statements and the
new statement  grandfathers  the accounting for  liabilities  that a company had
previously recorded under Emerging Issues Task Force Issue 94-3.

      In June 2001,  the Financial  Accounting  Standards  Board issued SFAS No.
141,  Accounting  for Business  Combinations  and SFAS No. 142,  Accounting  for
Goodwill and other Intangible  Assets effective for fiscal years beginning after
December 15, 2001. Under SFAS No. 141, a company must use the purchase method of
accounting  for all  business  acquisitions.  Under SFAS No. 142,  goodwill  and
intangible  assets deemed to have  indefinite  lives will no longer be amortized
but  will  be  subject  to  annual  impairment  tests  in  accordance  with  the
statements. The adoption of these standards is expected to have no effect on our
financial statements.

      In  August  2001,  the  FASB  issued  SFAS  No.  144,  Accounting  for the
Impairment or Disposal of Long-Lived Assets. This statement  superseded SFAS No.
121,  Accounting  for the  Impairment  of Long-Lived  Assets and for  Long-Lived
Assets to Be Disposed Of and addresses  financial  accounting  and reporting for
impairment of long-lived  assets to be held and used, and long-lived  assets and
components of an entity to be disposed of. We adopted this  statement on January
1, 2002.


                                       22
<PAGE>

      In  November  2002,  the FASB  issued  Interpretation  No. 45 ("FIN  45"),
Guarantor's  Accounting and Disclosure  Requirements  for Guarantees,  including
Indirect Guarantees of Indebtedness of Others. FIN 45 clarifies the requirements
of  SFAS  No.  5,  Accounting  for  Contingencies,  relating  to  a  guarantor's
accounting  for, and disclosure of, the issuance of certain types of guarantees.
For  certain  guarantees  issued  after  December  31,  2002,  FIN 45 requires a
guarantor to recognize,  upon issuance of a guarantee,  a liability for the fair
value of the obligations it assumes under the guarantee. Guarantees issued prior
to January 1, 2003 are not subject to liability recognition,  but are subject to
expended  disclosure  requirements.  We do not believe that the adoption of this
Interpretation  will  have a  material  impact  on  our  financial  position  or
statement of operations.

      In January  2003,  FASB  issued FIN 46, an  interpretation  of  Accounting
Research  Bulletin No. 51. FIN 46, requires us to consolidate  variable interest
entities  for which we are deemed to be the  primary  beneficiary  and  disclose
information  about  variable  interest  entities in which we have a  significant
variable  interest.  FIN 46 became effective  immediately for variable  interest
entities  formed after  January 31, 2003 and will become  effective in the third
quarter of 2003 for any variable  interest  entities formed prior to February 1,
2003.  The adoption of this  standard is expected to have no material  effect on
our financial statements.

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

Within 90 days prior to the date of this quarterly report on Form 10-QSB for the
first quarter ended  September 30, 2004, the Company  carried out an evaluation,
under the supervision and with the  participation  of the Company's  management,
including the Company's  President,  its principal  executive officers and Chief
Financial  Officer,  of the  effectiveness  of the design and  operation  of the
Company's  disclosure  controls  and  procedures  pursuant to Rule 13a-14 of the
Securities  Exchange Act of 1934.  Based upon that  evaluation,  these principal
executive officers and principal  financial officer concluded that the Company's
disclosure  controls and  procedures  are  effective in timely  alerting them to
material  information  relating  to  the  Company,  including  its  consolidated
subsidiaries,  required to be included in the  Company's  periodic  SEC filings.
There have been no significant  changes in internal controls or in other factors
that could significantly  affect internal controls subsequent to the date of our
most recent evaluation.

PART II- OTHER INFORMATION

Item 1. Legal Proceedings

As of  September  30, 2004 we were the  plaintiff  in a lawsuit  filed in Pierce
County,  Washington,  Superior Court, which we commenced in October 2002. In the
litigation  we  were  asserting  claims  against  a  corporation  and one of its
apparent  principals related to their alleged breach of contract to provide debt
financing  to the Company.  The matter was settled in July 2004,  as the Company
did not want to pursue the issue due to the lengthy and costly assessment of the
litigation process.

Ecuity, Inc.'s wholly owned subsidiary, Y3K, Inc., is the defendant in a lawsuit
filed in Pierce County,  Washington,  Superior  Court,  currently  pending.  The
plaintiff is the former  landlord of Y3K, Inc. and is asserting  claims  against
Y3K, Inc.  related to its alleged breach of two lease  agreements that Y3K, Inc.
entered into with its former landlord in 1999 and 2000. The total claim asserted
against Y3K, Inc. is in excess of $500,000  inclusive of allegedly unpaid rents,
late charges,  prejudgment interest, attorney fees, and the expenses incurred in
releasing  the premises.  No claims are asserted  against  Ecuity,  Inc. and, in
management  opinion,  it is unlikely  that any attempt to assert a claim against
Ecuity,  Inc.  would be  successful.  During the week of November 1, the Company
received  a  settlement  offer of $30,000  as  payment  for the  entire  balance
allegedly owned  (approximately  $500,000) provided it can be paid by the end of
November, 2004.


                                       23
<PAGE>

The Company is not a party to any other pending legal proceeding.  Management is
not aware of any threatened litigation, claims or assessments.

Item 2. Changes in Securities

During the quarter, the Company issued additional common shares as follows:

      During the quarter, 12,257,954 shares of common stock were issued for loan
      fees and services  amounting to  $412,501at  prices  ranging from $0.02 to
      $0.05 per share.

      The table below details the common shares issued for services:

<TABLE>
      -----------------------------------------------------------------------------------------------------
        Person/Class          # of              Consideration   Date of                Description of
                              Shares            (Value of       Transaction             Services Rendered
                              Issued            Service)
      -----------------------------------------------------------------------------------------------------
<S>                          <C>               <C>             <C>                    <C>
      Jeffrey Galpern        5,545,454         $  248,126      July16-19, 2004        Shares for marketing
      Pacific                  400,000         $   16,000      Sept. 8, 2004          Loan Fee
      Professional Prop
      Fried Schnaier           300,000         $   12,000      August 20, 2004        Loan Broker Fee
      Ken Israel             5,000,000         $  100,000      August 31, 2004        Consulting Fee
      Jason Goldstein          312,500         $    9,375      Sept. 9, 2004          Loan Broker Fee
      Troy Otillio Trust       300,000         $    9,000      Sept. 9, 2004          Loan Fee
      Individual                50,000         $    2,500      July 26, 2004          Investor Dinner
                                                                                      Meeting
      Individual               250,000         $   12,500      Sept. 8, 2004          Loan Fee
      -----------------------------------------------------------------------------------------------------
         Totals             12,257,954         $  412,501
      =====================================================================================================
</TABLE>

         12,000,000  additional  new  common  shares  were  issued  for  cash of
         $130,000.  Jeffrey  Galpern  was  issued  5,000,000  common  shares  as
         collateral for a loan.

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


                                       24
<PAGE>

Index to Exhibits:


   31.1  Certification  Pursuant  to the 18  U.S.C.  Section  1350,  as  Adopted
         Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

   31.2  Certification by King Cole

   31.3  Certification by Leon Caldwell

   32.1  Certification  Pursuant  to the 18  U.S.C.  Section  1350,  as  Adopted
         Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

   32.2  Certification  Pursuant  to the 18  U.S.C.  Section  1350,  as  Adopted
         Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

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.


                                      /s/ KING COLE
                                          --------------------
Date:  November 12, 2004                  King Cole, President



                                       25