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, 2005

|_|   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: 239,692,932 shares of $0.001 par value
common stock outstanding as of April 5, 2005.


<PAGE>

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

        Unaudited Consolidated Balance Sheets..................................1

        Unaudited Consolidated Statements of Operations
        for the Three and Nine Months Ended
        March 31, 2005 and March 31, 2004......................................3

        Unaudited Consolidated Statements of
        Cash Flows for the Nine Months Ended
        March 31, 2005 and March 31, 2004. ....................................4

        Unaudited Consolidated Statement of Changes in
        Stockholders' (Deficit) for the year ended June 30, 2004
        and the Nine months ended March 31, 2005...............................5

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

Item 2. Management's Discussion and Analysis of
        Financial Condition and Results of
        Operations............................................................22

Item 3. Quantitative and Qualitative Disclosures About Market Risk............28

Item 4. Controls and Procedures ..............................................28

PART II.OTHER INFORMATION ....................................................28

Item 1. Legal Proceedings  ...................................................28

Item 2. Changes in Securities  ...............................................29

Item 3. Defaults Upon Senior Securities.......................................29

Item 4. Submission of Matters to a Vote of Security Holders  .................29

Item 5. Other Information  ...................................................29

Item 6. Exhibits   ...........................................................29

Signatures....................................................................29

Certifications................................................................30

<PAGE>

                          ECUITY, INC. AND SUBSIDIARIES

                      UNAUDITED CONSOLIDATED BALANCE SHEETS



                                                   March 31, 2005  June 30, 2004
--------------------------------------------------------------------------------
ASSETS
Current
     Cash and cash equivalents                     $       3,103      107,695
      Accounts Receivable, net of allowance of
       $179,300 at June 30, 2004 and $169,375 at
       March 31, 2005                                    442,938      601,287

      Prepaid expenses                                    21,458       29,884
      Inventory                                              800
                                                   -----------------------------
           Total Current Assets                          468,299      738,866

Deposits                                                 121,815       43,722
Property and equipment, net                              448,184      499,346
Acquired customer list, net of amortization            1,182,245    1,677,600
                                                   -----------------------------
     Total Assets                                      2,220,543    2,959,534
================================================================================

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


                                        1
<PAGE>

                          ECUITY, INC. AND SUBSIDIARIES

                      UNAUDITED CONSOLIDATED BALANCE SHEETS

                                                   March 31, 2005  June 30, 2004
--------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' DEFICIT

Current

     Accounts payable and accrued liabilities      $   3,395,859    2,954,559

     Loans payable                                     4,273,515    5,887,061

     Stock to be issued for services and sales                 0      167,000

     Deposits and advance billings                       273,680      329,253

     Capital lease obligations - current portion         104,331      104,331
                                                   -----------------------------
         Total Current Liabilities                     8,047,385    9,442,204
                                                   -----------------------------
Long Term Liabilities

      Convertible Debentures                                   0      200,000

       Note payable to Fox - net of current portion    1,475,000            0
      Capitalized Leases-net of current portion           83,408      145,896
                                                   -----------------------------
           Total Long Term Liabilities                 1,558,408      345,896
                                                   -----------------------------
      Total Liabilities                                9,605,793    9,788,100

SHAREHOLDERS' DEFICIT

     Share Capital:
     Authorized: 400,000,000 common shares, par
         value $0.001 per share

           Issued and outstanding:

     239,692,932 common shares outstanding at
       March 31, 2005 and 113,260,948                    239,693      113,261
     common shares at June 30, 2004

       Additional paid-in capital                     11,915,236    8,601,184
      Additional paid-in-capital stock options
        issued
                                                         211,378      209,298

      Less deferred compensation                               0       (9,442)

      Deficit                                        (19,751,557) (15,742,867)
                                                   -----------------------------
      Total Shareholders' Deficit                     (7,385,250)  (6,828,566)
                                                   -----------------------------
     Total Liabilities and Shareholders' Deficit   $   2,220,543    2,959,534
                                                   =============================

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


                                       2
<PAGE>

<TABLE>
<CAPTION>
                                       ECUITY, INC. AND SUBSIDIARIES

                              UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS


                                                Three Months Ended                   Nine Months Ended
                                                     March 31                           March 31
                                           ------------------------------    ------------------------------
                                               2005              2004             2005             2004
                                           -------------    -------------    -------------    -------------
<S>                                        <C>              <C>              <C>              <C>
Revenues                                         664,859        1,650,655        2,320,421        1,650,655

Cost of revenues                                 399,759          848,353        1,551,534          848,353
                                           ------------------------------    ------------------------------
Gross margins                                    265,100          802,302          768,887          802,302
Operating expenses
      Selling expenses                           117,409          121,140          379,483          121,140
      Amortization of customer list               78,216                           234,648
      Depreciation                                33,064                            99,192
      General and administrative               1,608,927        2,057,784        3,918,714        3,268,541
                                           ------------------------------    ------------------------------
Total operating expenses                       1,837,616        2,178,924        4,632,037        3,389,681
                                           ------------------------------    ------------------------------
Operating loss                                (1,572,516)      (1,376,622)      (3,863,150)      (2,587,379)
                                           ------------------------------    ------------------------------
Other income (expense)
     Interest (expense)                         (134,629)         (39,836)        (537,103)         (71,643)
     Miscellaneous other                         391,563            8,649          391,563            8,649
                                           ------------------------------    ------------------------------
Total other income (expense)                     256,934          (31,187)        (145,540)         (62,994)
                                           ------------------------------    ------------------------------
Net loss                                   $  (1,315,582)      (1,407,809)      (4,008,690)      (2,650,373)
                                           ==============================    ==============================

Basic loss per share                       $        (.01)            (.02)            (.03)            (.03)

Weighted Average Number of Common Shares
Outstanding
                                             187,990,748       76,342,306      187,990,748       76,342,306

Diluted loss per share                     $        (.01)            (.02)            (.02)            (.03)

Diluted weighted average
  shares outstanding                         220,164,815       83,395,336      220,164,815       83,395,336


Note A - Miscellaneous  other income of $391,563 for the 3 and 9 months ended March 31, 2005 represents the
forgiveness  of debt on the Fox note from its inception  (January 2, 2004) to March 31, 2005 as part of the
revised note Agreement.


      The Accompanying Notes are an Integral part of these Unaudited Consolidated Financial Statements
</TABLE>


                                                     3
<PAGE>

<TABLE>
<CAPTION>
                              ECUITY, INC. AND SUBSIDIARIES
                      UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOW

                                                                   Nine Months Ended
                                                                       March 31
                                                               --------------------------
                                                                  2005            2004
                                                               -----------    -----------
<S>                                                            <C>            <C>
Cash Flows From Operating Activities
     Net loss                                                  $(4,008,690)    (2,650,373)
Adjustments To Reconcile Net Loss To Net Cash From Operating
  Activities
     Depreciation and amortization                                 333,840
                                                                                  225,677
     Stock issued for other than cash                            1,190,551      1,294,764
     Deferred compensation                                           9,444
     Changes in assets and liabilities:
     Decrease (increase) in accounts receivable, net               158,348       (719,556)
     Increase in deposits                                          (78,093)       (35,484)
     Decrease in stock issuances due                              (170,000)
     Increase in inventory                                            (800)
     Decrease (increase) in prepaid expenses                         8,426        (70,750)
     (Decrease) increase in payable and accrued liabilities
                                                                   444,300        984,912
     Stock options outstanding                                       2,080
     Decrease (increase) in advanced billings                      (55,573)       335,297
                                                               --------------------------
      Cash used by operating activities                         (2,166,167)      (635,513)
                                                               --------------------------

Cash Flows Used By Investing Activities
     Purchase of property and equipment                            (48,029)    (1,109,290)
      Acquisition of Fox subscriber base                                       (2,872,672)
                                                               --------------------------
     Cash used by investing activities                             (48,029)    (3,981,962)
                                                               --------------------------

Cash Flows From Financing Activities
     Proceeds from loans payable                                 1,279,957      3,321,247
     Paydown and retirement of loans payable                    (1,118,798)
     Issuance of common stock for loan reductions                1,422,933
     Sale of convertible debentures                                               700,000
     Share subscriptions receivable                                                (4,429)
     Sale of common stock for cash                                 588,000        384,180
     Change in capitalized leases                                  (62,488)       231,617
                                                               --------------------------
      Cash provided (used) by financing activities               2,109,604      4,632,615
                                                               --------------------------

Net Increase (Decrease) In Cash                                   (104,592)        15,140
Cash  And Cash Equivalents, Beginning Of Year                      107,695            653
                                                               --------------------------
Cash  And Cash Equivalents, End Of Year                        $     3,103         15,793
                                                               ==========================

      Interest paid during the periods                         $   136,924         71,643

</TABLE>

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


                                            4
<PAGE>

<TABLE>
<CAPTION>
                                               ECUITY, INC. AND SUBSIDIARIES
                               CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' (DEFICIT)
                      FOR THE YEAR ENDED JUNE 30, 2004 AND THE NINE MONTH PERIOD ENDED MARCH 31, 2005

                                                                                  ADDITIONAL
                                 COMMON STOCK           SHARE        ADDITIONAL  PAID-IN CAPITAL
                         -------------------------  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                                                                                 9,442          9,442
Stock options issued                                                                                  2,080          2,080
Issue of common stock
 for services             31,197,954        31,198                    1,159,354                                  1,190,552
Shares issued for stock
  issuances due            1,000,000         1,000                      169,000                                    170,000
Issue of common stock for
Collateral on loan         3,900,000         3,900                       (3,900)                                         0
Sale of common stock      33,530,414        33,530                      554,470                                    588,000
Shares issue to
  retire debt             56,803,616        56,804                    1,435,128                                  1,491,932
Net Loss for the Period                                                                          (4,008,690)    (4,008,690)
                         -------------------------------------------------------------------------------------------------
Balance March 31, 2005   239,692,932   $   239,693             0     11,915,236       211,378   (19,751,557)    (7,385,250)
                         =================================================================================================


             The Accompanying Notes are an Integral part of these Unaudited Consolidated Financial Statements
</TABLE>


                                                            5
<PAGE>

                          ECUITY, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                 MARCH 31, 2005
                                   (UNAUDITED)

1.   SIGNIFICANT ACCOUNTING POLICIES

     The consolidated  financial statements of the Company have been prepared in
     accordance  with  generally  accepted  accounting  principles in the United
     States of  America.  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 have, in management's  opinion, been
     properly  prepared within  reasonable  limits of materiality and within the
     framework of the significant accounting policies summarized below.

     CONSOLIDATION

     These consolidated financial statements include the accounts of the Company
     and its 100% owned  subsidiaries,  Y3K,  Incorporated  and Ecuity  Advanced
     Communications, Inc.

     CASH AND CASH EQUIVALENTS

     For purposes of the  statement  of cash flows,  the Company  considers  all
     highly liquid debt instruments purchased with an original maturity of three
     months or less to be cash equivalents.

     PROPERTY AND EQUIPMENT

     The cost of property and equipment is depreciated  using the  straight-line
     method over the  estimated  useful lives of the assets,  which are three to
     five years.  The Company leases  equipment that is capitalized.  All leases
     are accounted for in accordance with Financial  Accounting  Board Statement
     No. 13 - Accounting for Leases. Amortization expense related to capitalized
     leases is included with depreciation expense.

     SOFTWARE DEVELOPMENT COSTS

     All software development costs are expensed as incurred.  Capitalization of
     software  development  costs begins upon the establishment of the Company's
     ability to provide a product that is readily  marketable.  Amortization  of
     capitalized  software development costs is provided on a product-by-product
     basis using the straight-line method over each product's estimated economic
     life, which ranges from two to five years.

     Software  development  costs  also  include  capitalized  costs of  design,
     configuration, coding, installation and testing of the Company's website up
     to its initial implementation. The Company did not complete the development
     of the website and the initial implementation costs were expensed in fiscal
     2000.


                                       6
<PAGE>

                          ECUITY, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                                 MARCH 31, 2005


1.   SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

     REVENUE RECOGNITION

     The Company  recognizes  revenue and the related costs of sales as products
     are  shipped  and title is passed to the  customer.  The  Company  provides
     warranty on product sales for a period of one year.  This includes  updates
     and entitles the user to  replacement  software,  if needed,  at 20% of the
     original  sales  price.  After one year,  customers  can opt for an ongoing
     maintenance  program  entitling them to any product  upgrades at 20% on the
     current purchase price.

     For extended  warranty and continued  product update  services,  revenue is
     recognized over the term of the  maintenance  agreement.  The  subscription
     period can be no less than  quarterly.  Revenue  related to the services is
     deferred and  recognized as the services are  performed in accordance  with
     Statement of Position  97-2 - "Software  Revenue  Recognition"  and related
     interpretations.

     Sales  are  comprised  of gross  revenues  less  provisions  for  estimated
     customer returns and other sales allowances.  For software sales,  customer
     returns are only available within 30 days of the sale and only in the event
     that the software does not perform as described by the Company. Such return
     policy will require the customer to write to the Company with the specifics
     of their claim that the software does not deliver as promised.  The related
     reserves for these provisions are included in "Accounts Receivable, net" in
     the  accompanying  consolidated  statements  of  operations.  For telephony
     services,  billing errors may be corrected for 30 days after the mailing of
     the monthly bill to customers.  Usually such adjustments will be handled by
     phone with adjustment  approved by a customer service  manager.  Provisions
     for estimated  returns and sales  allowances are established by the Company
     concurrently  with the recognition of revenue and are based on a variety of
     factors  including  actual return and sale allowance  history and projected
     economic conditions. The Company has not incurred any significant amount of
     returns  or sales  allowances  in fiscal  years 2000 to 2004.  All  amounts
     billed to  customers  related to  shipping  and  handling  are  included in
     revenue.  All costs associated with shipping and handling are recognized in
     cost of sales.

     The Company  provides  services  for long  distance  and  Internet  access.
     Revenues are recognized when the services are provided.  Amounts prepaid by
     customers  is credited to Deferred  Revenues and  recognized  in the period
     they are earned.

     Effective  October 2000,  the Securities  and Exchange  Commission  ("SEC")
     issued Staff Accounting  Bulletin ("SAB") No. 101 - "Revenue  Recognition",
     which provides guidance on the recognition,  presentation and disclosure of
     revenue in  financial  statements  filed with the SEC. SAB No. 101 outlines
     the basic  criteria  that must be met to  recognize  revenue  and  provides
     guidance  for  disclosure  related to  revenue  recognition  policies.  The
     Company believes our revenue  recognition  practices are in conformity with
     the  guidelines  prescribed  in SAB No.  101.  There  was no  effect on the
     consolidated financial statements related to the adoption of SAB No. 101.


                                       7
<PAGE>

                         .ECUITY, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                                 MARCH 31, 2005


1.   SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) PRODUCT WARRANTY

     The Company records product  warranty costs in the period in which the work
     is performed as a cost of sale.

     INCOME TAXES

     Income taxes are  accounted  for using an asset and  liability  approach in
     accordance  with  Statement of Financial  Accounting  Standard # 109, which
     requires the  recognition  of deferred tax  liabilities  and assets for the
     expected future consequences of temporary differences between the financial
     statement and tax basis of assets and liabilities at the applicable enacted
     tax rates.  Generally  accepted  accounting  principles require a valuation
     allowance  against deferred tax assets if, based on the weight of available
     evidence,  it is more likely than not that some or all of its  deferred tax
     assets will not be realized.

     USE OF ESTIMATES

     Management makes estimates and assumptions that affect the amounts reported
     in the financial  statements and accompanying  notes.  Actual results could
     differ from those estimates.

     CONCENTRATION OF CREDIT RISK

     Financial   instruments,   which   potentially   subject   the  Company  to
     concentrations of credit risk, consist of trade accounts  receivables.  The
     Company provides credit in the normal course of business to individuals and
     businesses and generally does not require collateral or other security.

     Management does not anticipate any material adverse effect on the Company's
     financial position as a result of these credit risks.

     STOCK OPTIONS

     In  accordance  with  Statement of Financial  Accounting  Standards No. 123
     ("SFAS 123"),  the Company has elected to account for stock options  issued
     to employees under Accounting Principles Board Opinion No. 25 ("APB Opinion
     No. 25") and related  interpretations  and accounts  for options  issued to
     non-employees for services under SFAS 123.

     NET LOSS PER SHARE

     Basic loss per share is  calculated  on the basis of the  weighted  average
     number of common shares  outstanding.  Diluted loss per share is calculated
     in the same manner as basic loss per share  amounts,  except for the effect
     of  the  potentially   issuable  shares  resulting  from  the  exercise  of
     outstanding  stock options and warrants.  Fully diluted  earnings per share
     exclude potentially issuable shares that are anti dilutive.


                                       8
<PAGE>

                          ECUITY, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                                 MARCH 31, 2005

1.   SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

BUSINESS COMBINATIONS

The Company has adopted SFAS No. 141 Business  Combinations  that superseded APB
Opinion  No.  16  requiring  the  purchase  method  be  used  for  all  business
combinations  initiated  after  June 30,  2001.  This  statement  requires  that
intangible assets that can be identified and named be recognized as assets apart
from  goodwill if they meet one of two  criteria - the  contractual-legal  right
criterion  or the  separability  criterion.  This  statement  also  requires the
primary reason for the business  combination  and the allocation of the purchase
price paid to the assets acquired and liabilities assumed by major balance sheet
caption.

INTANGIBLE ASSETS

The Company has adopted SFAS No. 142 Goodwill and Other Intangible Assets.  This
Statement  addresses  financial  accounting and reporting for intangible  assets
acquired individually or with a group of other assets (but not those acquired in
a business combination) at acquisition.  This Statement also addresses financial
accounting and reporting for goodwill and other intangible  assets subsequent to
their  acquisition.  Intangible  assets with a definite  life will be  amortized
under this statement while intangible  assets with an indefinite life (goodwill)
will not be amortized.  Evaluation of the carrying cost of all intangible assets
will be performed  at least yearly and the carrying  amount of the asset will be
adjusted to the realizable value.

SFAS No. 150 Accounting for Certain Financial  Instruments with  Characteristics
of  both  Liabilities  and  Equity.   This  statement  requires  that  financial
instruments  issued in the form of shares that is  mandatorily  redeemable  that
embodies  an  unconditional  obligation  requiring  the  issuer  to redeem it by
transferring  its assets at a specified or determinable  date (or dates) or upon
an event that is certain to occur,  to classify  such  instrument as a liability
instead of equity. The Company does not expect that the adoption of SFAS No. 150
will have a material impact on the Company's consolidated financial statements.


2.   BASIS OF PRESENTATION

The unaudited  consolidated  financial  statements as of March 31, 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, 2005
and 2004 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.


                                       9
<PAGE>

                          ECUITY, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                                 MARCH 31, 2005


3.   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  were  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

     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)
                                                                =============


                                       10
<PAGE>

                          ECUITY, INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                                 MARCH 31, 2005

3.   ACQUISITION OF ASSETS AND SUBSIDIARIES (CONTINUED):

     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  Advanced  Communications,  Inc.
     ("EAC") 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.
     EAC has paid $300,000 toward the note as part 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 EAC. 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.  EAC in conjunction with its parent Company,
     Ecuity, Inc., was able to negotiate an extension of that note along with an
     issuance of commons shares of Ecuity, Inc. for a reduction in the debt.

     The revised terms provided that there was a waiver of all interest  through
     March 31, 2005 with a limit on the note  reduction of $250,000  (previously
     limited  to  $450,000)  representing  an  adjustment  against  the total of
     accounts  receivable,  less the sum of the accounts  payable,  accruals and
     deferred income balances.

     The revised note payments are summarized as follows:

     $125,000                      Due on or before April 22, 2005
     $250,000                      Due on or before May 9, 2005
     $625,000                      Due on or before May 16, 2005

     Further,  the  Company  and Fox have  agreed  that Fox will reduce the note
     obligation by $1,000,000 in exchange for the issuance of 28,277,278  common
     shares of Ecuity,  Inc.  and  extended  the due date for the balance of the
     note (principal of $1,475,000) and all accrued interest to July 1, 2007.



                                       11
<PAGE>

                          ECUITY, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                                 MARCH 31, 2005

3.   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,  but not  limited  to,  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 the Company  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,  Ecuity
     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.  Additionally the former President of Fox, Mr.
     Lonnie Benson, became a consultant to Ecuity with a contact that expired on
     January 14, 2005.

     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.


                                       12
<PAGE>

                          ECUITY, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                                 MARCH 31, 2005

3.   ACQUISITION OF ASSETS AND SUBSIDIARIES (CONTINUED):

     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:

     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. The note and all accrued interest was cancelled
     in exchange for the issuance of 19,000,000  of the Company's  common stock.
     The total acquisition 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.

4.   LOANS AND OTHER OBLIGATIONS PAYABLE

                                                                    March 31,
                                                                      2005
                                                                 --------------
     a) Current portion of note due to Fox Communications, Inc.  $    2,000,000
     b) Promissory notes to Cornell Capital at 12% per annum            850,000
     c and f) Unsecured loans payable on demand, with interest
       ranging from 10% to 18% per annum and judgment                 1,234,061

     d) Loan due to bank - defaulted in year 2001 (unsecured)           155,666

     e) Contract for advance lock box receipts                           33,788
                                                                 --------------
          Total Current Loans Payable                            $    4,273,515
                                                                 ==============


                                       13
<PAGE>

                          ECUITY, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                                 MARCH 31, 2005

4.   LOANS AND OTHER OBLIGATIONS PAYABLE (CONTINUED):

a)   The note that 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 addendums,  which have been agreed
     to in writing between the parties,  provide for an extension for payment of
     principal  of  $2,000,000  by May 16, 2005 and the  remaining  principal of
     $1,475,000 and accrued interest due July 1, 2007.

b)   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.  The  $350,000  note has been paid in full  through the sale of
     common  stock  under  the  terms  of the  Equity  Line  of  Credit  and the
     $1,000,000 note has been paid down to $500,000 also from the sale of common
     stock under the terms of the Equity Line of Credit.  Additionally,  Cornell
     provided the Company with a new loan in March 2005 in the principal  amount
     of $350,000  under the terms of the Equity Line of Credit.  The Company and
     Cornell have agreed that they may sell shares into the  marketplace  over a
     period of months at the rate of  $50,000  each week  until they are paid in
     full.

c)   There are ten private  parties  comprising the aggregate loan amounts.  The
     single  largest party who has a loan, in the amount of $352,500,  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 was
     a co founder of the Company and a consultant. His loans total $282,996. The
     next largest  lender is a private  individual  with a loan in the amount of
     $200,000.  He is also a  non-related  third  party.  Three  loans  are from
     Company  officers in the  principal  amounts of $27,500,  24,400 and $1,100
     respectively.  The remaining loans are from private  individuals in amounts
     ranging  from  $5,000 to  $30,000.  These  individuals  (or  entities)  are
     non-related parties.

d)   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. This note was incurred by the Company's  subsidiary,  Y3K, Inc.,
     and there is no liability to the parent company, Ecuity, Inc.

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 estimated at an annual rate of 26%.

f)   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.


                                       14
<PAGE>

                          ECUITY, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                                 MARCH 31, 2005

4.   LOANS AND OTHER OBLIGATIONS PAYABLE (CONTINUED):

     In November,  2004 the  landlord  for the office space that was  previously
     occupied  by Y3K,  Inc.,  a wholly  owned  subsidiary,  was  successful  in
     obtaining a judgment in the approximate amount of $577.000. The company has
     reserved $472,000 in anticipation of this loss and management believes that
     this reserve is  sufficient to cover any  settlement  that may be made with
     that creditor.

     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.

     The Company  issued  50,000,000  shares of Common Stock to Cornell  Capital
     Partners, LLC in October 2004 and an additional 15,319,464 shares of Common
     Stock to Cornell capital Partners, LLC on March 11, 2005. These shares were
     issued in order to provide additional interim funding as well as reduce the
     existing debt to Cornell  under the terms of the Equity Line of Credit.  Of
     the 65,319,464  shares that were issued to the escrow agent for the benefit
     of Cornell,  there are 19,269,958  shares  remaining in escrow at March 31,
     2005.  These  shares are not included in the issued and  outstanding  share
     calculations.

5.   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 nine  months  ended March 31,  2005 and for all prior  periods.  The
     Company currently operates in one segment.


                                       15
<PAGE>

                          ECUITY, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                                 MARCH 31, 2005

6.   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.

7.   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 March 31,
     2005 the Company had  remaining  stock  options  (24,108,480)  and warrants
     (11,836,325)  totaling  35,944,805  common  shares that has been granted to
     various  employees,  directors,  consultants  and lenders at prices ranging
     from  $.02 to $.75 per  share.  At March  31,  2005  there  were a total of
     20,337,742  options and  11,836,325  warrants  vested for a vested total of
     32,174,067.

8.   CAPITAL ASSETS

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

     MARCH 31, 2005
     ------------------------------------------------------------
                                                      Value after
     Description of Asset                              Impairment
     ------------------------------------------------------------
     Computers and Equipment                              321,281
     ------------------------------------------------------------
     Computer Software                                     74,329
     ------------------------------------------------------------
     Switch Equipment                                     145,310
     ------------------------------------------------------------
     Leasehold Improvements                                25,488
     ------------------------------------------------------------
     Office Equip.                                         15,973
     ------------------------------------------------------------
                                                          582,381
     ------------------------------------------------------------
     Accumulated Depreciation                            (134,197)
     ------------------------------------------------------------
     Net Book Value                                       448,184
     ------------------------------------------------------------


                                       16
<PAGE>

Note: 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.

9.   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 March 31, 2005
which have been impacted by the impairment charge at June 30, 2004:


                                       17
<PAGE>

                          ECUITY, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                                 MARCH 31, 2005

9.   ACQUIRED SUBSCRIBER BASE (CONTINUED):

<TABLE>
<CAPTION>
                                                REDUCTION FOR
                                                   SALE OF
                                 CARRY 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        421,048  1,182,245
</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


                                       18
<PAGE>

                          ECUITY, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                                 MARCH 31, 2005


10.  LEASE COMMITMENTS

     The Company is currently leasing one office space as follows.

     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
                                                =============

11.  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.

     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.  Ecuity has elected to continue to
     apply APB 25 in accounting for its stock option incentive plans.


                                       19
<PAGE>

                          ECUITY, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                                 MARCH 31, 2005

11.  STOCK-BASED COMPENSATION (CONTINUED):

     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 Ecuity'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.

12.  CONCENTRATION OF SALES AND PURCHASES

     The Company's subsidiary,  Ecuity Advanced  Communications has no customers
     that  exceed ten (10%)  percent  of annual  sales,  however,  there are two
     vendors with  purchases that exceed ten (10%) percent of the cost of sales.
     These vendors and their purchase amounts are as follows (rounded to 000"s):

     QWEST                                           $333,700
     ELECTRIC LIGHTWAVE                              $379,000

13.  SUBSEQUENT EVENTS

     On May 9, 2005, the time the second payment was due to Fox  Communications,
     the Company and Fox  renegotiated  the Note dated March 31, 2005 and agreed
     to the  following  new terms.  The new Note has been revised to provide for
     28,277,278 shares of common stock valued at $1,000,000,  a $675,000 payment
     on May 20,  2005,  and a $200,000,  payment on  December 1, 2005,  with the
     balance of the note still due in July 2007.  Fox will  release  its lien on
     the equipment in the Company's  Network  Operating Center upon the $675,000
     payment on May 20, 2005.

     On May 13,  2005 the  Company  filed an SB-2 the  proceeds  from  which are
     intended to be used to meet the payment  obligations to Fox  Communications
     according to the renegotiated Note Agreement.

14.  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.


                                       20
<PAGE>

     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 $3,000,000 over the next 12 months. This amount
     has been  substantially  reduced from its prior period  estimate due to the
     terms of the amendment to the Fox note obligation.  Primarily the fact that
     $391,563  in  accrued  debt  through  March  31,  2005 has  been  forgiven,
     $1,000,000 in debt will be reduced through the issuance of common stock and
     payment  of  $1,475,000  of the  note  and all  accrued  interest  has been
     extended to July 1, 2007.

     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.


                                       21
<PAGE>

ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS

INTEGRATED COMMUNICATIONS - OVERVIEW

Ecuity provides advanced telephone services and products,  both through state of
the  art  Internet  voice  (VoIP)  and  through  traditional  telephone  service
connections  (PSTN).  All of Ecuity's  telephone  services are business  grade -
carrier class products.  Ecuity also delivers additional valuable  communication
products and services  targeted to the small and medium sized  business  market,
maximizing   value  to  the  businesses   served,   creating   strong   customer
relationships  and allowing  Ecuity to maintain  higher  margins  throughout its
product line. These additional advanced  communication  services include secure,
encrypted instant messaging,  secure data transfer,  document and data archiving
and retrieval,  T-1 provisioning,  internet connections,  conference calling and
e-commerce  software to create  solutions that meet the  communication  needs of
today's business world.

As a  facilities-based  carrier,  Ecuity  continues  to  operate  a  traditional
telephone  company  with a 17-year  history,  providing  service to thousands of
customers   in   the   Northwest    through   the   integration   of   web-based
telecommunications  and cutting-edge  software  technology.  Ecuity economically
delivers secure unified communication  solutions that break down distance,  time
and media barriers to allow people to communicate  anywhere,  anytime and across
multiple  mediums.  While Ecuity's  primary market is the small and medium sized
business  customer,  Ecuity also  provides the same high  quality  communication
products and services to residential and retail  distribution  customers through
channel partners.

Prior to calendar year 2004, Ecuity had been an early stage development company.
Calendar  year 2004  ushered in a new era for Ecuity as it began the  transition
from early stage development  company to a mature operating  company.  Our goals
for 2004 were the following:

o     Purchase an in-place  telephone  business  infrastructure  to  effectively
      support the delivery of next generation  telecommunication services to the
      business enterprise market.

o     Achieve  99.999%  reliability  through our  strategically  deployed hybrid
      switch  that  seamlessly   connects  both  Internet  voice  and  tradition
      telephone voice networks.

o     Launch our 4 primary VoIP products

o     Achieve a lead position in next generation wireless phone service

o     Achieve recognition in the industry as an emerging leader

We achieved all of the above  primary  goals in calendar year 2004, as described
below:

Purchase of telephone business infrastructure

     JANUARY 2004 - FOX ASSET  ACQUISITION

     Effective  January 14, 2004,  Ecuity  completed its acquisition of selected
     assets  of Fox  Communications,  Corporation.  The local  exchange  carrier
     assets purchased include physical hardware assets for state of the art VoIP
     switching,  traditional telephone switching facilities, as well as seasoned
     customer   service   and   billing   departments   necessary   to   support
     business/carrier  class telephone service. The business assets consisted of
     a  customer  base of 18,000  business  and  residential  customers.  Ecuity
     continues  to provide  wired and WiFi VoIP  services,  dial  tone,  PBX and
     hosted  PBX,  DSL, T 1 and  internet  dial up  connectivity,  web  hosting,
     conferencing  and  traditional  local and long distance  calling to most of
     these customers as well as its expanding base of new customers


                                       22
<PAGE>

     JUNE 2004 - KARUNGA  ACQUISITION

     After the Fox asset  acquisition,  Ecuity  completed its acquisition of the
     technology  of Karunga  Technologies  Corporation,  the  developers  of its
     secure Instant  Communications  System technology ("ICS"). This allowed the
     Company to own the  proprietary  technology,  derive the  benefit of higher
     margins and control of future development of the technology. ICS provides a
     platform of proprietary  technologies developed over the past several years
     to combine  encrypted text  messaging,  secure data and file  transmission,
     data  and  messaging  archiving,  strategic  collaboration,   and  presence
     management,  all on a managed, "peer to peer" basis. Previously the Company
     worked with Karunga under a license agreement and under a joint development
     agreement.  The  acquisition  of the  ICS  technology  now  allows  for the
     integration of all aspects of Ecuity's  software  applications  and ongoing
     development of technology for the sole benefit of the Company.  In 2005 the
     Company  plans to  integrate  these  services  with its wired and WiFi VoIP
     voice  services,  and to  extend  the  functionality  of  this  proprietary
     technology.

Launch of VoIP Products

     Commencing the last half of calendar 2004 we successfully launched our four
     VoIP telephone  products.  By the end of the year we had installed over 700
     business lines using our VoIP services.

     OCTOBER 2004 - TELSYM/INTEL PARTNERSHIP - WORLD FIRST

     In October,  Ecuity became the first carrier to host a carrier-class mobile
     VoIP solution  providing full featured VoIP call  capability  over wireless
     networks such as `WiFi hotspots and wireless office  networks.  Now using a
     laptop  computer or a hand held Pocket PC-PDA,  Ecuity  customers can place
     and receive phone calls over any private WiFi, public hotspot, or broadband
     network using Macintosh or Windows computers,  or Pocket PC mobile devices.
     Mobile  VoIP  solutions  are  increasingly  being  deployed  to satisfy the
     communication  needs of today's mobile corporate  professionals and workers
     in  industries  that  require  high levels of  mobility  such as retail and
     healthcare.  This offering is a joint  partnership  with  TeleSym,  another
     Bellevue,  Washington  based  technology  firm whose  patented  software is
     optimized to deliver  voice over  wireless  networks.  TeleSym's  financial
     backers include  Intel(R) and Seimens.  Ecuity worked with both TeleSym and
     Intel(R) in deploying  this world class wireless voice offering and was one
     of the first  communications  carriers to deploy Intel's(R) HMP SIP server.
     Next  generation  wireless  phones will be optimized  for wireless VoIP and
     will allow wireless VoIP carriers to challenge  cellular  technologies  and
     communications strategies

     DECEMBER 2004 - OTTAWA WIRELESS PARTNERSHIP - FIRST CITYWIDE WIFI

     In December  Ecuity  teamed with  Azulstar  Networks,  a division of Ottawa
     Wireless,  a world leader in citywide  WiFi network  deployments,  to offer
     wireless Voice over Internet phone  services.  Under the agreement,  Ecuity
     will be the  exclusive  provider of private  label mobile VoIP  services to
     Azulstar's  wireless  broadband  customers,  both business and residential.
     Initial  markets  will  include  Rio  Rancho,  New Mexico and Grand  Haven,
     Michigan.  Azulstar  expects  to launch  the Rio  Rancho  WiFi  based  VoIP
     services  at the  beginning  of 2005  and  will  include  multiple  package
     offerings  of  Ecuity's  services.  Grand  Haven  customers,  who have been
     enjoying  the  citywide  WiFi  network  since  fall  2003,  will be offered
     Ecuity's VoIP services later in the year.  Often referred to as the Silicon


                                       23
<PAGE>

     Mesa,  forward-thinking  Rio Rancho,  NM is home to 64,000  residents and a
     large  number of small,  medium and large sized high tech  companies.  This
     will be the nation's  largest and most advanced city- wide WiFi network and
     the  combination  of Azulstar's  innovative  WiFi  technology  and Ecuity's
     leading  VoIP  services  will  make Rio  Rancho a model for  citywide  WiFi
     communications networks.

Achieved recognition in the industry as a leader- The 2004 Pulver 100 award

     Because of Ecuity's  increasing  success in  delivering  cutting  edge VoIP
     services to customers  nationwide and around the world,  Ecuity's privately
     held  subsidiary,  Ecuity  Advanced  Communications  was  named to the 2004
     "Pulver 100"- which is the VoIP  industry's  premiere  listing of companies
     that represent the future of the communications industry.

Achieved 99.999% reliability for our strategic hybrid Switch

     In January we reported that we had achieved "5 9's"  (99.999%)  reliability
     and had processed a billion minutes through our hybrid switch that connects
     us to both our Internet voice networks and our traditional telephone copper
     wire switched  networks.  This was the highest priority for us as it is the
     foundation  of our  strategic  positioning  going  forward.  Because of our
     proven  reliability,  our  seamless  connection  to both the old  telephone
     network and the new Internet  based  telephone  network  through our hybrid
     switch  configuration,  and our advanced PBX and security features,  we are
     now able to leverage  these  competitive  advantages  into  numerous  joint
     ventures and channel partner arrangements to drive the business forward.

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

o     Leverage the strategic  advantages  we have achieved  through our platform
      and emerging industry recognition to aggressively market our products
o     Transition  debt incurred in achieving  early stage  development  goals to
      long-term debt and equity.
o     Conclude  negotiations  with top  flight  industry  recognized  leaders to
      complete upper management positions
o     Commence  aggressive  acquisition  strategy for small  regional  telephone
      companies like the one we purchased and  transitioned to a next generation
      telco.
o     Entering  into  the  VoIP   conference   calling  market  to  replace  the
      traditional  landline  services  that  did not fit into  our  platform  of
      utilizing our VoIP technology,

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  incurred 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.


                                       24
<PAGE>

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.

Distribution  of the company's  VoIP products and services is completed  through
direct sales and through channel partners.  Channel partner  categories  include
Branded Community-Wide Distribution Partnerships,  Private-Label  Community-Wide
Wholesalers,  and Value-Added Resellers.  The company has successfully concluded
new transactions that validate each of these distribution models as follows:

1. Branded Partnerships: Issaquah Highlands Project (Issaquah, WA) - The company
has been  selected  as the  exclusive  IP voice,  video and data  provider  over
community-wide  fiber network in a planned urban village community  comprised of
3200  residential  units and 3.8M square  feet of  commercial  space  (shopping,
hotel, hospital & Microsoft campus). Monthly recurring revenues are projected to
range from  $30-$120 for  residential  service and for business IP PPX voice and
data services from  $50-$100.  Nationally  there are over 400  Fiber-to-the-Home
communities reflecting a market opportunity of over 3M customers.

2. Private Label  Wholesalers:  AzulStar's  Metro-wide WiFi Network (Rio Rancho,
NM) - The company has been  selected as the  exclusive  IP voice  provider  over
Azulstar's Rio Rancho  metro-wide WiFi network  serving 60,000 base  population.
Monthly  recurring  revenues per  residential  line are  projected to range from
$15-$30 and for business  services from $30-$50.  Nationally  there are over 100
WiFi and WiMax  networks  projected  over the next 18  months  in an  aggregated
coverage area comprising 100M+ potential customers.

3. Value-Added Resellers: DigiLink (Marina del Rey, CA) - The company has signed
on as exclusive supplier of IP voice services to Southern  California's  largest
independent ISP for business market to resell to small-medium  sized  businesses
within >2M population base area.  Monthly  recurring  revenues per business line
are projected at $15-$45.  Nationally  the  addressable  market for resellers of
this type is comprised of over 10,000 regional telecom service  providers (ISP's
& CLECs) servicing a 100M+ customer universe.


LIQUIDITY AND CAPITAL RESOURCES

The working  capital  deficit  decreased to  $7,579,086 at March 31, 2005 from a
deficit  of  $8,703,338  as of June  30,  2004,  primarily  as a  result  of the
following:  the deferral of $1,475,000 of the Fox note from a current  liability
to long term debt, a decrease in account  receivable of $270,566 and an increase
in accounts payable and accrued liabilities of $444,300.

The Company had a  consolidated  operating net loss of  $4,008,690  for the nine
months ended March 31, 2005  compared to a net loss of  $2,650,373  for the same
period  last year.  The  substantial  increase  between  the 9 month  periods is
primarily a result of the  operating  loss for Ecuity  Advanced  Communications,
Inc.,  which was $1,433,036  this year.  There was only a 3 month operating loss
for the prior year for the period ended March 31, 2004 as the acquisition of the
Fox assets was not effective  until January  2004.  EAC has operating  income of
$29,126 for the 3 months ended March 31, 2004.

Revenues  from  the Fox  asset  purchase  are  recognized  in our  wholly  owned
subsidiary, Ecuity Advanced Communications,  Inc. Ecuity's business is primarily
related to long distance  services,  Internet  server  provider  (ISP),  and web
hosting.  The  ISP  hosting  line is sold on a  monthly,  quarterly  and  annual


                                       25
<PAGE>

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  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.

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.  Current
availability of such line is  approximately  $17,500,000 as of May 13, 2005. 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.  Cornell and the Company have
agreed on an orderly pay down of  existing  debt at the rate of $50,000 per week
utilizing the remaining shares that are being held in the trust escrow. Existing
debt obligations to Cornell at March 31, 2005 total $850,000.

We  anticipate  that a minimum of  $3,000,000  will be required  for the next 12
months from the balance sheet date to sustain Ecuity's corporate operations that
are  segregated  from its EAC  subsidiary  operations  and  satisfy  the current
portion of the note obligation to Fox  Communications  (the cash portion amounts
to $1,000,000),  accounts payable and other existing debt obligations  including
subsidiary liabilities. Currently, revenue in EAC is insufficient to provide for
all operating  costs  including  payroll,  rent,  selling  expenses and costs of
sales.  The Company took measures in the prior  quarters that have helped reduce
the negative cash flow. Excluding interest, a savings of nearly $648,000 for the
3-month  period has been  obtained due to the cost cutting  measures such as the
lowering  the  payroll,  outside  consulting  services  and network  costs.  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 approximately 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.  Achieving  some  or all  of  these  objectives  is  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  expense we  anticipate  necessary  to market
            these  bundled  services  is $50,000  until  such time as  increased
            revenues are  sufficient to offset the additional  costs  associated
            with the marketing of these products.  Further,  a cash reserve will
            be necessary  to show  strategic  partners  that we have the staying
            power necessary to support them in the short and long term.


                                       26
<PAGE>

      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.
      o     Securing  equity  or long term  financing  which,  will  allow us to
            operate  without  the  continued  short term  funding  that has only
            provided short term solutions.
      o     Continue to built out our Network Operating Center.

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 in the near
term the company will not be able to continue its 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.
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 nine month  periods  ended March 31, 2005 and March 31, 2004 the balance
sheets  at March  31,  2005 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 nine month  period  ended March 31,
2005,  we incurred a net loss of  $4,008,690 as compared to a loss of $2,650,373
for the same period last year.

The  substantial  increase  between the 9 month periods are  primarily  from the
operating loss of Ecuity  Advanced  Communications,  Inc.,  which was $1,433,036
this year and there was only the quarter ending March 31, 2004 that was included
for EAC last year with a net income of $29,126 for the period.


                                       27
<PAGE>

Since  incorporation,  we have funded our operations  through  private loans and
equity  financings.  As at March 31,  2005,  our total  assets were  recorded at
$2,220,543 consisting of cash $3,103 accounts receivable, net $442,938, prepaids
$21,458,  net  capital  assets  $448,184  deposits  $121,815  and the  purchased
subscriber  list of Fox in the  amount of  $1,182,245  (net of  amortization  of
$421,048  and a  reduction  from  the  sale  of  the  conferencing  services  of
$260,707).  Our total liabilities  totaled $9,605,793,  consisting  primarily of
$3,395,859  in accounts  payable and accrued  liabilities,  deposits on advanced
billings  of  $273,680,  loans  payable  to the  seller  of the  Fox  assets  of
$3,475,000, two notes to Cornell totaling $850,000 a defaulted bank loan payable
of  $155,666,  $121,564 for  defaulted  leased  equipment  and  equipment  lease
obligations of $187,739.

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
quarter ended  December 31, 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

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  Plaintiff  was
successful in obtaining a judgment  against its  subsidiary  in the  approximate
amount of $557,000 including an estimated, yet undetermined,  award for attorney
fees and costs of $25,000.

The Company is involved in other  litigation  from time to time in the  ordinary
course of business;  the outcome of which the Company's management believes will
not have a  material  adverse  effect on the  Company's  financial  position  or
results of operations.  During the period  covered by this  Quarterly  Report no
material developments occurred in such litigation.


                                       28
<PAGE>

Item 2. Changes in Securities

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

     18,225,000 shares of common stock were issued for consulting fees, interest
     expense,  research  work,  and PR services  amounting to $756,600 at prices
     ranging from $0.04 to $0.12 per share.

     14,827,594  common shares were issued to Cornell Capital Partners to reduce
     the Company debt by $600,000 and interest of $38,663 under the terms of the
     Equity Line of Credit.

     4,297,994  common  shares  were  issued to  Cornell  Capital  Partners  for
     proceeds of $150,000 under the Equity Line of Credit.

     10,000,000 common shares were sold to an individual for $100,000.

     20,000,000  common  shares  were  issued to Ray Weller of which  19,000,000
     common  shares  were issued in exchange  for the  cancellation  of his note
     which had a balance of $571,404  including  principal and accrued  interest
     and 1,000,000  common shares were issued for the prior  interest bonus that
     has been classified as stock issuances due.

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:

31.1    Certification  of the Chief  Executive  Officer  Pursuant to Rule 13a-14
        (a), as Adopted  Pursuant to Section  302 of the  Sarbanes-Oxley  Act of
        2002.

31.2    Certification  of the Chief  Financial  Officer  Pursuant to Rule 13a-14
        (a), as Adopted  Pursuant to Section  302 of the  Sarbanes-Oxley  Act of
        2002.

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/ SHANE SMITH
                                              -------------------
Date:  May 18, 2005                           Shane Smith, CEO


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