U.S. SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON, D.C. 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, 2003

OR

[_]   TRANSITION REPORT PURSUANT TO
SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE 
        ACT OF 1934

FOR THE TRANSITION
PERIOD FROM   ______________      TO
_____________

COMMISSION
FILE NUMBER 0-27580

‐‐‐‐‐‐‐‐‐

NETLOJIX
COMMUNICATIONS, INC.
(EXACT NAME
OF SMALL BUSINESS ISSUER AS SPECIFIED IN ITS CHARTER)

‐‐‐‐‐‐‐‐‐

DELAWARE
      
      87-0378021(STATE OR OTHER JURISDICTION
OF
      
      (I.R.S. EMPLOYERINCORPORATION OR
ORGANIZATION)
      
      IDENTIFICATION NO.)


501
BATH STREET
SANTA
BARBARA, CALIFORNIA 93101
(ADDRESS OF
PRINCIPAL EXECUTIVE OFFICES)

(805) 884-6300
(ISSUER'S
TELEPHONE NUMBER)

As of May 12, 2003, there were
14,695,149 shares of the Registrant's Common Stock, par value $0.01 per share,
issued and outstanding, excluding treasury stock.

Transitional Small Business
Disclosure Format (check one):           Yes  [_]  No  [X]

---

NETLOJIX
COMMUNICATIONS, INC.
QUARTER
ENDED March 31, 2003

TABLE OF
CONTENTS

PAGE‐‐‐‐Part I.         FINANCIAL
INFORMATIONItem 1.  Financial StatementsCondensed
Consolidated Balance Sheet as of March 31,
2003
    3Condensed
Consolidated Statements of Operations forthe Three Month
Periods Ended March 31, 2003 and 2002
    4Condensed
Consolidated Statements of Cash Flows forthe Three Month
Periods Ended March 31, 2003 and 2002
    5Notes to Condensed Consolidated Financial Statements
    6Item 2. 
Management's
Discussion and Analysis or Plan of
Operation
    12Item
3.  Controls and Procedures
    17PART
II.        OTHER INFORMATIONItem 3. 
Defaults upon Senior
Securities
    17Item 6. 
Exhibits and Reports
on Form 8-K
    17Signature
Page
    18Certifications
    19


2

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PART I.  FINANCIAL INFORMATIONITEM 1.  FINANCIAL STATEMENTSNETLOJIX COMMUNICATIONS, INC. AND SUBSIDIARIESCONDENSED CONSOLIDATED BALANCE SHEET(unaudited)March 31,2003AssetsCURRENT ASSETSCash
  
  $
  321,000Accounts receivable, net
  
  805,000Accounts receivable from related parties
  
  354,000Prepaid expenses and other current assets
  
  217,000Total current assets
  
  1,697,000Property and equipment, net
  
  615,000Other assets
  
  
  40,000Total assets
  $
  2,352,000Liabilities and Stockholders' DeficitCURRENT LIABILITIESRevolving line of credit
  $
  1,200,000Accounts payable and other accrued expenses
  
  1,084,000Accrued payroll related liabilities
  
  602,000Accrued network services costs
  
  374,000Litigation settlement liability
  
  6,000Sales and excise tax payable
  
  32,000Unearned revenue
  
  
  711,000Other current liabilities
  
  475,000Total current liabilities
  
  4,484,000Long term obligations
  
  -Total liabilities
  
  4,484,000Commitments and contingenciesSTOCKHOLDERS' DEFICITPreferred stock, authorized 1,000,000 shares, $0.01 par valueSeries A convertible preferred stock, designated 250,000 shares,cumulative as to 8% dividends, 147,700 shares issued andoutstanding. (Liquidation preference of $845,824 at March 31, 2003including dividends in arrears totaling $255,024.)
  
  1,000Common stock, authorized 40,000,000 shares, $0.01 par value,issued 14,858,054 shares at March 31, 2003.
  
  149,000Deferred Compensation - restricted stock
  
  (7,000)Additional paid in capital
  
  28,631,000Preferred dividends
  
  (102,000)Accumulated deficit
  
  (30,802,000)Treasury stock, $0.01 par value, 162,905 shares at March 31, 2003
  
  (2,000)Total stockholders' deficit
  
  (2,132,000)Total liabilities and stockholders' deficit
  $
  2,352,000See accompanying notes.


3

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NETLOJIX COMMUNICATIONS, INC. AND SUBSIDIARIESCONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS(unaudited)Three monthsEnded March 31,2003
      
      2002SERVICE REVENUESUnrelated parties
      $
      2,097,000
      
      2,889,000Related parties - (note 8)
      
      431,000
      
      1,032,000TOTAL SERVICE REVENUES
      
      2,528,000
      
      3,921,000COST OF SERVICE REVENUES(exclusive of depreciation - note 11)
      
      1,368,000
      
      2,290,000GROSS MARGIN
      
      1,160,000
      
      1,631,000OPERATING EXPENSESSelling, general and administrative
      
      1,132,000
      
      1,597,000Depreciation and amortization
      
      112,000
      
      154,000Total operating expenses
      
      1,244,000
      
      1,751,000OPERATING LOSS
      
      (84,000)
      
      (120,000)Interest expense
      
      (31,000)
      
      (21,000)Other expense, net
      
      (6,000)
      
      (12,000)Loss from operationsbefore income taxes
      
      (121,000)
      
      (153,000)Income tax benefit
      
      -
      
      -NET LOSS
      $
      (121,000)
      
      (153,000)Preferred dividends
      
      -
      
      -Loss applicable to common shareholders
      $
      (121,000)
      
      (153,000)Net loss per common share - basic and diluted
      $
      (0.01)
      
      (0.01)Weighted average number ofcommon shares - basic & diluted
      
      14,858,054
      
      14,656,328See accompanying Notes


4

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NETLOJIX COMMUNICATIONS, INC. AND SUBSIDIARIESCONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS(unadudited)Three monthsEnded March 31,2003
    
    2002CASH FLOWS FROM OPERATING ACTIVITIES:Net loss from operations
    $
    (121,000)
    $
    (153,000)Adjustments to reconcile net loss from operationsto cash provided by (used by) operating activities:Depreciation and amortization
    
    112,000
    
    154,000Provision for bad debts
    
    34,000
    
    70,000Stock compensation earned
    
    2,000
    
    2,000Changes in certain operating assets and liabilities:Accounts receivable
    
    4,000
    
    748,000Due from affiliates
    
    63,000
    
    (206,000)Other current assets
    
    (18,000)
    
    (92,000)Accounts payable and accrued liabilities
    
    (203,000)
    
    (841,000)Cash provided by (used by) operating activities
    
    (127,000)
    
    (318,000)CASH FLOWS FROM INVESTING ACTIVITIES:Additions to property and equipment
    
    (21,000)
    
    (18,000)Cash used by investing activities
    
    (21,000)
    
    (18,000)CASH FLOWS FROM FINANCING ACTIVITIES:Principal payments on capital leases
    
    (4,000)
    
    (4,000)Amount borrowed (paid) on line of credit, net
    
    -
    
    373,000Amounts paid on long term borrowings
    
    -
    
    (5,000)Cash provided by (used by) financing activities
    
    (4,000)
    
    364,000Net increase (decrease) in cash and cash equivalents
    
    (152,000)
    
    28,000Cash at beginning of period
    
    473,000
    
    72,000Cash at end of period
    $
    321,000
    $
    100,000Cash paid during the period:Interest
    $
    31,000
    $
    21,000Non cash investing and financing activities:None
    
    $
    -
    $
    -See accompanying notes.




5

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NETLOJIX
COMMUNICATIONS, INC. AND SUBSIDIARIESNOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

March 31,
2003 and 2002

(1)  Basis of Presentation

The unaudited condensed consolidated financial statements of NetLojix
Communications, Inc. and Subsidiaries (the "Company" or "NetLojix")
as of March 31, 2003 and for the three month periods ended March 31, 2003 and
2002 have been prepared in accordance with accounting principles generally
accepted in the United States for interim financial reporting. Accordingly,
they do not include all of the disclosures required by accounting principles
generally accepted in the United States for complete financial statements and
should be read in conjunction with the audited consolidated financial
statements and notes thereto included in NetLojix's Form 10-KSB for the year
ended December 31, 2002. All significant intercompany balances and transactions
have been eliminated in consolidation. In the opinion of management, all
adjustments (consisting only of normal recurring adjustments) considered
necessary for a fair presentation of the interim financial information have
been included.  The results of operations for any interim period are not
necessarily indicative of the results of operations for the entire year.
Certain reclassifications have been made to prior period amounts in order to
conform to current year presentation.

(2)  Going
Concern

The
company is in default under its secured credit facility and cannot borrow
additional funds.  In addition, at March 31, 2003, the Company had a working
capital deficit of $2,787,000 and negative stockholders' equity of $2,132,000. 
These factors raise substantial doubt about the Company's ability to continue
as a going concern. Based upon estimates of projected cash flows for the
calendar year 2003, management believes that the Company's ability to continue
in existence is dependent upon receiving new debt financing, cost reduction and
general revenues from the operations of the Company's subsidiaries, as to any
of which there can be no assurance.  Management is currently in the process of
taking the Company private (see note 4) and is continuing to reduce costs.

(3)  Acquisitions
and Dispositions

In January 2003, we ceased
operations at Smith Technology Solutions, Inc., based in Northern California
("STS"), which provided technical support services to corporate customers, primarily
in California. In April 2003 we sold STS's customers and one service contract
to Dewayne Cornelious, the former general manager of STS.  The purchase price
of $24,000 will be paid over 18 months and may be reduced by negotiating a
reduction in rent and or disposing of assets at a price in excess of their book
value.  We do not believe that this transaction will have a material adverse
effect on NetLojix's net income.

On September 30, 2001 we
sold a portion of our New York technical support services business (consisting
of our New York City customer list and related customer contracts) to Laser
Printer Care Company, Ltd. We retained all of our help desk customers and
contracts. This was a non-cash transaction. The consideration consisted of the
purchaser assuming our responsibility for unused customer retainers and
remaining terms on service agreements, which we held as liabilities.  We
recorded a gain (net of costs) of $203,000 in connection with this sale as a
result of the removal of these liabilities. In addition, if the purchaser was
able to renew retainers, service agreements or provide any additional services
to the customers that were transferred, then it was to pay us 5% of any such
cash received prior to September 30, 2002. We have recorded $3,918 in such
additional payments as of September 30, 2002.



6

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(4)  Going
private

On December
28, 2002, NetLojix entered into an Agreement and Plan of Merger (the "merger
agreement") with NetLojix Acquisitions Corporation ("NAC") providing for the
merger of NAC with and into NetLojix, with NetLojix as the surviving
corporation in the merger. NAC is owned and controlled by Anthony E. Papa and
James P. Pisani, NetLojix's Chief Executive Officer and President, respectively
(the "Executives"). Upon completion of the merger, NetLojix would become a
privately held corporation all of the common stock of which would be owned by
the Executives.

The merger
agreement provides that, at the effective time of the merger, all issued and
outstanding shares of NetLojix common stock (other than shares of NetLojix
common stock held by NAC, the Executives or NetLojix, or shares subject to
properly exercised appraisal rights) will be converted into the right to
receive $0.02 in cash, without interest and less any applicable withholding
taxes. The closing of the transaction is subject to certain conditions,
including the approval of NetLojix stockholders.

(5)  Net Loss Per Common Share

Net
Loss per common share for the three month periods ended March 31, 2003 and 2002
are as follows:

Three
  Months
  Ended
  March 31,Net loss per
  share -
  
  2003
  
  2002Numerator:Net loss
  $
  (121,000)
  
  (153,000)Preferred
  dividends
  
  -
  
  -Net loss
  applicable  to     
         common stockholders
  
  (121,000)
  
  (153,000)Denominator:Weighted
  average number of    
     common shares used in basic   
     and diluted Net loss
  per    
     common share
  
  14,858,054
  
  14,656,328Basic and
  diluted Net loss per common share
  $
  (0.01)
  
  (0.01)


As of March 31, 2003 and 2002, common stock
equivalent shares such as employee stock options have been excluded from the
computation of diluted weighted average shares, as the effect would be antidilutive.  Comprehensive loss for the periods ended March 31, 2003 and 2002
is equal to net loss reported for such periods.



7

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(6) 
Litigation and Contingencies

In
connection with our 1998 acquisition of Remote Lojix/PCSI, Inc. we have accrued
$456,000 in possible liabilities, which makes up most of our other current liabilities.
However, our ultimate liability may exceed that amount.  On March 10, 2003 we
received an assessment from the New York State Department of Taxation and
Finance related to a portion of this liability in the amount of $115,000.

In connection with the sale
in November 1999 of Matrix Telecom (a former subsidiary of NetLojix) to
Platinum Equity Holdings LLC, the amount of the final purchase price is subject
to adjustment based on finalization of a balance sheet for Matrix Telecom as of
August 31, 1999 and agreement by both parties. NetLojix provided the purchaser
a Matrix Telecom balance sheet prepared in accordance with generally accepted
accounting principles as required.  We were subsequently notified by Platinum
that it materially disagreed with the closing balance sheet that we prepared
and that it believed it was entitled to a reduction of the purchase price we
had received.  We attempted to resolve the matter, but the purchaser resisted
submitting the matter to an independent firm of accountants chosen by the
parties for final resolution, as required by the contract.   Our last contact
with Platinum regarding this matter was in February 2001, and we have had no
indication since then that Platinum intends to pursue this dispute.  At this
time, we do not expect any additional expense or recovery and have chosen not
to pursue legal action against Platinum.  We believe that the ultimate
resolution of the items in dispute will not materially affect the recorded
gain.

NetLojix presently has other contingent liabilities
relating to the conduct of our business.  On the basis of information furnished
by counsel and others, management believes that the resolution of these
contingencies will not materially affect the financial condition or results of
operations of the Company.

(7)  Stockholders' Equity

During March 2002 we retired 25,000
shares of our common stock, which we repurchased from the NetLojix
Communications, Inc. Employees' Savings Plan and Trust (the "401(k) Plan") at a
price of $0.16 per share in December 2001.  These were unallocated shares that
had been part of the employer contribution to the 401(k) Plan and were
repurchased as a result of our decision to remove stock ownership as an option
under the 401(k) Plan.

During April 2002, we retired 30,274
shares of our common stock out of the 100,000 shares held in escrow from the
purchase of CW Electronic Enterprises, Inc. ("CWE2") in 2000.  These shares
were returned to Netlojix due to discrepancies in CWE2's balance sheet at the
time of purchase.  The remaining 69,726 shares were released from escrow to the
former owner of CWE2.

On August 20, 2002, we issued 232,000
shares of our common stock and warrants to purchase 200,000 shares of common
stock at an exercise price of $8.00 per share as part of the settlement of all
outstanding claims under the class action lawsuit initiated in December 1998.

On October 14, 2002, we exercised our
right to redeem all of the warrants for a redemption price of $.05 per share of
common stock issuable upon exercise of the warrants.  As a result, the warrants
are no longer outstanding.

(8)  Related Party Transactions

We have had transactions in
the normal course of business with various companies who are related to our
shareholders.  We provide long distance and data network service to a number of
such related companies. Balances related to operating activities are settled
monthly.  The relationships that generate the revenues are effectively the same
as all other customer relationships held by the Company. The agreements are
standard term agreements.  We neither receive nor provide any benefit outside
of a standard customer-supplier relationship.



8

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For the Quarter ended March
31, 2003, revenue from related parties as a percentage of total revenue
decreased 10 percentage points to 17%.  The decrease was mainly due to the fact
that UICI (a public company affiliated with certain stockholders of NetLojix)
terminated NetLojix as its long distance services provider as of December 2002.

On January 31, 2002,
NetLojix's secured credit facility with Coast Business Credit expired, and
NetLojix entered into a new secured credit facility with DTL One, LLC ("DTL"). 
DTL is owned and controlled by director Jeffrey J. Jensen. Under the DTL line
of credit, NetLojix may borrow up to 80% of eligible receivables (as defined)
up to a total amount of $2.0 million.  Borrowings under the line of credit bear
interest, payable monthly, based upon the prime rate of Bank of America NT
& SA plus 2% with a minimum interest rate of 10%. Borrowings under the
credit facility are secured by substantially all assets of NetLojix. The credit
facility also prohibits the payment of dividends and limits the size of
business acquisitions that we may make without the prior consent of DTL.
NetLojix is in violation of the maximum borrowing provisions of this credit
facility and may not borrow additional amounts. DTL has notified the Company
that it does not intend to renew the line of credit when it expires, but has
not yet exercised its right to accelerate the required repayment of the amounts
due under the facility.

Between 1998 and 2000,
NetLojix loaned or advanced Craig R. Clark, its former Vice President of
Business Development, a total of $86,000, including interest.  All of these
loans and obligations are unsecured.  On January 15, 2002, NetLojix entered
into a separation agreement with Craig R. Clark.  As a result of the agreement,
Mr. Clark resigned from all positions with NetLojix, effective March 31, 2002. 
NetLojix then notified Mr. Clark that the loan was due and payable in full. 
NetLojix has not yet received any payment from Mr. Clark.  We chose to reserve
for the total amount advanced as of June 30, 2002.

(9)  Accounts
Receivable

Accounts receivable are net
of allowances for doubtful accounts and other provisions of $271,000 as of
March 31, 2003.  Interest is not accrued on overdue accounts receivable.  The
allowance for doubtful accounts receivable is charged to income in amounts
sufficient to maintain the allowance for uncollectible accounts at a level
management believes is adequate to cover any probable losses.  Management
determines the adequacy of the allowance based on historical write-off
percentages and information collected from individual customers.  Accounts
receivable are charged off against the allowance when collectibility is
determined to be permanently impaired (bankruptcy, lack of contact, account
balance over one year old, etc.).

(10)  Revenue Recognition

Revenues for long
distance, frame relay, Internet, applications development and web hosting
services are recognized as service is provided. Amounts paid in advance are
recorded as unearned revenue and recognized as services are provided.  Within
the Technical Support Services segment, we sell services under hourly service
contracts (whether prepaid or billed in arrears), flat fee service contracts or
prepaid maintenance contracts.  For prepaid maintenance contracts, we recognize
revenue ratably over the service period.  A small number of our applications
development contracts contain customer acceptance provisions.  In accordance
with SAB 101, we recognize revenue on such contracts only after a customer has
indicated acceptance or the customer acceptance period has lapsed.  For all
other services, revenues are recognized when the services are rendered.



9

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(11)  Depreciation Excluded from
Cost of Sales

We have also excluded depreciation from Cost of Sales in the amount of $25,000
and $25,000 for the three month periods ended March 31, 2003 and 2002
respectively. Such amounts are included in depreciation in the operating expense
section of the Statement of Operations and represent depreciation of equipment
used in our data center.

(12) Segment Reporting

NetLojix's primary
business segments are Network Connectivity, Technical Support Services and
Application Development and Hosting. Parent company costs are allocated to each
segment based on revenue.

The Network Connectivity
segment includes services for the transfer of data or voice traffic.  We
provide traditional long distance services, calling card, dedicated voice and
data access and numerous Internet service options.  Telecommunications product
offerings include dedicated or leased lines, switched long distance, frame
relay, calling cards, and "1-800" services.  Internet product offerings within
the network connectivity segment include dial-up access, DSL, ISDN and
dedicated access.  This segment includes the Internet connectivity portion of
our Southern California based ISP.

The Technical Support
Services segment encompasses a broad array of technical support services and
solutions including system integration, desktop and network support, asset
management and help desk solutions. Services include flat-fee maintenance
contracts, prepaid time block retainers, help desk management contracts, LAN
installations, warranty repairs and a small amount of hardware sales.

The Applications
Development and Hosting services segment includes producing, designing and
programming creative multimedia applications that can be produced as a web
application or a stand alone application, and hosting, including shared,
dedicated, co-location and managed services.



10

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The results for the three months ended March 31, 2003 and 2002
are as follows:

Three Months Ended March 31, 2003Network
  Connectivity
  Services
  
  Technical
  Support
 Services
  
  Applications
  Development
  and
  Web
 Hosting
  
  TotalRevenues
  $
  1,303,000
  
  854,000
  
  371,000
  
  2,528,000Gross
  margin
  
  565,000
  
  260,000
  
  335,000
  
  1,160,000Selling,
  general & administration
  
  562,000
  
  352,000
  
  218,000
  
  1,132,000Depreciation
  & amortization
  
  56,000
  
  28,000
  
  28,000
  
  112,000Interest
  expense
  
  16,000
  
  11,000
  
  4,000
  
  31,000Other
  expense
  
  3,000
  
  1,000
  
  2,000
  
  6,000Net
  income (loss)
  $
  (72,000)
  
  (132,000)
  
  83,000
  
  (121,000)Total assets
  $
  1,226,000
  
  796,000
  
  330,000
  
  2,352,000




Three Months Ended March 31, 2002Network
  Connectivity
 Services
  
  Technical
  Support
 Service
  
  Applications
  Development
  and
  Web
 Hosting
  
  TotalRevenues
  $
  2,026,000
  
  1,486,000
  
  409,000
  
  3,921,000Gross
  margin
  
  664,000
  
  666,000
  
  301,000
  
  1,631,000Selling,
  general & administration
  
  743,000
  
  653,000
  
  201,000
  
  1,597,000Depreciation
  & amortization
  
  62,000
  
  68,000
  
  24,000
  
  154,000Interest
  expense
  
  10,000
  
  10,000
  
  1,000
  
  21,000Other
  expense (income)
  
  5,000
  
  6,000
  
  1,000
  
  12,000Net
  income (loss)
  $
  (156,000)
  
  (71,000)
  
  74,000
  
  (153,000)Total
  assets
  $
  2,265,000
  
  975,000
  
  470,000
  
  3,710,000






11

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Within the
three business segments there are multiple types of revenue which are stated
separately below:

Three monthsEnded March 31,2003
  
  2002Network
  Connectivity ServicesData & Voice Services
  $
  774,000
  
  1,375,000Internet Services
  
  529,000
  
  650,000Technical
  Support ServicesTechnical Support
  
  161,000
  
  514,000Help Desk Services
  
  664,000
  
  943,000Hardware
  
  29,000
  
  29,000Applications
  Development and Web HostingApplications Development
  71,000
  
  132,000Web Hosting
  
  300,000
  
  278,000$
  2,528,000
  
  3,921,000




In
December 2002 the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard (SFAS) #148, "Accounting for Stock-Based
Compensation, Transition and Disclosure". This Standard provides
alternative methods of transition for a voluntary change to the "fair
value" based method of accounting for stock-based employee compensation.
SFAS 148 also requires that disclosures of the pro-forma effect of using the
fair value method of accounting for stock-based compensation be displayed more
prominently and in a tabular format. Additional, this standard requires the
disclosure of the pro-forma effect in interim financial statements. The
transition and annual disclosure requirements of SFAS #148 are effective for
fiscal years ending after December 15, 2002. The interim disclosure
requirements are effective for interim periods beginning after December 15,
2002. We do not expect that the adoption of SFAS 148 will have a material
effect on our financial position or results of operations.

ITEM 2.  MANAGEMENT'S
DISCUSSION AND ANALYSIS OR PLAN OF OPERATION



THIS QUARTERLY REPORT ON FORM 10-QSB CONTAINS
FORWARD-LOOKING STATEMENTS THATINVOLVE
RISKS AND UNCERTAINTIES.  THE STATEMENTS CONTAINED IN THIS DOCUMENT THAT ARE NOT
PURELY HISTORICAL ARE FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF
SECTION 27A OF THE SECURITIES ACT OF 1933 AND SECTION 21E OF THE SECURITIES
EXCHANGE ACT OF 1934, INCLUDING WITHOUT LIMITATION STATEMENTS  REGARDING
THE COMPANY'S EXPECTATIONS, BELIEFS, INTENTIONS OR STRATEGIES  REGARDING
THE FUTURE.  ALL FORWARD-LOOKING STATEMENTS INCLUDED IN THIS QUARTERLY
REPORT ARE BASED ON INFORMATION AVAILABLE TO THE COMPANY ON THE DATE HEREOF,
AND THE COMPANY ASSUMES NO OBLIGATION TO UPDATE ANY SUCH FORWARD-LOOKING
STATEMENTS.  ACTUAL EVENTS AND OUTCOMES COULD DIFFER MATERIALLY
FROM THOSE ANTICIPATED IN THESE FORWARD-LOOKING STATEMENTS AS A RESULT
OF MANY FACTORS, INCLUDING THOSE DESCRIBED HEREIN AND THOSE SET FORTH IN
THE RISK FACTORS DESCRIBED IN ITEM 1 OF THE COMPANY'S ANNUAL REPORT ON
FORM 10-KSB FOR THE YEAR ENDED DECEMBER 31, 2002.



12

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The
following discussion and analysis should be read in connection with the
unaudited condensed consolidated financial statements for the three month
periods ended March 31, 2003 and 2002 of the Company and related notes included
elsewhere in this report and the consolidated financial statements and related
management discussion and analysis included in NetLojix's Annual Report on Form
10-KSB, for the year ended December 31, 2002.

DESCRIPTION OF REVENUE SEGMENTS

We classify our business
into three segments: Network Connectivity, Technical Support Services and
Application Development and Hosting.  The segmentation of our company is how we
manage the day-to-day operations of our business and is based on the types of
services we provide.

Network
Connectivity

The network connectivity
segment includes services for the transfer of data or voice traffic.  We
provide numerous Internet service options, data and voice access and
traditional long distance services. Our Internet product offerings within the
network connectivity segment include dial-up access, DSL, and dedicated
access.  Our telecommunications product offerings include dedicated or leased
lines, switched long distance, frame relay, ATM, calling cards, and "1-800"
services. This segment includes the Internet connectivity portion of our
Internet service provider business.  Within this segment, our networking and communications
professionals will design, build and maintain a flexible, cost-effective
package of data networking and voice communication services to meet our
customers' needs.

Technical
Support Services

Technical support
services encompasses a broad array of solutions including system integration,
desktop and network support, asset management and help desk solutions aimed at
keeping our customers' IT systems operational and their networks running
smoothly. Service options within this segment include systems and network
installations, flat-fee maintenance contracts, prepaid time block retainers,
help desk management contracts, warranty repairs and a small amount of hardware
sales.

Application
Development and Hosting

The applications development and hosting services
segment includes producing, designing and programming creative multimedia and
commerce applications that can be produced as a web application or a stand
alone application.  Once a web site has been designed we can also provide site
maintenance services, host the web site on our own web servers or provide
co-location space within one of our data centers.

Our
discussion and analysis of our financial condition and results of operations are
based upon our consolidated statements, which have been prepared in accordance
with accounting principles generally accepted in the United States. The
preparation of these financial statements requires us to make estimates and
judgments that affect the reported amounts of assets, liabilities, revenues and
expenses.  In consultation with our Board of Directors and Audit Committee,
we have identified three accounting policies that we believe are key to an
understanding of our financial statements. These are important accounting
policies that require management's most difficult, subjective judgments.

The
first critical accounting policy relates to revenue recognition.  In most
cases, we recognize revenue when the services are rendered.  For prepaid
maintenance contracts, we recognize revenue ratably over the service period. 
For contracts that contain customer acceptance provisions, we recognize revenue
only after a customer has indicated acceptance.



13

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The
second critical accounting policy relates to accounts receivable. Interest is
not accrued on overdue accounts receivable.  The allowance for doubtful
accounts receivable is charged to income in amounts sufficient to maintain the
allowance for uncollectible accounts at a level management believes is adequate
to cover any probable losses.  Management determines the adequacy of the
allowance based on historical write-off percentages and information collected
from individual customers.  Accounts receivable are charged off against the
allowance when collectibility is determined to be permanently impaired
(bankruptcy, lack of contact, account balance over one year old, etc.).



The
third critical accounting policy relates to depreciation of fixed assets. The
purchase of equipment is capitalized based on its cost. We provide depreciation
of fixed assets using the straight-line method over the equipment's estimated
useful life. We have also excluded $25,000 and $25,000 for the three month
periods ended March 31, 2003 and 2002 respectively in depreciation from Cost of
Sales.

RESULTS OF OPERATIONS

THREE MONTHS ENDED MARCH 31, 2003
COMPARED WITH THREE MONTHS ENDED MARCH 31, 2002.

Revenues

Revenues
from operations decreased $1.4 million or 35.5% to $2.5 million for the three
months ended March 31, 2003 as compared to $3.9 million for 2002.  Revenues
from related parties were $0.4 million for 2003, a decrease of $601,000, or
58%, from 2002.  For the three months ended March 31, 2003, revenue from
related parties as a percentage of total revenue decreased 10 percentage
points, to 17%.  These related parties include UICI, Excel Agent Services LLC,
HealthAxis.com and Specialized Association Services (all companies affiliated
with director Jeffrey J. Jensen or certain other stockholders of NetLojix). The
decrease in revenue from related parties as a percentage of total revenue was
mainly due to the loss of UICI, which terminated NetLojix as its long distance
services provider with service ending in December of 2002. These related party
revenues reflect long distance and data network services we provide to such
parties on effectively the same terms as our other customers.

Network
connectivity services revenues decreased $0.7 million to $1.3 million for the
three months ended March 31, 2003 from $2.0 million for the three months ended
March 31, 2002. Within the network connectivity services segment, data and
voice services accounted for $0.6 million of the decrease with the balance of
the decrease attributable to Internet services.  Data and voice services
decreased 43.7% from the comparable quarter in 2002 primarily due to the loss
of UICI. Internet services revenues decreased $0.1 million or 18.6% to $0.5
million. The decrease is primarily due to a decrease in dial up connectivity
accounts and reduced pricing on some of our dedicated products due to the
competitiveness of the industry.

Technical support services revenues were $0.9
million for the three months ended March 31, 2003, a decrease of $0.6 million
or 42.5%, over the comparable quarter in 2002. Of the decrease in revenue, $0.3
million was associated with SG Cowen Securities Corporation's decision to
decrease spending in this area with much of the remainder caused by the loss of
ABN AMRO Inc. as a customer in July 2002.

Application
development and hosting services revenues decreased to $0.37 million for the
three months ended March 31, 2003 from $0.41 million for the comparable quarter
in 2002, a 9.5% decrease.  The decrease is primarily due to lower customer
spending on non-recurring revenue streams such as application development projects
and our increased focus on monthly recurring revenue streams such as hosting
and managed services.  For the three months ended March 31, 2003 revenues from
hosting services increased 8.0% over the three months ended March 31, 2002.



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Gross Margin

Gross
margin from operations as a percentage of revenues increased to 45.9% for the
three months ended March 31, 2003 from 41.6% for the three months ended March
31, 2002. Gross margin from operations decreased $0.4 million to $1.2 million
for the three months ended March 31, 2003 from $1.6 million for the three
months ended March 31, 2002.

Network
connectivity services gross margin as a percent of revenue increased to 43.4%
for the three months ended March 31, 2003 from 32.8% for the three months ended
March 31, 2002.  Within the network connectivity services segment, data and
voice gross margins averaged 32.4% vs. 18.0% in the comparable quarter in 2002.
This increase is largely due to the termination of the contract with UICI
because of the low margins associated with that contract. Gross margins for
Internet services decreased to 59.4% during the three months ended March 31,
2003 compared to 64.2% for the comparable 2002 quarter. The decrease from 2002
is primarily attributable to the reduced pricing on some of our dedicated
products due to the competitiveness of the industry.

Technical
support services gross margins averaged 30.4% during the quarter ended March
31, 2003 compared to 44.8% for the comparable quarter in 2002.  Gross margins
in the technical service segment decreased as a result of the loss of ABN AMRO
Inc. along with increased costs associated with our remote help desk created in
April of 2002.

Application
development and web hosting gross margins were 90.4% during 2003 compared to
73.3% for the comparable quarter in 2002.  The increase in gross margin is due
primarily to the lowering of costs of good sold by renegotiating lower
bandwidth costs.

Selling,
General, and Administrative Costs

Selling,
general, and administrative costs decreased $0.5 million to $1.1 million for
the three months ended March 31, 2003 from $1.6 million for the three months
ended March 31, 2002.  As a percentage of revenues, selling, general and
administrative costs increased to 44.8% for the three months ended March 31,
2003 from 40.7% for the three months ended March 31, 2002.  Of the decrease in
selling, general and administrative expenses, $0.3 million is due to decreased
salary expense. The remaining decrease in cost was associated with the
consolidation of office space and a streamlining of our business.

Interest
Expense

At
March 31, 2003, we had approximately $1.2 million in borrowings outstanding
under our secured line of credit.  During the three months ended March 31, 2003
we averaged approximately $1.2 million in outstanding borrowings. Interest
expense increased to $31,000 for the three months ended March 31, 2003 from
$21,000 for the three months ended March 31, 2002, as a result of the higher
level of average borrowings outstanding in the first quarter of 2003.

LIQUIDITY
AND CAPITAL RESOURCES

For the three months
ended March 31, 2003, NetLojix reported a net loss from operations of $0.1
million and net cash used from operations of $0.1 million.  As of March 31,
2003, NetLojix had cash used by investing activities of $0.02 million.  The
main change in the cash flow statement from December 31, 2002, is a lower cash
balance, which paid down accounts payable.  As of March 31, 2003, NetLojix had
cash and cash equivalents of $0.3 million and an outstanding indebtedness on
its line of credit of $1.2 million. At that date, we had a working capital
deficit of $2.8 million.  As a result of our operating losses and our working
capital deficiency, our auditors have indicated in our annual report on the
year ended December 31, 2002 that they have substantial doubt about our ability
to continue as a going concern.



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On January 31, 2002, we
repaid our secured credit facility with Coast Business Credit and entered into
a new secured credit facility with DTL One, LLC ("DTL"), a newly formed entity
affiliated with director Jeffrey J. Jensen.  Under the DTL line of credit, we
may borrow up to 80% of eligible receivables (as defined) up to a total amount
of $2.0 million.  Borrowings under the line of credit bear interest, payable
monthly, based upon the prime rate of Bank of America NT & SA plus 2%, with
a minimum interest rate of 10%. Borrowings under the credit facility are
secured by substantially all of our assets.  The credit facility will mature on
January 31, 2004.  After January 31, 2003, DTL may terminate the line of credit
without cause, upon six months notice.  As of May 14, 2003, approximately $1.2
million is outstanding under the credit facility, and no amounts are available
to be borrowed under the formula described above.  We have been in default
under the DTL facility since January 2003, because our borrowings have exceeded
80% of our eligible receivables.  DTL has notified us that it does not intend
to renew the line of credit upon expiration, but has not yet exercised its
right to accelerate the required repayment of the amounts due under the
facility.

In July 2002, UICI (a
public company affiliated with certain stockholders of NetLojix) terminated
NetLojix as its long distance services provider.  The termination became
effective in December 2002. For the three months ended March 31, 2003, UICI
accounted for approximately $20,000 of NetLojix's revenues compared to $200,000
in the three months ended March 31, 2002.  Also in July 2002, ABN AMRO Inc.
terminated NetLojix as its technical services provider.  For the three months
ended March 31, 2002, ABN AMRO accounted for approximately $182,000 of
NetLojix's revenues.  Finally, SG Cowen Securities Corporation, our single
largest customer, dramatically reduced its usage of our services in 2002, and
has indicated that it will further reduce or eliminate its usage of our
services in 2003. These terminations or reductions will negatively affect our
cash flow from operations.

We believe that current
market conditions are not conducive to raising additional equity capital at
this time.  Our current low stock price and delisting from The Nasdaq SmallCap
Market present substantial obstacles to raising any equity capital.

Historically, our cash
flow from operations, our secured borrowings, and occasional private placements
of both common and preferred stock have been sufficient to meet working capital
and capital expenditure requirements. However, as noted above, our cash flow
from operations has been negatively affected, and no additional amounts are
available to us under our credit facility or through the capital markets. 
During the last two years, we have taken steps to conserve cash and reduce
operating expenses.  If our cash flow from operations continues to be negative,
we will have to engage in additional cost control measures in order to meet our
minimum working capital requirements.

As of March 31, 2003,
NetLojix's current assets consisted primarily of cash of $321,000 and accounts
receivable of $1,430,000, net of an allowance for doubtful accounts of
$271,000.  This reserve is established based on factors surrounding the credit
risk of customers, historical trends and other information.  At that date,
$61,000 of our accounts receivable were over ninety days past due, including
one customer with a $100,000 balance on a payment plan.  NetLojix's current
liabilities included $1.2 million on our line of credit and $2.1 million in
accounts payable, payroll related expenses and accrued network services.  At March
31, 2003, NetLojix had $711,000 of unearned revenue, which consisted primarily
of amounts billed and/or paid in advance for telecom and Internet related
services with smaller amounts relating to prepaid retainers and service
contracts.  In connection with our 1998 acquisition of Remote Lojix/PCSI, Inc.
we have accrued $456,000 in possible liabilities, which makes up most of our
other current liabilities. However our ultimate liability may exceed that
amount.  On March 10, 2003 we received an assessment from the New York State
Department of Taxation and Finance related to a portion of this liability in
the amount of $115,000.



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We lease office space and
various equipment under operating leases which expire in various years through
2006.  In the normal course of business, operating leases are generally renewed
or replaced by other leases. Total office and building expense for the three
months ended March 31, 2003 was $146,000 and $167,000 for the same period in
2002. NetLojix currently has multiple contracts for switching and transmission
facilities, equipment, network lines and software.  The total commitment is
approximately $475,000 with termination dates ranging from present through
second quarter 2005.  The commitment consists of a number of small contracts
with venders for services with varying minimum amounts and termination dates,
none of which is material by itself.  The larger telecom contracts with minimum
commitments that we have had in the past have been renegotiated to exclude
minimums.

NetLojix has service
contracts with the majority of its business customers.  Some of these contracts
have minimum commitments by the customers that range in amount from $25 to
$35,000 per month. The majority of such contracts have fixed terms of one
year.  Many of our service contracts have no minimum commitments or fixed terms
and are based on actual usage.

Item
3.    Controls and Procedures

Within
90 days prior to the date of filing this report, an evaluation was performed
under the supervision and with the participation of the Company's management,
including the Chief Executive Officer and Treasurer and Controller, of the
effectiveness of the design and operation of the Company's disclosure controls
and procedures (as defined in Rule 13a-14(c) of the Exchange Act). Based on and
as of the time of such evaluation, the Company's management, including the
Chief Executive Officer and Treasurer and Controller, concluded that the
Company's disclosure controls and procedures were effective in timely alerting
them to material information relating to the Company (including its
consolidated subsidiaries) required to be included in the Company's reports
filed or submitted by it under the Exchange Act. There have been no significant
changes in the Company's internal controls or in other factors that could
significantly affect internal controls subsequent to the time of such
evaluation.

PART II. OTHER INFORMATION

ITEM 3. 
DEFAULTS UPON SENIOR SECURITIES

(b)   NetLojix has outstanding
147,700 shares of its Series A Convertible Preferred Stock (the "Series A
Preferred").  The Series A Preferred ranks prior to NetLojix's common stock. 
As of May 12, 2003, dividends in arrears on the Series A Preferred totaled
$255,024.

ITEM 6. 
EXHIBITS AND REPORTS ON FORM 8-K

(a)   Exhibits.

> 99.1  Certification
> of Chief Executive Officer Pursuant to 18 U.S.C. 1350
> 
> 
> 99.2 
> Certification of Chief Financial Officer Pursuant to 18 U.S.C. 1350

(b)   Reports
on Form 8-K.  NetLojix did not file any reports on Form 8-K during the quarter
ended March 31, 2003.



17

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SIGNATURE



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.



NETLOJIX
COMMUNICATIONS, INC.,
a Delaware
corporation

By:   /S/
GREGORY J. WILSON
      ------------------------
      Gregory
J. Wilson
      Treasurer
and Controller
      (Duly
Authorized Officer and Principal Financial Officer 
        and Principal Accounting
Officer)

Dated: May
14, 2003



18

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CERTIFICATIONS

I, Anthony E. Papa, certify that:

1. I have reviewed this quarterly
report on Form 10-QSB of NetLojix Communications Inc.;

2. Based on my knowledge, this
quarterly report does not contain any untrue statement of a material fact or
omit to state a material fact necessary to make the statements made, in light
of the circumstances under which such statements were made, not misleading with
respect to the period covered by this quarterly report;

3. Based on my knowledge, the
financial statements, and other financial information included in this
quarterly report, fairly present in all material respects the financial
condition, results of operations and cash flows of the registrant as of, and
for, the periods presented in this quarterly report;

4. The registrant's other certifying
officers and I are responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14)
for the registrant and have:

a) designed such disclosure controls
and procedures to ensure that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this quarterly report
is being prepared;

b) evaluated the effectiveness of
the registrant's disclosure controls and procedures as of a date within 90 days
prior to the filing date of this quarterly report (the "Evaluation Date"); and

c) presented in this quarterly
report our conclusions about the effectiveness of the disclosure controls and
procedures based on our evaluation as of the Evaluation Date;

5. The registrant's other certifying
officers and I have disclosed, based on our most recent evaluation, to the
registrant's auditors and the audit committee of registrant's board of
directors (or persons performing the equivalent functions):

a) all significant deficiencies in
the design or operation of internal controls which could adversely affect the
registrant's ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material weaknesses in
internal controls; and

b) any fraud, whether or not
material, that involves management or other employees who have a significant
role in the registrant's internal controls; and

6. The registrant's other certifying
officers and I have indicated in this quarterly report whether or not there
were significant changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date of our most
recent evaluation, including any corrective actions with regard to significant
deficiencies and material weaknesses.

Date May 14, 2003



/s/  ANTHONY E. PAPA
---------------------------------
Anthony E. Papa
Chairman of the Board and
Chief Executive Officer



19

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CERTIFICATIONS



I, Gregory J. Wilson, certify that:

1. I have reviewed this quarterly
report on Form 10-QSB of NetLojix Communications Inc.;

2. Based on my knowledge, this
quarterly report does not contain any untrue statement of a material fact or
omit to state a material fact necessary to make the statements made, in light
of the circumstances under which such statements were made, not misleading with
respect to the period covered by this quarterly report;

3. Based on my knowledge, the
financial statements, and other financial information included in this
quarterly report, fairly present in all material respects the financial
condition, results of operations and cash flows of the registrant as of, and for,
the periods presented in this quarterly report;

4. The registrant's other certifying
officers and I are responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14)
for the registrant and have:

a) designed such disclosure controls
and procedures to ensure that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this quarterly report
is being prepared;

b) evaluated the effectiveness of
the registrant's disclosure controls and procedures as of a date within 90 days
prior to the filing date of this quarterly report (the "Evaluation Date"); and

c) presented in this quarterly
report our conclusions about the effectiveness of the disclosure controls and
procedures based on our evaluation as of the Evaluation Date;

5. The registrant's other certifying
officers and I have disclosed, based on our most recent evaluation, to the
registrant's auditors and the audit committee of registrant's board of
directors (or persons performing the equivalent functions):

a) all significant deficiencies in
the design or operation of internal controls which could adversely affect the
registrant's ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material weaknesses in
internal controls; and

b) any fraud, whether or not
material, that involves management or other employees who have a significant
role in the registrant's internal controls; and

6. The registrant's other certifying
officers and I have indicated in this quarterly report whether or not there
were significant changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date of our most
recent evaluation, including any corrective actions with regard to significant
deficiencies and material weaknesses.



Date May 14, 2003



/s/  GREGORY J. WILSON
---------------------------------
Gregory J. Wilson
Treasurer and Controller (Principal 
Financial Officer and Principal
Accounting Officer)



20