U.S. SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

‐‐‐‐‐‐‐‐‐

FORM 10‐QSB

‐‐‐‐‐‐‐‐‐

                                        

[X]  QUARTERLY REPORT PURSUANT TO SECTION 13 OR15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

FORTHE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2002

OR

[_]  TRANSITION REPORT PURSUANT TO SECTION 13 OR15(D) OF THE SECURITIES EXCHANGE ACT OF1934

FOR THE TRANSITION PERIODFROM       TO

COMMISSION FILE NUMBER 0-27580

‐‐‐‐‐‐‐‐‐

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

‐‐‐‐‐‐‐‐‐

                                        

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

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

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

Asof November 13, 2002, there were 14,695,149 shares of the Registrant's CommonStock, par value $0.01 per share, issued and outstanding, excluding treasurystock.

TransitionalSmall Business Disclosure Format (check one):

Yes  [_] No  [X]

 

----

 

**NETLOJIX COMMUNICATIONS,INC.QUARTER ENDED September30, 2002**

**                                                                                         **

|   | **TABLE OF CONTENTS**   PAGE  ‐‐‐‐   Part I.FINANCIAL INFORMATION                Item 1.Financial Statements  Condensed Consolidated Balance Sheet as of September 30,      2002 3    Condensed Consolidated Statements of Operations for the      Three and Nine Month Periods Ended September 30, 2002 and 20014    Condensed Consolidated Statements of Cash Flows for the      Nine Month Periods Ended September 30, 2002and 2001   5    Notes to Condensed Consolidated Financial Statements  6                  Item 2.Management's Discussion and Analysis or Plan of Operation      14                  Item 3.Controls and Procedures 20PART II.OTHER INFORMATION                Item 2.Changes in Securities and Use of Proceeds20               Item 3.Defaults upon Senior Securities   20               Item 5.Other Information 20               Item 6.Exhibits and Reports on Form 8-K21Signature Page  22Certifications 23
2

 
**PART I.  FINANCIAL INFORMATION** **ITEM 1.  FINANCIAL STATEMENTS** **NETLOJIX COMMUNICATIONS, INC. AND SUBSIDIARIES****CONDENSED CONSOLIDATED BALANCE SHEET****(unaudited)** September 30, 2002 Assets CURRENT ASSETS Cash$     624,000 Accounts receivable, net    1,222,000 Accounts receivable from related parties      586,000 Prepaid expenses and other current assets      280,000                        Total current assets    2,712,000  Property and equipment, net      819,000 Customer bases aquired and other intangibles, net      290,000 Other assets       55,000                        Total assets    3,876,000   $       Liabilities and Stockholders' Equity CURRENT LIABILITIES Revolving line of credit$   1,200,000 Accounts payable and other accrued expenses    1,485,000 Accrued payroll related liabilities      653,000 Accrued network services costs      688,000 Litigation settlement liability       10,000 Sales and excise tax payable       72,000 Unearned revenue      801,000 Accrued litigation & contingencies cost      465,000 Other current liabilities       23,000                        Total current liabilities    5,397,000  Long term obligations       15,000                        Total liabilities    5,412,000     Commitments and contingencies  STOCKHOLDERS' EQUITY       Preferred stock, authorized 1,000,000 shares, $0.01 par value       Series A convertible preferred stock, designated 250,000 shares,         cumulative as to 8% dividends, 147,700 shares issued and         outstanding. (Liquidation preference of $822,000 at September 30, 2002         including dividends in arrears totaling $231,392.)         1,000        Common stock, authorized 40,000,000 shares, $0.01 par value,         issued 14,858,054 shares at September 30, 2002.      149,000 Deferred Compensation - restricted stock      (11,000)Additional paid in capital   28,631,000 Accumulated deficit  (30,304,000)       Treasury stock, $0.01 par value, 162,905 shares at September 30, 2002  (2,000)                       Total stockholders' equity   (1,536,000)                        Total liabilities and stockholders' equity$   3,876,000    
See accompanying notes.

3

 
**NETLOJIX COMMUNICATIONS, INC. AND SUBSIDIARIES****CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS****(unaudited)**Three monthsNine monthsEnded September 30,Ended September 30,2002200120022001SERVICE REVENUESUnrelated parties$  2,561,000   3,989,000   8,135,000  12,700,000 Related parties - (note 6)  1,126,000     779,000   3,237,000   2,216,000      TOTAL SERVICE REVENUES  3,687,000   4,768,000  11,372,000  14,916,000 COST OF SERVICE REVENUES(exclusive of depreciation - note 8)  2,262,000   2,828,000   6,804,000   8,833,000      GROSS MARGIN  1,425,000   1,940,000   4,568,000   6,083,000 OPERATING EXPENSESSelling, general and administrative  1,380,000   1,825,000   4,390,000   5,950,000 Litigation settlement (recovery) costs          -           -           -    (684,000)Gain on sale of Contracts and Customer List          -    (203,000)          -    (203,000)Depreciation and amortization    137,000     396,000     426,000   1,170,000         Total operating expenses  1,517,000   2,018,000   4,816,000   6,233,000      OPERATING (LOSS)    (92,000)    (78,000)   (248,000)   (150,000)Interest expense    (32,000)    (29,000)    (85,000)   (118,000)Other income (expense), net    (25,000)    (31,000)   (107,000)    (21,000)(Loss) from operationsbefore income taxes   (149,000)   (138,000)   (440,000)   (289,000)Income tax benefit          -           -           -           - NET (LOSS)$   (149,000)   (138,000)   (440,000)   (289,000)Preferred dividends          -           -           -           -       Loss applicable to common shareholders$   (149,000)   (138,000)   (440,000)   (289,000)      Net (loss) per common share - basic & diluted$      (0.01)      (0.01)      (0.03)      (0.02)Weighted average number ofcommon shares - basic and diluted 14,729,445  14,681,328  14,672,208  14,550,925 See accompanying Notes
4

 
**NETLOJIX COMMUNICATIONS, INC. AND SUBSIDIARIES****CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS****(unadudited)**Nine months      Ended September 30,20022001      CASH FLOWS FROM OPERATING ACTIVITIES:      Net loss from continuing operations$   (440,000) $    (289,000)      Adjustments to reconcile net loss from continuing operations        to cash provided by (used by) continuing operating activities:Depreciation and amortization    426,000   1,170,000 Provision for bad debts    174,000     311,000       Litigation settlement (recovery)   (684,000)      Gain on sale of Contracts and Customer List   (203,000)Stock compensation earned      5,000       3,000       Changes in certain operating assets and liabilities:Accounts receivable    482,000     265,000 Due from affiliates    (25,000)     84,000 Other current assets     12,000     (56,000)Litigation settlement liability          -    (183,000)      Accounts payable and accrued liabilities   (784,000)    172,000             Cash provided by (used by) operating activities   (150,000)    590,000       CASH FLOWS FROM INVESTING ACTIVITIES:      Additions to property and equipment    (55,000)   (162,000)            Cash used by investing activities    (55,000)   (162,000)      CASH FLOWS FROM FINANCING ACTIVITIES:      Principal payments on capital leases    (11,000)    (15,000)      Amount borrowed (paid) on line of credit, net    773,000    (369,000)      Amounts paid on long term borrowings     (5,000)     (4,000)            Cash provided by (used by) financing activities    757,000    (388,000)            Net increase (decrease) in cash and cash equivalents    552,000      40,000       Cash at beginning of period     72,000     184,000             Cash at end of period$    624,000  $     224,000             Cash paid during the period:Interest$     85,246 $    118,000       Non cash investing and financing activities:None$          - $          -       See accompanying notes.
5

**NETLOJIX COMMUNICATIONS, INC. ANDSUBSIDIARIESNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Unaudited)**

**September 30, 2002 and 2001**

**(1)  Basis ofPresentation**

        The unaudited condensed consolidated financial statements of NetLojixCommunications, Inc. and Subsidiaries (the "Company" or "NetLojix")as of September 30, 2002 and 2001 and for the three and nine month periods thenended have been prepared in accordance with accounting principles generallyaccepted in the United States for interim financial reporting. Accordingly,they do not include all of the disclosures required by accounting principlesgenerally accepted in the United States for complete financial statements andshould be read in conjunction with the audited consolidated financialstatements and notes thereto included in NetLojix's Form 10-K for the yearended December 31, 2001. All significant intercompany balances and transactionshave been eliminated in consolidation. In the opinion of management, all adjustments(consisting only of normal recurring adjustments) considered necessary for afair presentation of the interim financial information have been included.  The results of operations for any interimperiod are not necessarily indicative of the results of operations for theentire year. Certain reclassifications have been made to prior period amountsin order to conform to current year presentation.

**(2)  Acquisitions and Dispositions**

        On September 30, 2001 wesold a portion of our New York technical support services business (consistingof our New York City customer list and related customer contracts) to anunrelated third party. We retained all of our help desk customers andcontracts. The purchaser assumed responsibility for unused customer retainers andremaining terms on service agreements. We recorded a gain (net of costs) of$203,000 in connection with this sale. In addition, if the purchaser is able torenew retainers, service agreements or provide any additional services to thecustomers that were transferred, then it will pay us 5% of any such cashreceived prior to September 30, 2002. We have recorded $3,918 in suchadditional payments as of September 30, 2002.

6

 

**(3)  Net Loss PerCommon Share**

Net Loss per common share for the three and nine month periodsended September 30, 2002 and 2001 are as follows:

 

 

 

Three MonthsEnded September 30,

Nine MonthsEnded September 30,

Net (loss) per share -

 

2002

2001

2002

2001

 

 

 

 

 

 

Numerator:

 

 

 

 

 

     Net (loss)

$

(149,000)

 (138,000)

 (440,000)

  (289,000) 

     Preferred dividends

 

               -

               -

               -

                 -

     Net (loss)  applicable  to common     stockholders

$

(149,000)

(138,000)  

(440,000)

 (289,000)  

 

 

Denominator:

 

 

 

 

 

    Weighted average  number of       common shares used in  basic  and     diluted Net (loss) per common share
   
14,729,445

14,681,328

14,672,208

14,550,925

 

 

Basic and diluted Net (loss) per common share

$

(0.01)

    (0.01)

(0.03)

   (0.02)

 

 
                  
         As of September 30, 2002 and 2001, commonstock equivalent shares such as employee stock options have been excluded fromthe computation of diluted weighted average shares, as the effect would be antidilutive. Comprehensive loss for the periods ended September 30, 2002 and 2001 is equalto net loss reported for such periods.

**(4)  Litigation and Contingencies**

        As previously reported, NetLojix was a defendant in a classaction under the federal securities laws (IN RE AVTEL SECURITIES LITIGATION,Case No. 98-9236) initiated in December 1998 in the United States DistrictCourt for the Central District of California.

        On October 4, 2000, NetLojixfinalized an agreement with counsel for the plaintiff class to settle alloutstanding claims under the class action lawsuit. This agreement received thepreliminary approval of the court on November 8, 2000, and NetLojix thereafterpaid $150,000 for administrative costs and other settlement implementationexpenses. On May 29, 2001, the court entered its final order of dismissal andapproval of the settlement.  Pursuant tothe settlement, we issued a total of 232,000 shares of common stock andwarrants to purchase 200,000 shares of common stock at an exercise price of$8.00 per share during the third quarter of 2002 for distribution to theclaimant class members and for payment of the remaining plaintiffs attorneys'fees and litigation expenses.  OnSeptember 20, 2002 we notified the warrantholdersthat we would redeem all of the warrants for a redemption price of $.05 pershare of common stock issuable upon exercise of thewarrants.  The redemption was effectiveon October 14, 2002. As of November 13, 2002 we have disbursed $3,017 of thetotal of $10,000 in aggregate redemption price to the former warrantholders.

 

7

 

        Inconnection with the sale in November 1999 of Matrix Telecom (a formersubsidiary of NetLojix) to Platinum Equity Holdings LLC, the amount of thefinal purchase price is subject to adjustment based on finalization of abalance sheet for Matrix Telecom as of August 31, 1999 and agreement by bothparties. We completed the balance sheet as required. We were subsequentlynotified by Platinum that it materially disagreed with the closing balancesheet that we prepared.  We attempted tonegotiate a settlement of the balance sheet items in disagreement, but were unsuccessful.  To date, the buyer has resisted submittingthe matter to an independent firm of accountants chosen by the parties forfinal resolution, as required by the contract. At this time, we believe thatthe ultimate resolution of the items in dispute will not materially affect therecorded gain. 

      NetLojix presently has other contingentliabilities relating to the conduct of our business.  On the basis of information furnished bycounsel and others, management believes that the resolution of these contingencieswill not materially affect the financial condition or results of operations ofthe Company.

**(5)  Stockholders' Equity**

      DuringDecember 2001, we repurchased 25,000 shares of our common stock from theNetLojix Communications, Inc. Employees' Savings Plan and Trust (the "401(k)Plan") at a price of $0.16 per share. These were unallocated shares that had been part of the employercontribution to the 401(k) Plan and were repurchased as a result of our decisionto remove stock ownership as an option under the 401(k) Plan. These 25,000shares were retired on March 20, 2002.

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

      OnAugust 20, 2002, we issued 232,000 shares of our common stock and warrants topurchase 200,000 shares of common stock at an exercise price of $8.00 per shareas part of the settlement of all outstanding claims under the class actionlawsuit initiated in December 1998.

      OnOctober 14, 2002, we exercised our right to redeem all of the warrants for aredemption price of $.05 per share of common stock issuableupon exercise of the warrants.  As aresult, the warrants are no longer outstanding.

**(6)  Related PartyTransactions**

        We have had transactions inthe normal course of business with various companies who are related to ourshareholders.  We provide long distanceand data network service to a number of such related companies. Balancesrelated to operating activities are settled monthly.  The relationships that generate the revenuesare effectively the same as all other customer relationships held by theCompany. The agreements are standard term agreements.  We neither receive nor provide any benefitoutside of a standard customer-supplier relationship.

        On January 31, 2002,NetLojix's secured credit facility with Coast Business Credit expired, andNetLojix entered into a new secured credit facility with DTL One, LLC("DTL").  DTL is owned and controlled bydirector Jeffrey J. Jensen. Under the DTL line of credit, NetLojix may borrowup to 80% of eligible receivables (as defined) up to a total amount of $2.0million.  Borrowings under the line ofcredit bear interest, payable monthly, based upon the prime rate of Bank of AmericaNT & SA plus 2% with a minimum interest rate of 10%. Borrowings under thecredit facility are secured by substantially all assets of NetLojix. The creditfacility also prohibits the payment of dividends and limits the size ofbusiness acquisitions that we may make without the prior consent of DTL.NetLojix believes that the terms of the DTL line of credit are more favorableto NetLojix than those of any other credit facility available to NetLojix toreplace the expiring Coast agreement.

8

 

        Since 1998, NetLojix hasfrom time to time loaned or advanced Craig R. Clark, its former Vice Presidentof Business Development, a total of $86,000, including interest.  All of these loans and obligations areunsecured.  On January 15, 2002, NetLojixentered into a separation agreement with Craig R. Clark.  As a result of the agreement, Mr. Clarkresigned from all positions with NetLojix, effective March 31, 2002.  NetLojix then notified Mr. Clark that theloan was due and payable in full. NetLojix has not yet received any payment from Mr. Clark.  We chose to reserve for the total amountadvanced as of June 30, 2002.

**(7)  RevenueRecognition**

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

**(8)  Depreciation Excluded from Cost of Sales**

      Wehave also excluded depreciation from Cost of Sales in the amount of $26,000 and$25,000 for the three month periods ended and $76,000 and $75,000 for the ninemonth periods ended September 30, 2002 and 2001 respectively. Such amounts areincluded in depreciation in the operating expense section of the Statement ofOperations and represent depreciation of equipment used in our data center.

9

**(9)  IntangibleAssets**

      Intangible assetsconsist of the following:

September 30, 2002

 Gross 

 

 Net 

 Weighted 

 Intangible 

 Accumulated 

 Intangible 

 Ave. Life 

 Assets 

 Amortization 

 Assets 

 (Years) 

Customer  Base

$

     1,583,000 

     1,293,000 

       290,000 

0.42

Non  - Compete

         200,000 

          200,000 

                        - 

0.00

Total

$

      1,783,000  

      1,493,000  

        290,000  
         
December 31, 2001

 Gross 

 

 Net 

 Weighted 

 Intangible 

 Accumulated 

 Intangible 

 Ave. Life 

 Assets 

 Amortization 

 Assets 

 (Years) 

Customer  Base

$

     1,583,000 

     1,293,000 

       290,000 

0.92

Non  - Compete

          200,000 

          150,000 

               50,000 

0.75

Total

$

      1,783,000  

      1,443,000  

        340,000  
                           
      The Companyadopted SFAS 142 on January 1, 2002 and has ceased amortization of assets whichare deemed to have indefinite lives. Under the new rules, the Company is nolonger permitted to amortize intangible assets with indefinite lives; insteadthey will be subject to periodic tests for impairment.

      SFAS142 supercedes APB Opinion #17, Intangible Assets. In accordance with SFAS 142the Company also performed an impairment test of its remaining customer baseand determined that no write-down was necessary.

      Below is areconciliation of previously reported net income and earnings per share to theamounts adjusted for the exclusion of amortization expense for goodwill and thecustomer base, net of income tax.

 Nine Months 

Ended  September 30, 

2002

2001

 Net income (loss)

$

    (440,000)

   (289,000)

     Goodwill and Customer base amortization

                   -    

    531,000  

Adjusted  net income (loss)

$

     (440,000)

     242,000  

Reported  diluted earnings (loss) per share

$

       (0.03)

      (0.02)

     Goodwill and Customer base  Amortization per share

                       - 

                  0.04 

Adjusted  diluted earnings (loss) per share

$

        (0.03)

        0.02  
            
     

10

 Estimated amortization expense for each of the next five years endedSeptember 30, is as follows:
2002       (12 Months)$     50,000200302004 0200502006               0  Total$    50,000 
**(10) Segment Reporting**

        NetLojix's primarybusiness segments are Network Connectivity, Technical Support Services andApplication Development and Hosting. Parent company costs are allocated to eachsegment based on revenue.

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

        The Technical SupportServices segment encompasses a broad array of technical support services andsolutions including system integration, desktop and network support, assetmanagement and help desk solutions. Services include flat-fee maintenancecontracts, prepaid time block retainers, help desk management contracts, LANinstallations, warranty repairs and a small amount of hardware sales. 

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

        We measure our performance based on revenues, gross margin, netincome or loss and earnings before interest, taxes, depreciation andamortization ("EBITDA").  EBITDA is not ameasure of financial performance under generally accepted accounting principlesand should not be considered as an alternative to net income or cash flows fromoperations, as a measure of performance.

 

11

 

The results for the three months ended September 30, 2002 and2001 are as follows:

Three Months Ended September 30, 2002

 

Network  ConnectivityServices

Technical  Support Services

Applications  Development  and  Web Hosting

Total

Revenues                       

 $

2,049,000

1,284,000

354,000

3,687,000

Gross  margin

 

657,000

482,000

286,000

1,425,000

Selling,  general & administration

 

627,000

561,000

192,000

1,380,000

Depreciation  & amortization

 

60,000

52,000

25,000

137,000

Interest  expense

 

17,000

12,000

3,000

32,000

Other  expense

 

        7,000

      17,000

       1,000

      25,000

Net  income (loss) 

$

(54,000)

(160,000)

65,000

(149,000)
      
EBITDA

$

23,000

(96,000)

93,000

20,000
      
Total assets

$

1,898,000

1,452,000

526,000

3,876,000
                        
Three Months Ended September 30, 2001

 

Network  Connectivity Services

Technical  Support Service

Applications  Development  and  Web Hosting

Total

Revenues                       

 $

2,440,000

1,903,000

425,000

4,768,000

Gross  margin

 

830,000

769,000

341,000

1,940,000

Selling,  general & administration

 

785,000

884,000

156,000

1,825,000

Depreciation  & amortization

 

146,000

227,000

23,000

396,000

Interest  expense

 

 17,000

12,000

    -

  29,000

Other  expense (income)

 

6,000

24,000

1,000

31,000

Sale  of New York Technical Support Services Assets

 

                 -

                -

                -

     203,000

Net  income (loss)

$

(124,000)  

(378,000)

161,000

(138,000)
      
EBITDA

$

(39,000)

(139,000)

184,000

287,000  
      
Total  assets

$

2,994,000

6,761,000

395,000

10,150,000
                        
 

12

Nine Months Ended September 30, 2002

 

Network  ConnectivityServices

Technical  Support Services

Applications  Development  and  Web Hosting

Total

Revenues                       

 $

6,101,000

4,101,000

1,170,000

11,372,000

Gross  margin

 

1,967,000

1,691,000

910,000

4,568,000

Selling,  general & administration

 

2,004,000

1,775,000

611,000

4,390,000

Depreciation  & amortization

 

180,000

171,000

75,000

426,000

Interest  expense

 

42,000

36,000

7,000

85,000

Other  expense

 

      43,000

      53,000

     11,000

    107,000

Net  income (loss) 

$

(302,000)

(344,000)

206,000

(440,000)
      
EBITDA

$

(80,000)

(137,000)

288,000

71,000
                        
Nine Months Ended September 30, 2001

 

Network  Connectivity Services

Technical  Support Service

Applications  Development  and  Web Hosting

Total

Revenues                       

 $

7,466,000

6,147,000

1,303,000

14,916,000

Gross  margin

 

2,636,000

2,485,000

962,000

6,083,000

Selling,  general & administration

 

2,487,000

2,950,000

513,000

5,950,000

Depreciation  & amortization

 

431,000

681,000

58,000

1,170,000

Interest  expense

 

 67,000

51,000

    -

  118,000

Other  expense (income)

 

(19,000)

38,000

2,000

 21,000

Sale  of New York Technical Support Services Assets

 

                -

                -

                 -

     203,000

Corporate  litigation settlement adjustment

 

                -

                -

                -

     684,000

Net  income (loss)

$

(330,000)  

(1,235,000)

389,000

(289,000)
      
EBITDA

$

168,000

(503,000)

447,000

999,000  
                        
 

13

 

        Within thethree business segments there are multiple types of revenue which are statedseparately below:

Three months

Nine months

Ended September 30,

Ended September 30,

2002

2001

2002

2001

Network  Connectivity Services

  

    Data & Voice Services

$

 1,483,000 

 1,737,000 

 4,274,000 

  5,273,000 

    Internet Services 

 

   566,000 

   703,000 

 1,827,000 

  2,193,000 

 

Technical  Support Services

 

  

  

    Technical Support

 

   458,000 

   696,000 

 1,451,000 

  2,585,000 

    Help Desk Services

 

   790,000 

 1,189,000 

 2,546,000 

  3,409,000 

    Hardware

 

    36,000 

    18,000 

   104,000 

    153,000 

Applications  Development and Web Hosting

  

  

    Applications Development

    72,000 

   146,000 

   317,000 

    459,000 

    Web Hosting

      282,000 

      279,000 

      853,000 

       844,000 

$

 3,687,000  

 4,768,000  

11,372,000  

 14,916,000  
         
 

**(11) Recent Accounting Pronouncements**

      InAugust 2001, the FASB issued SFAS No. 143, "Accounting for Asset RetirementObligations."  SFAS 143 establishesaccounting standards for recognition and measurement of a liability for thecosts of asset retirement obligations. Under SFAS 143, the costs of retiring an asset will be recorded as aliability when the retirement obligation arises, and will be amortized toexpense over the life of the asset. We do not expect any effect on ourfinancial position or results of operations from the adoption of thisstatement.

     In October 2001, the FASB issued SFAS No. 144,"Accounting for the Impairment or Disposal of Long-Lived Assets."  SFAS 144 addresses financial accounting andreporting for the impairment or disposal of long-lived assets and discontinuedoperations. We do not expect any effect on our financial position or results ofoperations from the adoption of this statement.

      In June of 2002, the FASB issued SFAS 146,"Accounting for Costs Associated with Exit or Disposal Activities," whichnullifies EITF Issue 94-3.  SFAS 146 iseffective for exit and disposal activities that are initiated after December31, 2002 and requires that a liability for a cost associated with an exit ordisposal activity be recognized when the liability is incurred, in contrast tothe date of an entity's commitment to an exit plan, as required by ETIF Issue94-3.  We will adopt the provisions ofSFAS 146 effective January 1,2003.

      

**ITEM2.  MANAGEMENT'S DISCUSSION AND ANALYSISOR PLAN OF OPERATION**

THIS QUARTERLY REPORT ON FORM 10-Q CONTAINS FORWARD-LOOKINGSTATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES.  THE STATEMENTS CONTAINEDIN THIS DOCUMENT THAT ARE NOT PURELY HISTORICAL ARE FORWARD-LOOKING STATEMENTSWITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933 AND SECTION 21EOF THE SECURITIES EXCHANGE ACT OF 1934, INCLUDING WITHOUT LIMITATION STATEMENTSREGARDING THE COMPANY'S EXPECTATIONS,

 

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BELIEFS, INTENTIONS OR STRATEGIES REGARDING THE FUTURE. ALL FORWARD-LOOKING STATEMENTS INCLUDED IN THIS QUARTERLY REPORT ARE BASED ONINFORMATION AVAILABLE TO THE COMPANY ON THE DATE HEREOF, AND THE COMPANY ASSUMESNO OBLIGATION TO UPDATE ANY SUCH FORWARD-LOOKING STATEMENTS.  ACTUAL EVENTSAND OUTCOMES COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED IN THESEFORWARD-LOOKING STATEMENTS AS A RESULT OF MANY FACTORS, INCLUDING THOSEDESCRIBED HEREIN AND THOSE SET FORTH IN THE RISK FACTORS DESCRIBED IN ITEM 1 OFTHE COMPANY'S ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2001.

        The following discussion and analysis should be read inconnection with the unaudited condensed consolidated financial statements forthe three and nine month periods ended September 30, 2002 and 2001 of theCompany and related notes included elsewhere in this report and theconsolidated financial statements and related management discussion andanalysis included in NetLojix's Annual Report on Form 10-K, for the year endedDecember 31, 2001.

**DESCRIPTION OF REVENUE SEGMENTS**

        We classify our businessinto three segments: Network Connectivity, Technical Support Services andApplication Development and Hosting.  Thesegmentation of our company is how we manage the day-to-day operations of ourbusiness and is based on the types of services we provide.

**NetworkConnectivity**

        The network connectivitysegment 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 Internetproduct offerings within the network connectivity segment include dial-upaccess, DSL, and dedicated access.  Ourtelecommunications 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 serviceprovider business.  Within this segment,our networking and communications professionals will design, build and maintaina flexible, cost-effective package of data networking and voice communicationservices to meet our customers' needs.

**TechnicalSupport Services**

        Technical supportservices encompasses a broad array of solutions including system integration,desktop and network support, asset management and help desk solutions aimed atkeeping our customers' IT systems operational and their networks runningsmoothly. Service options within this segment include systems and networkinstallations, flat-fee maintenance contracts, prepaid time block retainers,help desk management contracts, warranty repairs and a small amount of hardwaresales. 

**ApplicationDevelopment and Hosting**

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

**Critical Accounting Policies**

      Our discussion and analysis of ourfinancial condition and results of operations are based upon our consolidatedstatements, which have been prepared in accordance with accounting principlesgenerally accepted in the United States. The preparation of these financialstatements requires us to make estimates and judgments that affect the reportedamounts of assets, liabilities, revenues and expenses.  In consultation with our Board of Directorsand Audit Committee, we have identified three accounting policies that webelieve are key to an understanding of our financial statements. These areimportant accounting policies that require management's most difficult,subjective judgments. 

 

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      The firstcritical accounting policy relates to revenue recognition.  In most cases, we recognize revenue when theservices are rendered.  For prepaidmaintenance contracts, we recognize revenue ratably over the serviceperiod.  For contracts that containcustomer acceptance provisions, we recognize revenue only after a customer hasindicated acceptance. 

      The secondcritical accounting policy relates to accounts receivable. We establish anallowance for doubtful accounts based upon factors surrounding the credit riskof our customers, historical trends and other information.  

        The third critical accounting policy relates to depreciation offixed assets. The purchase of equipment is capitalized based on its cost. Weprovide depreciation of fixed assets using the straight-line method over theequipment's estimated useful life. We have also excluded $26,000 and $25,000for the three month periods ended and $76,000 and $75,000 for the nine monthperiods ended September 30, 2002 and 2001 respectively in depreciation fromCost of Sales.

**RESULTS OF OPERATIONS**

**THREE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED WITH THREEMONTHS ENDED SEPTEMBER 30, 2001.**

**Revenues**

        Revenues from operations for the three months ended September30, 2002 were $3.7 million, a decrease of 22.7% or $1.1 million from $4.8million for the three months ended September 30, 2001.  

        Network connectivity services revenues decreased $.4 million to$2.0 million for the three months ended September 30, 2002 from $2.4 millionfor the three months ended September 30, 2001. Within the network connectivityservices segment, data and voice services accounted for $.3 million of thedecrease with the balance of the decrease attributable to Internetservices.  Data and voice servicesdecreased 14.7% from the comparable quarter in 2001 primarily due to the lossof a large customer as a result of the sale of that customer by its parent company.Internet services revenues decreased $.1 million or 19.4% to $.6 million. Thedecrease is primarily due to a decrease in dial up connectivity accounts andreduced pricing on some of our dedicated products due to the competitiveness ofthe industry.

     Technical support services revenues were$1.3 million for the three months ended September 30, 2002, a decrease of $.6million or 32.5%, over the comparable quarter in 2001. The decrease was due tothe reduction of revenue from the sale of a portion of the New York technicalsupport services business (consisting of the New York City customer list andrelated customer contracts) along with a loss of revenue associated with alarge customer's decision to decrease spending in this area.

        Application development and hosting services revenues decreasedto $.36 million for the three months ended September 30, 2002 from $.4 millionfor the comparable quarter in 2001, a 16.5% decrease.  The decrease is primarily due to lowercustomer spending on non-recurring revenue streams such as Application developmentprojects and our increased focus on monthly recurring revenue streams such ashosting and managed services.  For thethree months ended September 30, 2002 revenues from hosting services increased1.8% over the three months ended September 30, 2001.

 

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**Gross Margin**

        Gross margin from operations as a percentage of revenuesdecreased to 38.6% for the three months ended September 30, 2002 from 40.8% forthe three months ended September 30, 2001. Gross margin from operationsdecreased $.5 million to $1.4 million for the three months ended September 30,2002 from $1.9 million for the three months ended September 30, 2001.

        Network connectivity services gross margin as a percent ofrevenue decreased to 32.1% for the three months ended September 30, 2002 from34.0% for the three months ended September 30, 2001.  Within the network connectivity servicessegment, data and voice gross margins averaged 21.6% vs. 23.0% in thecomparable quarter in 2001. The decrease in gross margins was primarily due toan unusually high gross margin in 2001, which was caused by customers notmeeting their minimum usage requirements, resulting in revenue with noassociated costs.  Gross margins forInternet services decreased to 59.5% during the three months ended September30, 2002 compared to 61.1% for the comparable 2001 quarter. The decrease from2001 is primarily attributable to the added costs associated with thereorganization of our network to produce future cost savings.

        Technical support services gross margins averaged 37.5% duringthe quarter ended September 30, 2002 compared to 40.4% for the comparablequarter in 2001.  Gross margins in thetechnical service segment decreased primarily as a result of increased costsassociated with creating an remote help desk along with two large specialprojects that required us to supplement our own personnel with higher costsubcontractors in order to accommodate our customers needs.

        Application development and web hosting gross margins were80.6% during 2002 compared to 80.0% for the comparable quarter in 2001.  The increase in gross margin is due primarilyto the completion of one high margin Application development project in thethird quarter of 2002. 

Selling, General, and Administrative Costs

        Selling, general, and administrative costs decreased $.4million to $1.4 million for the three months ended September 30, 2002 from $1.8million for the three months ended September 30, 2001.  As a percentage of revenues, selling, generaland administrative costs decreased to 37.4% for the three months endedSeptember 30, 2002 from 37.9% for the three months ended September 30,2001.  Of the decrease in selling,general and administrative expenses, $0.17 million is attributable to the saleof a portion of the New York technical support services business (consisting ofthe New York City customer list and related customer contracts).  Approximately $0.12 million is due todecreased salary expense. The remainder is due to decreased professional servicefees, primarily due to the change in auditors and the decline of legal feesassociated with the class action lawsuit.

**NINE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED WITH NINEMONTHS ENDED SEPTEMBER 30, 2001.**

**Revenues**

        Revenues from continuing operations for the nine months endedSeptember 30, 2002 were $11.4 million, a decrease of 23.8% or $3.5 million from$14.9 million for the nine months ended September 30, 2001.  

        Network connectivity services revenues, decreased $1.4 millionto $6.1 million for the nine months ended September 30, 2002 from $7.5 millionfor the nine months ended September 30, 2001. Within the network connectivityservices segment, data and voice services accounted for $1.0 million of thedecrease with the balance of the decrease attributable to Internet services.  Data and voice services decreased 19.0% fromthe comparable period in 2001 primarily due to the loss of a large customer asa result of the sale of that customer by its parent company.  Internet services revenues decreased $.4million or 16.7% to $1.8 million.  Thedecrease is primarily due to a decrease in dial up connectivity accounts andreduced pricing on some of our dedicated products due to the competitiveness ofthe industry.

 

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        Technical support services revenues were $4.1 million for thenine months ended September 30, 2002, a decrease of 33.3% or $2.0 million overthe comparable period in 2001. Approximately $1.2 million of the decrease was due to the reduction ofrevenue from the sale of a portion of the New York technical support servicesbusiness (consisting of the New York City customer list and related customercontracts).  The remaining decrease inrevenue was associated with a large customer's decision to decrease spending inthis area.  

        Application development and hosting services revenues decreasedto $1.2 million for the nine months ended September 30, 2002 from $1.3 millionfor the comparable period in 2001, a 10.2% decrease.  The decrease is primarily attributable to thedownsizing of the application development group.  For the nine months ended September 30, 2002revenues from hosting services increased 1.1% over the nine months endedSeptember 30, 2001.

**Gross Margin**

        Gross margin from operations as a percentage of revenuesdecreased to 40.2% for the nine months ended September 30, 2002 from 40.8% forthe nine months ended September 30, 2001. Gross margin from operationsdecreased $1.5 million to $4.6 million for the nine months ended September 30,2002 from $6.1 million for the nine months ended September 30, 2001. 

        Network connectivity services gross margin as a percent ofrevenue decreased to 32.2% for the nine months ended September 30, 2002 from35.3% for the nine months ended September 30, 2001.  Within the network connectivity servicessegment, data and voice gross margins averaged 19.5% vs. 25.5% in thecomparable period in 2001. The decrease in gross margins was primarily due to aone-time adjustment to cost of goods sold due to resolution of the amount ofUniversal Service Fund liability in the first quarter of 2001.  Gross margins for Internet services increasedto 62.0% during the nine months ended September 30, 2002 vs. 58.8% for thecomparable period in 2001. The increase in 2002 is primarily attributable tohigher costs in 2001 relating to the opening of the New York, San Francisco,and Los Angeles MPOPs along with the reduction ofnetwork infrastructure costs, better utilization of bandwidth and a focus onhigher margin services.

        Technical support services gross margins averaged 41.2% duringthe nine months ended September 30, 2002 compared to 40.4% for the comparableperiod in 2001.  Gross margins in thetechnical service segment increased due to the sale of a lower margin portionof the New York technical support services business (consisting of the New YorkCity customer list and related customer contracts) along with a change of focusto our higher margin help desk solution.

        Application development and web hosting gross margins were77.8% during the nine months ended 2002 compared to 73.7% for the nine monthsended in 2001.  The increase isattributable to staff reductions in the application development area andfocusing our applications development efforts on e-commerce, web centricapplications and managed web hosting which are generally higher margin services.

 

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**Selling, General, and Administrative Costs**

        Selling, general, and administrative costs decreased $1.6million to $4.4 million for the nine months ended September 30, 2002 from $6.0million for the nine months ended September 30, 2001.  As a percentage of revenues, selling, generaland administrative costs decreased to 38.6% for the nine months ended September30, 2002 from 39.7% for the nine months ended September 30, 2001.  Of the decrease in selling, general andadministrative expenses, $0.7 million is attributable to the sale of a portionof the New York technical support services business (consisting of the New YorkCity customer list and related customer contracts).  Approximately $0.42 million is due to decreasedsalary expense. The remainder is due to decreased professional service fees,primarily due to the change in auditors and the decline of legal feesassociated with the class action lawsuit.

**Interest Expense**

        At September 30, 2002, we had approximately $1.2 million inborrowings outstanding under our secured line of credit.  During the nine months ended September 30,2002 we averaged approximately $1.0 million in outstanding borrowings. Interestexpense decreased to $85,000 for the nine months ended September 30, 2002 from$118,000 for the nine months ended September 30, 2001, as a result of the lowerlevel of average borrowings outstanding in the first quarter of 2002.

**LIQUIDITY AND CAPITAL RESOURCES**

        For the nine months endedSeptember 30, 2002, we reported a net loss from continuing operations of $.44million and used net cash in operations of $.15 million.  As of September 30, 2002, we had cash andcash equivalents of $.6 million and outstanding indebtedness on our line ofcredit of $1.2 million. At that date, we had a working capital deficit of $2.7million.

        On January 31, 2002, werepaid our secured credit facility with Coast Business Credit and entered intoa new secured credit facility with DTL One, LLC ("DTL"), a newly formed entityaffiliated with director Jeffrey J. Jensen. Under the DTL line of credit, we may borrow up to 80% of eligiblereceivables (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 plus2%, with a minimum interest rate of 10%. Borrowings under the credit facilityare secured by substantially all of our assets. The credit facility will mature on January 31, 2004.  After January 31, 2003, DTL may terminate theline of credit without cause, upon six months notice.  As of November 13, 2002, approximately $1.2million was outstanding under the credit facility, and approximately $0.3million was available to be borrowed under the formula described above.

        In July 2002, UICI (apublic company affiliated with a director and certain stockholders of NetLojix)terminated NetLojix as its long distance services provider.  For the nine months ended September 30, 2002,UICI accounted for approximately $1,900,000 of NetLojix'srevenues.  However, because of the lowmargins associated with the UICI contract, we do not believe that thetermination will have a material adverse effect on NetLojix'snet income.  Also in July 2002, ABN AMROInc. terminated NetLojix as its technical services provider.  For the nine months ended September 30, 2002,ABN AMRO accounted for approximately $562,000 of NetLojix'srevenues and approximately $382,000 in gross margin.  These terminations could negatively affectour cash flow from operations. 

        Historically, our cash flowfrom operations, our secured borrowings, and occasional private placements ofboth common and preferred stock have been sufficient to meet working capitaland capital expenditure requirements. However, as noted above, our cash flowfrom operations has been decreasing in recent years.

        We believe that currentmarket conditions are not conducive to raising additional equity capital atthis time.  In any event, our current lowstock price and delisting from The NasdaqSmallCap Market present substantial obstacles to raisingany equity capital. We continue to conserve cash and reduce operatingexpenses.  As a result of these costcontrol measures, we expect that operating cash flows coupled with theremaining availability under our secured line of credit facility should besufficient to meet our minimum working capital requirements into theforeseeable future.

 

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        An important component of our past growth has been to developour business through acquisitions. However, our current cash position and lowstock price again present substantial obstacles to such acquisitions.

**Item3.    Controls and Procedures**

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

**PART II. OTHER INFORMATION**

**ITEM 2.  CHANGES INSECURITIES AND USE OF PROCEEDS**

(c)   As previouslynoted, NetLojix was a defendant in a class action lawsuit under the federalsecurities laws initiated in December 1998 in the United States District Courtfor the Central District of California.  On October 4, 2000, NetLojix finalized an agreement with counsel for theplaintiff class to settle all outstanding claims under the class actionlawsuit. After appropriate notice and a hearing, the court entered its finalorder of dismissal and approval of the settlement on May 29, 2001. Pursuant tothe settlement and court order, on August 20, 2002, we issued 232,000 shares ofcommon stock and warrants to purchase an additional 200,000 shares of commonstock to a total of 162 persons who were members of the class or attorneys forthe class.

        These shares and warrants were not registered under theSecurities Act, in reliance upon the exemption from registration set forth inSection 3(a)(10) of the Securities Act. The terms and conditions of such issuance were approved, after a hearingupon the fairness of such terms and conditions, by the United States DistrictCourt for the Central District of California. No underwriters were used in this issuance.

        The warrants to purchase common stock that were part of suchissuance had an exercise price of $8.00 per share and were to be exercisableduring the two-year period after registration of the underlying common stockwas effected.  By their terms, thewarrants were redeemable at the option of NetLojix for a redemption price equalto equal to the number of shares issuable uponexercise of the warrants, multiplied by $0.05. NetLojix elected to redeem the warrants, and such redemption becameeffective on October 14, 2002. Accordingly, the warrants are no longer outstanding.

**ITEM 3.  DEFAULTS UPONSENIOR SECURITIES**

(b)   NetLojix has outstanding 147,700 shares ofits Series A Convertible Preferred Stock (the "Series A Preferred").  The Series A Preferred ranks prior to NetLojix's common stock. As of November 13, 2002, dividend in arrears on the Series A Preferredtotaled $231,392.

 

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**ITEM 5.  OTHERINFORMATION**

        On October 7, 2002, the Board of Directors of NetLojixfilled the existing vacancy on the Board by appointing Peter Wenner to serve as a director. Mr. Wenneris a principal of Wenner & Associates, LLC, whichprovides financial, strategic and real estate consulting services for clientslocated in Europe, China and the United States. From April 1997 through April 2001, Mr. Wennerwas a principal of and development manager for Atlas Homes, LLC, whichdeveloped a 500-acre master planned residential development. He received a Bachelorof Science degree from the University of Wisconsin and a Master of BusinessAdministration degree from the University of Southern California.

**ITEM 6.  EXHIBITS ANDREPORTS ON FORM 8-K**

     (a)   Exhibits.

             99.1  Certificationof 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 Form8-K.  NetLojix did not file any reportson Form 8-K during the quarter ended September 30, 2002.

 

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**SIGNATURE**

In accordance with the requirements of the Exchange Act, theregistrant 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 andController      (Duly Authorized Officer and Principal Financial Officer andPrincipal Accounting Officer)  

Dated: November 13, 2002
 
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**CERTIFICATIONS**

I, Anthony E. Papa, certify that:

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

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

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

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

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

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

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

5. The registrant's other certifying officers and I havedisclosed, based on our most recent evaluation, to the registrant's auditorsand the audit committee of registrant's board of directors (or personsperforming the equivalent functions):

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

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

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

Date November 13, 2002

 

/s/  ANTHONY E. PAPA---------------------------------Anthony E. PapaChairman of the Board andChief Executive Officer

 

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**CERTIFICATIONS**

I, Gregory J. Wilson, certify that:

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

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

3. Based on my knowledge, the financial statements, and otherfinancial information included in this quarterly report, fairly present in allmaterial respects the financial condition, results of operations and cash flowsof the registrant as of, and for, the periods presented in this quarterlyreport; 

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

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

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

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

5. The registrant's other certifying officers and I havedisclosed, based on our most recent evaluation, to the registrant's auditorsand the audit committee of registrant's board of directors (or personsperforming the equivalent functions):

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

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

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

 

Date November 13, 2002

 

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

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