10-Q

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

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FORM 10-Q
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[X]   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
       EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2001

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

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                    NETLOJIX COMMUNICATIONS, INC.                    
(EXACT NAME OF REGISTRANT SPECIFIED IN ITS CHARTER)

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

501 BATH STREET

          SANTA BARBARA, CALIFORNIA 93101          

(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)

                                             (805) 884-6300                                             

(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [_]

As of November 9, 2001, there were 14,518,423 shares of the Registrant's Common Stock, par value $0.01 per share, issued and outstanding, excluding treasury stock.

NETLOJIX COMMUNICATIONS, INC.
QUARTER ENDED September 30, 2001

TABLE OF CONTENTS

		PAGE
Part I.         FINANCIAL INFORMATION
Item 1.  Financial Statements
	Condensed Consolidated Balance Sheets as of September 30,
	2001 and December 31, 2000	3
	Condensed Consolidated Statements of Operations for
	the Three and Nine-Month Periods Ended September 30, 2001
	and 2000	4
	Condensed Consolidated Statements of Cash Flows for
	Nine Month Periods Ended September 30, 2001 and 2000	5
	Notes to Condensed Consolidated Financial Statements	6
Item 2.  Management's Discussion and Analysis of Financial
	Condition and Results of Operations	13
Item 3.  Quantitative and Qualitative Disclosures About Market Risk		19
PART II.        OTHER INFORMATION
Item 6.  Exhibits and Reports on Form 8-K		19
Signature Page		20

2

PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS

NETLOJIX COMMUNICATIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
		September 30,		December 31,
		2001		2000
		(Unaudited)
Assets
CURRENT ASSETS
Cash and cash equivalents	$	224,000	$	184,000
Accounts receivable, net		1,714,000		2,289,000
Due from related parties		747,000		832,000
Prepaid expenses and other current assets		345,000		381,000
Total current assets		3,030,000		3,686,000
Property and equipment, net		1,260,000		1,502,000
Goodwill, net		4,328,000		4,585,000
Customer bases acquired and other intangibles, net		1,377,000		1,860,000
Other assets		155,000		86,000
Total assets	$	10,150,000	$	11,719,000
Liabilities and Stockholders' Equity
CURRENT LIABILITIES
Revolving line of credit	$	809,000	$	1,178,000
Accounts payable and other accrued expenses		1,778,000		2,097,000
Accrued payroll related liabilities		690,000		593,000
Accrued network services costs		1,498,000		668,000
Litigation settlement liability		73,000		940,000
Sales and excise tax payable		308,000		338,000
Unearned revenue		665,000		1,160,000
Other current liabilities		428,000		542,000
Total current liabilities		6,249,000		7,516,000
Long term obligations		36,000		54,000
Total liabilities		6,285,000		7,570,000
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 $728,000 at December 31,2000
and $775,000 at September 30, 2001 including dividends in arrears.)		1,000		1,000
Common stock, authorized 40,000,000 shares, $0.01 par value,
issued 14,681,328 shares at September 30, 2001 and
14,481,328 shares at December 31, 2000.		147,000		145,000
Additional paid in capital		28,455,000		28,452,000
Preferred dividends		(102,000)		(102,000)
Accumulated deficit		(24,634,000)		(24,345,000)
Treasury stock, $0.01 par value, 162,905 at September 30, 2001 and
December 31, 2000.		(2,000)		(2,000)
Total stockholders' equity		3,865,000		4,149,000
Total liabilities and stockholders' equity	$	10,150,000	$	11,719,000
See accompanying notes.

3

NETLOJIX COMMUNICATIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
		Three months		Nine months
		Ended September 30,		Ended September 30,
		2001	2000	2001	2000
SERVICE REVENUES
Unrelated parties	$	3,989,000	3,900,000	12,700,000	12,544,000
Related parties - (note 6)		779,000	1,040,000	2,216,000	2,995,000
TOTAL SERVICE REVENUES		4,768,000	4,940,000	14,916,000	15,539,000
COST OF REVENUES
(exclusive of depreciation - note 1)		2,828,000	2,884,000	8,833,000	9,137,000
GROSS MARGIN		1,940,000	2,056,000	6,083,000	6,402,000
OPERATING EXPENSES
Selling, general and administrative		1,825,000	2,835,000	5,950,000	9,131,000
Litigation settlement (recovery) costs		-	-	(684,000)	998,000
Gain on sale of Contracts and Customer List		(203,000)	-	(203,000)	-
Depreciation and amortization		396,000	290,000	1,170,000	817,000
Total operating expenses		2,018,000	3,125,000	6,233,000	10,946,000
OPERATING (LOSS)		(78,000)	(1,069,000)	(150,000)	(4,544,000)
Interest expense		(29,000)	(36,000)	(118,000)	(50,000)
Other income (expense), net		(31,000)	10,000	(21,000)	7,000
(Loss) from operations
before income taxes		(138,000)	(1,095,000)	(289,000)	(4,587,000)
Income tax benefit		-	-	-	-
NET (LOSS)	$	(138,000)	(1,095,000)	(289,000)	(4,587,000)
Net (loss) per common share - basic and diluted	$	(0.01)	(0.08)	(0.02)	(0.35)
Weighted average number of
common shares - basic & diluted		14,681,328	13,861,987	14,550,925	13,444,289
See accompanying notes

4

NETLOJIX COMMUNICATIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unadudited)
		Nine months
		Ended September 30,
		2001		2000
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss from continuing operations	$	(289,000)	$	(3,492,000)
Adjustments to reconcile net loss from continuing operations
to cash provided by (used by) continuing operating activities:
Depreciation and amortization		1,170,000		528,000
Issuance of warrants for professional services		-		216,000
Provision for bad debts		311,000		200,000
Litigation settlement (recovery)		(684,000)		998,000
Gain on sale of Contracts and Customer List		(203,000)		-
Stock compensation earned		3,000		57,000
Changes in certain operating assets and liabilities:
Accounts receivable		265,000		(1,436,000)
Due from affiliates		84,000		310,000
Other current assets		(56,000)		(564,000)
Litigation settlement liability		(183,000)		-
Accounts payable and accrued liabilities		172,000		288,000
Cash provided by (used by) operating activities		590,000		(2,895,000)
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment		(162,000)		(261,000)
Payments received on loans to officers		-		30,000
Cash received (paid) in acquisitions		-		(25,000)
Cash used by investing activities		(162,000)		(256,000)
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on capital leases		(15,000)		(45,000)
Cash proceeds from exercise of options		-		1,231,000
Sale of common stock		-		1,472,000
Preferred stock dividend payments		-		(24,000)
Amount borrowed (paid) on line of credit, net		(369,000)		719,000
Amounts paid on long term borrowings		(4,000)		-
Costs associated with issuance of common stock		-		(23,000)
Purchase of common stock for treasury		-		(38,000)
Cash provided by (used by) financing activities		(388,000)		3,292,000
Net increase (decrease) in cash and cash equivalents		40,000		141,000
Cash and cash equivalents at beginning of period		184,000		1,135,000
Cash and cash equivalents at end of period	$	224,000	$	1,276,000
Cash paid during the period:
Interest	$	118,000	$	2,000
Non cash investing and financing activities:
Common stock issued for acquisition	$	-	$	195,000
See accompanying notes.

5

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

September 30, 2001 and 2000

(1) Basis of Presentation

        The unaudited condensed consolidated financial statements of NetLojix Communications, Inc. and Subsidiaries (the "Company") as of September 30, 2001 and 2000 and for the three and nine-month periods then ended 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 the Company's Form 10-K for the year ended December 31, 2000. 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. The Company has excluded $25,000 and $42,000 in depreciation from Cost of Sales for the three-month periods ended September 30, 2001 and 2000 respectively. For the nine-month periods ended September 30, 2001 and 2000 the Company has excluded $75,000 and $115,000 respectively.

(2) Acquisitions and Dispositions

        In August and September 2000, the Company acquired all the outstanding shares of Smith Technology Solutions, Inc. (STS) and CW Electronic Enterprises, Inc. (CWE²), respectively. These enterprises provide local and wide area network design, integration and support, and web-site design and management for businesses. The Company paid cash of $60,000 and $150,000 and issued 250,000 and 500,000 shares of its common stock valued at approximately $484,000 and $1,214,000 in exchange for all the outstanding shares of STS and CWE², respectively. The Company also paid $90,000 for a consulting agreement with an officer of STS. In addition, the Company incurred acquisition related expenses totaling approximately $233,000. These acquisitions were accounted for using the purchase method of accounting

        On September 30, 2001 the Company sold its a portion of its New York technical support services business (consisting of its New York City customer list and related customer contracts) to an unrelated third party. The company retained all of its help desk customers and contracts, which it will focus on in the future. The purchaser assumed responsibility for unused customer retainers and remaining terms on service agreements. The Company recorded a gain (net of costs) of $203,000 in connection with this sale. In addition, if the purchaser is able to renew retainers, service agreements or provide any additional services to the customers that were transferred, then it will pay the Company 5% of any such cash received prior to September 30, 2002.

6

 (3) Net (Loss) Per Common Share

Net (Loss) per common share for the three-month and nine-month periods ended September 30, 2001 and 2000 are as follows:

		Three Months Ended September 30,		Nine Months Ended September 30,
		2001	2000	2001	2000
Numerator:
Net (Loss)	$	(138,000)	(1,094,000)	(289,000)	(4,587,000)
Preferred dividends		-	24,000	-	47,000
Net (Loss) applicable to      common stockholders	$	(138,000)	(1,118,000)	(289,000)	(4,634,000)
Denominator:
Weighted average number of      common shares used in basic      and diluted      Net (Loss) per common share		14,681,328	13,861,987	14,550,925	13,444,289
Basic and diluted net (Loss)      per common share	$	(0.01)	(0.08)	(0.02)	(0.35)

        As of September 30, 2001 and 2000, 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 September 30, 2000 and 2001 is equal to net loss reported for such periods.

(4) Litigation and Contingencies

On April 19, 2000, the Company reached an agreement in principle to settle all outstanding claims under the class action lawsuit pending against NetLojix and certain of its officers. On May 29, 2001 the court entered its final order of dismissal and approval of the settlement. The period for any appeals has passed. The Company will issue, for distribution to the claimant class members and for payment of any plaintiffs attorneys' fees and litigation expenses, a total of 232,000 shares of common stock and warrants to purchase 200,000 shares of NetLojix's common stock at an exercise price of $8.00 per share with a term of 2 years. During the quarter ended March 31, 2000, the Company recorded a charge against earnings of $998,000 and a liability relating to the expected settlement. This liability has been adjusted to the current market value of the stock and warrants on the date that the settlement became effective. This resulted in credit to earnings in the second quarter of 2001 of $684,000.

7

        In connection with the sale in November 1999 of Matrix Telecom (a former subsidiary of NetLojix), the final amount of the 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. The Company was notified by the purchaser on December 16, 1999 that the purchaser materially disagreed with the balance sheet of Matrix Telecom prepared by the Company. To date, the Company has attempted to resolve the matter, but the purchaser has resisted submitting the matter to an independent firm of accountants chosen by the parties for final resolution, as required by the contract. Any adjustments in the purchase price would affect the purchase price and the recorded gain. If the dispute is determined in the purchaser's favor, the Company could be required to repay some of the purchase price to the purchaser in cash. At this time, the Company does not believe that the ultimate resolution of the items in dispute will materially af fect the recorded gain.

        The Company presently has other contingent liabilities relating to various other matters related to the conduct of its 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.

 (5) Stockholders' Equity

        On April 1, 2001, the Company sold 200,000 shares of Restricted Stock to two of its officers and directors under its 1998 Stock Incentive Plan at $.01 per share. These shares vest 30% at the end of each of the first two anniversary dates of their issuance and 40% on the third anniversary of their issuance. The difference between the purchase price and the fair market value of the stock at the time of grant is being amortized over the restriction period. The two individuals were also granted an option to purchase 800,000 shares of the Company's common stock under the same plan with the same vesting schedule at an exercise price of $.11 per share. In addition, the Company granted to other employees, options to purchase 18,000 shares under the same plan vesting 25% each anniversary of issue at exercise prices of $.14 and $.17 per share. In the third quarter of 2001 the Company issued options to two directors and one employe e to purchase 100,000 shares of common stock each at $.14. The employee's options vest equally over 4 years and the directors' vest equally over two years. The above options were all issued at the fair market value of the stock at the date of grant.

(6) Related Party Transactions

        The Company has had transactions in the normal course of business with various companies who are related with shareholders of the Company. The Company provides long distance and data network service to a number of such related companies. Balances related to operating activities are settled monthly. The natures of 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. The Company neither receives nor provides any benefits outside of a standard customer-supplier relationship.

(7) Revenue Recognition

        Revenues for long distance, frame relay, Internet, and 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, the Company sells its services under hourly service contracts (whether prepaid or billed in arrears), flat fee service call contracts or prepaid maintenance contracts. For prepaid maintenance contracts, the Company recognizes revenues 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.

8

(8) Segment Reporting

        The Company's primary business segments are network connectivity, technical support services and application development and hosting. The segmentation is based on the types of services provided. All of the Company's services are targeted toward mid-sized businesses (50-500 employees). Parent company costs are allocated to each segment based on revenue. However, extraordinary items are not allocated.

        The network connectivity segment includes services that are wide area network connections for Internet, data or voice traffic. The Company provides traditional long distance services, calling card, dedicated voice and data access and numerous Internet service options. Telecommunications product offerings include dedicated or leased lines, dedicated and switched long distance, frame relay, ATM, calling cards, and "1-800" services. Internet product offerings within the network connectivity segment include dial-up access, DSL, dedicated access and cable access. This segment includes the Internet connectivity portion of the Company's Southern California based Internet service provider business.

        Technical support services encompass a broad array of technical support services and solutions including system integration, desktop and network support, asset management and help desk solutions. Services provided 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 as well as web hosting services.

        The Company measures its performance based on revenues, gross margin, net income or loss and earnings before interest, taxes, depreciation and amortization ("EBITDA"). However, EBITDA is not a measure of financial performance under accounting principles generally accepted in the United States and should not be considered as an alternative to net income or cash flows from operations, as a measure of performance.

9

The results for the three months and nine months ended September 30, 2001 and 2000 are as follows:

		Three Months Ended September 30, 2001
		Network Connectivity Services	Technical Support Services	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		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

		Three Months Ended September 30, 2000
		Network Connectivity Services	Technical Support  Service	Applications Development and Web  Hosting	Total
Revenues	$	2,696,000	1,655,000	589,000	4,940,000
Gross margin		990,000	659,000	407,000	2,056,000
Selling, general & administration		2,083,000	432,000	320,000	2,835,000
Depreciation & amortization		123,000	122,000	45,000	290,000
Interest expense		34,000	4,000	(2,000)	36,000
Other (income)		(10,000)	-	-	(10,000)
Net income (loss)	$	(1,240,000)	101,000	44,000	(1,095,000)
EBITDA	$	(1,083,000)	227,000	87,000	(769,000)
Total assets	$	5,399,000	7,896,000	608,000	13,903,000

10

		Nine Months Ended September 30, 2001
		Network Connectivity Services	Technical Support Services	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 (income) expense		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

		Nine Months Ended September 30, 2000
		Network Connectivity Services	Technical Support Services	Applications Development and Web  Hosting	Total
Revenues	$	8,921,000	4,594,000	2,024,000	15,539,000
Gross margin		3,294,000	1,791,000	1,317,000	6,402,000
Selling, general & administration		5,819,000	2,322,000	990,000	9,131,000
Depreciation & amortization		383,000	350,000	84,000	817,000
Interest expense		42,000	8,000	-	50,000
Other (income) expense		(8,000)	1,000	-	(7,000)
Corporate litigation settlement		-	-	-	(998,000)
Net income (loss)	$	(2,942,000)	(890,000)	243,000	(4,587,000)
EBITDA	$	(2,517,000)	(532,000)	327,000	(3,720,000)

11

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

		Three months		Nine months
		Ended September 30,		Ended September 30,
		2001	2000	2001	2000
Network Connectivity Services:
	Data & Voice Services	$ 1,737,000	1,871,000	5,273,000	6,067,000
	Internet Services	703,000	825,000	2,193,000	2,854,000
Technical Support Services:
	Technical Support Services	696,000	840,000	2,585,000	2,087,000
	Help Desk Services	1,189,000	742,000	3,409,000	2,283,000
	Hardware	18,000	73,000	153,000	225,000
Applications Development and Web Hosting:
	Applications Development	146,000	345,000	459,000	1,374,000
	Web Hosting	279,000	244,000	844,000	649,000
		$ 4,768,000	4,940,000	14,916,000	15,539,000

(9) Recent Accounting Pronouncements

     In June 2001, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards No. 141, "Business Combinations", and No. 142 "Goodwill and Other Intangible Assets", effective for fiscal years beginning after December 15, 2001. Under the new rules, goodwill and intangible assets will no longer be amortized but will be subject to annual impairment tests. Other intangible assets will continue to be amortized over their useful lives.

        The Company will apply the new rules on accounting for goodwill and other intangible assets beginning in the first quarter of 2002. During 2002, the Company will perform the first of the required impairment tests of goodwill and indefinite lived intangible assets as of January 1, 2002 and has not yet determined what the effect of these tests will be on the earnings and financial position of the Company.

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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

THIS QUARTERLY REPORT ON FORM 10-Q CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE 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-K FOR THE Y EAR ENDED DECEMBER 31, 2000.

        The following discussion and analysis should be read in connection with the unaudited condensed consolidated financial statements for the three month and nine month periods ended September 30, 2001 and 2000 of the Company and related notes included elsewhere in this report and the consolidated financial statements and related management discussion and analysis included in the Company's Annual Report on Form 10-K, for the year ended December 31, 2000.

 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, dedicated access and cable 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. The IT support team is certified by over 40 hardware and software manufacturers. 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.

13

RESULTS OF OPERATIONS

THREE MONTHS ENDED SEPTMEBER 30, 2001 COMPARED WITH THREE MONTHS ENDED SEPTEMBER 30, 2000.

Revenues

        Revenues from operations for the three months ended September 30, 2001 were $4.8 million, a decrease of 3.5% or $.1 million from $4.9 million for the three months ended September 30, 2000.

        Network connectivity services revenues, decreased $.26 million to $2.44 million for the three months ended September 30, 2001 from $2.7 million for the three months ended September 30, 2000. Within the network connectivity services segment, data and voice services accounted for $.14 million of the decrease with the balance of the decrease attributable to Internet services. Data and voice services decreased 7.2% from the comparable quarter in 2000 primarily due to the decrease in per minute rates attributable to continued competitive pricing pressures within the telecommunications industry. Internet services revenues decreased $.12 million or 14.9% to $.7 million. The decrease is primarily due to a decrease in dial up connectivity accounts due to the competitiveness of the industry. We believe that while demand for dial up connectivity is decreasing, broadband Internet access products will continue to be strong, however they will also experience downward competitive pricing. We have upgraded our product offerings through partnerships and alliances with major vendors so that we can continue to increase our focus on broadband products.

        Technical support services revenues were $1.9 million for the three months ended September 30, 2001, an increase of $.25 million or 15.0%, over the comparable quarter in 2000. The increase was principally due to the acquisition of CWE² and STS late in the third quarter of 2000.

        Application development and hosting services revenues decreased to $.4 million for the three months ended September 30, 2001 from $.6 million for the comparable quarter in 2000, a 27.9% decrease. The decrease is primarily attributable to a decrease in the demand for new application development. Also, during the second quarter of 2000, the Company realized several revenue recognition milestones on two large application development projects. The Company has made a strategic decision to focus our applications development efforts on e-commerce, web centric applications and managed web hosting. Generally, these are higher margin services. For the three months ended September 30, 2001 hosting services increased 14.4% over the three months ended September 30, 2000. Generally, these are higher margin services. We expect to increase our focus on web centric applications and an expanded portfolio of managed hosting services. I n the fourth quarter of 2000, the Company initiated the expansion of its Santa Barbara data center to support its increased service offerings.

Gross Margin

        Gross margin from operations as a percentage of revenues decreased to 40.8% for the three months ended September 30, 2001 from 41.6% for the three months ended September 30, 2000. Gross margin from operations decreased $.2 million to $1.9 million for the three months ended September 30, 2001 from $2.1 million for the three months ended September 30, 2000.

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        Network connectivity services gross margin as a percent of revenue decreased to 34.0% for the three months ended September 30, 2001 from 36.7% for the three months ended September 30, 2000. Within the network connectivity services segment, data and voice gross margins averaged 23.0% vs. 21.7% in the comparable quarter in 2000. The increase in gross margins was primarily due to the re-provisioning of certain customers to alternate carriers for optimal pricing.

        Gross margins for Internet services decreased to 61.1% during the three months ended September 30, 2001 compared to 64.0% for the comparable 2000 quarter. The decrease from 2000 is primarily attributable to increased costs relating to the opening of the New York, San Francisco, and Los Angeles MPOPs along with the lower revenue with fixed connectivity costs.

        Technical support services gross margins increased to 40.4% during the quarter ended September 30, 2001 compared to 39.9% for the comparable quarter in 2000. Gross margins in the technical service segment increased due to an increase in retail pricing along with a change of focus to our higher margin help desk solution.

        Application development and web hosting gross margins were 80.0% during 2001 compared to 69.1% for the comparable quarter in 2000. The increase is attributable to staff reductions in the application development area and the increase in web hosting revenue with costs that are fixed.

Selling, General, and Administrative Costs

        Selling, general, and administrative costs decreased $1.0 million to $1.8 million for the three months ended September 30, 2001 from $2.8 million for the three months ended September 30, 2000. As a percentage of revenues, selling, general and administrative costs decreased to 37.9% for the three months ended September 30, 2001 from 57.5% for the three months ended September 30, 2000. These decreases are primarily due to a cost reduction plan, which began in November of 2000 and was fully implemented early in the second quarter of 2001.

        Of the decrease in selling, general and administrative expenses, $.8 million is attributable to salary expense, which was the main focus of the cost reduction plan. Approximately $.15 million of the decrease is due to decreased professional service fees, primarily due to the decline of legal fees associated with the class action lawsuit and regulatory registration. The remaining decrease in cost was associated with the consolidation of office space and a streamlining of the Company's business.

NINE MONTHS ENDED SEPTEMBER 30, 2001 COMPARED WITH NINE MONTHS ENDED SEPTEMBER 30, 2000.

Revenues

        Revenues from continuing operations for the nine months ended September 30, 2001 were $14.9 million, a decrease of 4.0% or $.6 million from $15.5 million for the nine months ended September 30, 2000.

        Network connectivity services revenues, decreased $1.4 million to $7.5 million for the nine months ended September 30, 2001 from $8.9 million for the nine months ended September 30, 2000. Within the network connectivity services segment, data and voice services accounted for $.8 million of the decrease with the balance of the decrease attributable to Internet services. Data and voice services decreased 13.1% from the comparable quarter in 2000 primarily due to the decrease in per minute rates attributable to continued competitive pricing pressures within the telecommunications industry. Internet services revenues decreased $.6 million or 23.2% to $2.2 million. The decrease is primarily due to a decrease in dial up connectivity accounts due to the competitiveness of the industry

 15

        Technical support services revenues were $6.2 million for the nine months ended September 30, 2001, an increase of 33.8% or $1.6 million over the comparable quarter in 2000. Approximately $1.4 million of the increase was due to the acquisition of CWE² and STS late in the third quarter of 2000. The balance of the increase was due to increased revenues from the cross marketing of technical support services to network connectivity customers and increased sales of our help desk solution.

        Application development and hosting services revenues decreased to $1.3 million for the nine months ended September 30, 2000 from $2.0 million for the comparable period in 2000, a 35.6% decrease. The decrease is primarily attributable to the downsizing of the application development group. The Company has made a strategic decision to focus our applications development efforts on e-commerce, web centric applications and managed web hosting. Generally, these are higher margin services. For the nine months ended September 30, 2001 hosting services increased 29.9% over the nine months ended September 30, 2000.

Gross Margin

        Gross margin from operations as a percentage of revenues decreased to 40.8% for the nine months ended September 30, 2001 from 41.0% for the nine months ended September 30, 2000. Gross margin from operations decreased $.3 million to $6.1 million for the nine months ended September 30, 2001 from $6.4 million for the nine months ended September 30, 2000.

        Network connectivity services gross margin as a percent of revenue decreased to 35.3% for the nine months ended September 30, 2001 from 35.5% for the nine months ended September 30, 2000. Within the network connectivity services segment, data and voice gross margins averaged 25.5% vs. 17.7% in the comparable quarter in 2000. The increase in gross margins was primarily due to a one-time adjustment to cost of goods sold due to resolution of the amount of Universal Service Fund liability in the first quarter of 2001.

        Gross margins for Internet services decreased to 58.8% during the nine months ended September 30, 2001 vs. 73.2% for the comparable period in 2000. The decrease from 2000 is primarily attributable to increased network costs relating to high-speed connectivity, increased costs relating to the opening of the New York, San Francisco, and Los Angeles MPOPs and lower revenue with fixed connectivity costs.

        Technical support services gross margins averaged 40.4% during the nine months ended September 30, 2001 compared to 39.0% for the comparable period in 2000. Gross margins in the technical service segment increased due to an increase in retail pricing along with a change of focus to our higher margin help desk solution.

        Application development and web hosting gross margins were 73.7% during the nine months ended 2001 compared to 71.5% for the nine months ended in 2000. The increase in gross margin is due primarily to a one-time adjustment following the resolution of a warranty liability for an application development project. The increase is also attributable to staff reductions in the application development area and the increase in web hosting revenue with costs that are fixed.

Selling, General, and Administrative Costs

        Selling, general, and administrative costs decreased $3.1 million to $6.0 million for the nine months ended September 30, 2001 from $9.1 million for the nine months ended September 30, 2000. As a percentage of revenues, selling, general and administrative costs decreased to 39.7% for the nine months ended September 30, 2001 from 58.8% for the nine months ended September 30, 2000. These decreases are primarily due to a cost reduction plan, which began in November of 2000 and was fully implemented early in the second quarter of 2001.

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        Of the decrease in selling, general and administrative expenses, $1.8 million is attributable to salary expense, which was the main focus of the cost reduction plan. Approximately $.9 million of the decrease is due to decreased professional service fees, primarily due to the decline of legal fees associated with the class action lawsuit and regulatory registration. Approximately $.2 million of the decrease is attributable to bringing the billing for telecommunications in house in the third quarter of 2000. The remaining decrease in cost was associated with the consolidation of office space and a streamlining of the Company's business.

Settlement Costs

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

        On October 4, 2000, NetLojix finalized an agreement with counsel for the plaintiff class to settle all outstanding claims under the class action lawsuit. During the last quarter of 2000 and the first quarter of 2001, NetLojix paid a total of $150,000 for administrative costs and other settlement implementation expenses.

        On May 29, 2001, the court entered its final order of dismissal and approval of the settlement. The appeal period for this final approval ended on June 28, 2001. Upon receipt of instructions from the class action claims administrator, NetLojix will issue for distribution to the claimant class members, and payment of the plaintiffs attorneys' fees and litigation expenses, a total of 232,000 shares of common stock and warrants to purchase 200,000 shares of NetLojix's common stock at an exercise price of $8.00 per share with a term of 2 years. During the three month period ended March 31, 2000, the Company recorded a charge against earnings of $998,000 and a liability relating to the expected settlement. This charge has been adjusted to reflect the market value of the stock and warrants on the date that the settlement became effective. This adjustment resulted in a credit to earnings in the second quarter of 2001 of $684, 000.

Interest Expense

        At September 30, 2001, the Company has $809,000 in borrowings outstanding under its secured line of credit. During the nine month period ended September 30, 2000 the Company averaged approximately $1.0 million in outstanding borrowings. The company was required to pay interest on a minimum borrowing of $1.0 million. As of September 13, 2001 the loan agreement was amended to waive the minimum interest provision for the remainder of the contract period. This facility expires on January 31, 2002. The lender has informed us that they do not intend to renew the facility. We are in the process of negotiating a new credit facility to replace the existing one. We expect the interest rate to be substantially higher than our current rate.

LIQUIDITY AND CAPITAL RESOURCES

        For the nine months ended September 30, 2001, we reported a net loss from continuing operations of $.24 million although operations provided net cash of $.6 million. As of September 30, 2001, we had cash and cash equivalents of $.22 million and outstanding indebtedness on our line of credit of $0.8 million. At that date, we had a working capital deficit of $3.2 million. In their report on NetLojix's December 31, 2000 consolidated financial statements, our independent auditors included an explanatory paragraph indicating that NetLojix's recurring operating losses and working capital deficit at December 31, 2000 raise doubts in their minds about NetLojix's ability to continue as a going concern. As described in more detail below, we initiated a cost reduction plan, which began in November of 2000 and was fully implemented early in the second quarter of 2001, to improve our cash flow from operations. This plan included a reduction in staff, closure of offices and a refocusing of our marketing and sales activities on more profitable lines of business.

 17

        Under our secured credit facility with Coast Business Credit, we may borrow up to 70% of eligible billed receivables (as defined) up to a total amount of $3.0 million. The percentage may be increased to 80% of eligible billed receivables if we reach certain operational targets. Borrowings under the line of credit bear interest, payable monthly, based upon the prime rate of Bank of America NT & SA plus 2% (8.5% at September 30, 2001 and 8.0% at October 31, 2001). Borrowings under the credit facility are secured by substantially all of our assets. As of October 31, 2001, approximately $.4 million is outstanding under the credit facility, and approximately $.1 million is available to be borrowed under the formula described above. This facility expires on January 31, 2002. The lender has informed us that they do not intend to renew the facility. We are in the process of negotiating a new credit facility to replace the e xisting one. We expect the interest rate to be substantially higher than our current rate.

        On April 23, 1999, we entered into an equity line agreement with Cambois Finance, Inc. Under the terms of the equity line agreement, we were permitted to sell or put our common stock to Cambois Finance, at our option at any time, subject to the satisfaction of several conditions. Among other requirements, our stock was required to have a minimum bid price of $2.26 per share and meet certain volume levels on The Nasdaq SmallCap Market in order for us to require Cambois Finance to purchase stock, unless Cambois Finance otherwise agreed. Our stock has not met these trading price and volume requirements for some time and was delisted from The Nasdaq SmallCap Market in June 2001. Accordingly, we are unable to utilize the equity line without Cambois' agreement. We have not sold any shares of common stock to Cambois under the equity line agreement since December 1999, and we do not know if Cambois would be willing to agree to any further sales.

        On February 21, 2001, we paid $120,000 in connection with the settlement agreement entered into in November 2000 with respect to NetLojix's outstanding class action lawsuit.

        Historically, our cash flow from operations, our secured borrowings, our private placements of both common and preferred stock and our equity line agreement with Cambois Finance, Inc. have been sufficient to meet working capital and capital expenditure requirements. However, as noted above, we currently cannot utilize the equity line without the agreement of Cambois.

        We believe that current public market conditions are not conducive to raising large amounts of additional capital at this time. Therefore, we have taken several steps to conserve cash and reduce operating expenses. We expect that operating cash flows coupled with the remaining availability under our existing secured line of credit facility (or a new facility to be negotiated) should be sufficient to meet our minimum working capital requirements into the foreseeable future. While we believe the cost control measures will significantly reduce our monthly cash requirements, we are also exploring other possible sources of cash including the possibility of a private equity placement. However, our current low stock price presents substantial obstacles to additional private placements.

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

        The Company is not exposed to material future earnings or cash flow fluctuations, from changes in interest rates on its long-term debt at September 30, 2001. A hypothetical increase of 85 basis points in interest rate (ten percent of the Company's overall borrowing rate) would not result in a material fluctuation in future earnings or cash flow. The Company had not entered into any derivative financial instruments to manage interest rate risk or for speculative purposes and is currently not evaluating the future use of such financial instruments.

PART II. OTHER INFORMATION

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

        (a)    Exhibits

2.1	Assignment and Assumption Agreement dated as of September 28, 2001, among the Registrant, Remote Lojix/PCSI, Inc. and Laser Printer Care Company, Ltd.
10.1	Employment Agreement dated as of September 10, 2001, between the Registrant and Anthony E. Papa.
10.2	Employment Agreement dated as of September 10, 2001, between the Registrant and James P. Pisani.
10.3	Amendment dated as of September 13, 2001, between the Registrant and Coast Business Credit

        (b)    Reports on Form 8-K

        The Registrant filed no reports on Form 8-K during the quarter ended September 30, 2001.

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SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly 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: November 13, 2001

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EX-2

Exhibit 2.1

EX-10

Exhibit 10.1

EMPLOYMENT AGREEMENT

THIS EMPLOYMENT AGREEMENT (this "Agreement") is made and entered into as of September 10, 2001, by and between NETLOJIX COMMUNICATIONS, INC., a Delaware corporation (the "Company"), and ANTHONY E. PAPA ("Executive").

RECITALS

A.

Executive has been employed by the Company for many years and has served as its Chairman and Chief Executive Officer since October 1996.  During Executive's tenure, he has substantially improved the business and operations of the Company.

B.

The Company and Executive desire to enter into this Agreement to assure the Company of the con­tinuing and exclusive services of Executive and to set forth the rights and duties of the parties hereto.

AGREEMENT

NOW, THEREFORE, in consideration of the premises and the mutual covenants, terms and conditions set forth herein, the parties hereto agree as follows:

1.

EMPLOYMENT

1.1

Position and Duties.  During the term hereof, the Company hereby employs Executive, and   Executive hereby accepts employment, as the Chairman and Chief Executive Officer of the Company. Executive's primary duties will be to oversee the overall business and operations of the Company and its affiliates, in accordance with the policies established by the Company's Board of Directors (the "Board"). Executive will also perform those duties and possess those powers customarily performed and possessed by the Chairman and Chief Executive Officer, including general executive duties and other powers and duties assigned by law, regulations or practice to such offices, or otherwise imposed by the policies or Bylaws of the Company.  Executive will faithfully perform his duties to the best of his ability in accordance with the reasonable directions of the Company as given through the Board.

            1.2      Full Time and Loyalty.  Executive will devote his full business time, ability, attention and loyalty to the business of the Company during the term of this Agreement, and will not, directly or indirectly, render any services of a business, commercial, or professional nature to any other person, firm, corporation, or organization for compensation without the prior written consent of the Company.  The Company hereby acknowledges and consents to Executive's investment in and provision of services to the entities identified on Exhibit A hereto. Executive will not be interested, directly or indirectly, in any form, whether as an employee, officer, director, shareholder, partner, investor, or in any other form or capacity, in any business or enterprise  which is competitive with the business of the Company.  Nothing contained herein shall limit Executive's ability as an investor to hold and make investments in securities of any corporation that is registered on a national securities exchange or actively traded in a generally recognized over-the-counter market, provided his equity interest therein does not exceed 1% of the outstanding shares or interests in such corporation.

1.3

Place of Employment.  Unless the parties agree otherwise in writing, during the term of this Agreement, Executive shall perform the services required by this Agreement at the Company's offices located in, or within 25 miles of, Santa Barbara, California; provided, however, that the Company may from time to time require Executive to travel temporarily to other locations on the Company's business, as reasonably necessary.  Executive shall not be required to relocate his principal residence from Santa Barbara, California.

1.4

Facilities.  The Company shall provide Executive with an office, computer, secretarial or technical help, and such other facilities, equipment, supplies and services as are reasonably required for his position and adequate for the performance of his duties.

2.

TERM  

Unless earlier terminated by either party as hereinafter provided in Section 8, the term of Executive's employment by the Company pursuant to this Agreement shall be for a period of three (3) years and shall be deemed to have commenced on April 1, 2001 (the "Effective Date").  On each anniversary of the Effective Date, the term of this Agreement shall automatically be extended for an additional one (1) year unless, on or before such anniversary, the Company gives notice in writing to Executive that the term shall not be so extended.  By way of illustration, on the first anniversary of the Effective Date on April 1, 2002, the term of this Agreement shall automatically be extended for an additional one (1) year ending April 1, 2005, unless the Company gives written notice to Executive on or before April 1, 2002, that the term shall not be so extended, in which case the term shall end on April 1, 2004.

3.

COMPENSATION; FRINGE BENEFITS

3.1

Base Salary.  The Company shall pay Executive a base salary during the term of this Agreement at the rate of $248,500 per year.  Executive's base salary shall be paid on a bi-weekly or semi-monthly basis in accordance with the Company's payroll practices established from time to time.  Executive's base salary shall increase by a minimum of three percent (3%) on each anniversary of the Effective Date.  Executive may receive such other increases in his salary in addition to those set forth above as the Board may approve from time to time.

3.2

Bonus Compensation.  In addition to the base salary, Executive shall be entitled to receive bonuses based on the financial performance of the Company as set forth in Exhibit B hereto.

3.3

Paid Vacation Leave.  Executive shall be entitled to annual vacation leave in accordance with the Company's vacation policy as in effect from time to time, during which vacation leave his salary shall be paid in full.  

             3.4      Other Fringe Benefits.  During the employment term, Executive shall be eligible to participate on the same basis as other management employees of the Company in (i) any group health, life or disability insurance plans, and (ii) any retirement, pension or profit-sharing plans, maintained by the Company for the benefit of its employees.  In addition, Executive shall be entitled to receive such other benefits as are accorded to employees of the Company from time to time by the Company.

3.5

Stock Options.  Executive shall be awarded stock options to purchase a total of 400,000 shares of the Company's common stock pursuant to the Company's 1998 Stock Incentive Plan, as amended (the "Plan").  Such options shall be incentive stock options to the extent permitted by the Internal Revenue Code of 1986, as amended. This option grant shall be evidenced by an Incentive Stock Option Agreement in the form attached hereto as Exhibit C.

3.6

Restricted Stock.  Executive shall be awarded 100,000 shares of restricted stock pursuant to the Plan.  This restricted stock grant shall be evidenced by an Restricted Stock Agreement in the form attached hereto as Exhibit D.

3.7

Taxes.  Compensation paid to Executive under this Section 3 shall be subject to deductions as required or permitted by federal or state law, including withholding for federal and state tax purposes.  All payments received hereunder by Executive shall be reported on his federal and state tax returns as compensation for employment in a manner consistent with this Agreement.

4.

EXPENSES

During the term of Executive's employment hereunder, Executive shall be entitled to receive prompt reimbursement for all reasonable expenses incurred by Executive in performing services hereunder, including all expenses of travel while on business or at the request of and in the service of the Company, provided that such expenses are incurred and accounted for in accordance with the policies and procedures established by the Company.  The Company agrees to indemnify Executive, as an officer and director of the Company, to the fullest extent permitted by Section 145 of the Delaware General Corporation Law and by the Company's Certificate of Incorporation and Bylaws as in effect on the date hereof.

5.

COMPLIANCE WITH POLICIES OF THE COMPANY

Except as otherwise provided in this Agreement, Executive shall be subject to and shall comply with all policies and procedures of the Company which are applicable to the Company's employees generally.  Such policies shall include, without limitation, the Company's insider trading policy and those policies contained in any employee handbook adopted by the Company, as the same may be modified from time to time.

6.

CONFIDENTIAL INFORMATION AND RESTRICTIONS

6.1

Confidential Information.  Executive acknowledges that he will have access to confidential information of the Company and its affiliates including, without limitation, information with respect to (i) customer and vendor identities, preferences and specifications, (ii) the past, present and future confidential business relationships, business opportunities and business plans of the Company and its affiliates, and (iii) the historical financial information, financial projections and strategic plans of the Company and its affiliates (collectively, the "Confidential Information").  Executive acknowledges and agrees that the Confidential Information constitutes trade secrets of the Company.

            6.2       Agreement Not to Disclose or Use.  Executive shall, at all times during the term hereof and thereafter, hold in strict confidence and not disclose to any person or entity with­out the express prior authorization of the Company, any and all Confidential Information of the Company.  Executive agrees that, other than as required in the course of his employment by the Company,  he will not at any time (including after termination of his employment here­under) make use of any of the above, or use such information for his own benefit or to the detriment of the Company.  Upon termination of his employment, Executive shall deliver to the Company all documents, records, note­books, work papers, and all similar repositories containing any information con­cerning the Company, whether prepared by Executive, the Company or anyone else. 

6.3

Incorporation of Other Agreements.  This Agreement will further incorporate any and all provisions with respect to confidentiality, trade secrets and data to which Company may be required to cause its employees to agree under the terms and provisions of any contract entered into by the Company with any third party.

6.4

No Solicitation of Employees.  Executive fur­ther agrees that during the term hereof and for a period of twelve (12) months thereafter, he will not, directly or indirectly, for himself, or as agent, or on behalf of or in conjunction with any other person, firm, partnership, corpo­ration or other entity, other than the Company, solicit or induce any employee of the Company or its affiliates to leave such employment or cause anyone else to do so.  

7.

ASSIGNMENT

Executive shall not have any right to delegate or transfer any duty or obligation to be per­formed by him hereunder to any third party, nor to assign or transfer the right, if any, to receive payments hereunder.  The Company's rights hereunder may be assigned to any successor to the business of the Company on condition that the assignee agree in writing to assume all of the obligations of the Company hereunder.

8.

TERMINATION

8.1

Termination Events.  The employment of Executive hereunder, but not the covenants contained in Section 6, may be terminated at any time:

8.1.1

By mutual agreement;

8.1.2

By the Company if Executive dies or becomes physically or mentally disabled (the term "disabled" as used herein shall mean any mental or physical illness or disability that renders Executive unable to perform the essential functions of his position hereunder, after reasonable accommodation of such disability by the Company);

8.1.3

By the Company, for cause, if (1) Executive has committed any material act of dishonesty, fraud or willful misrepresentation or any similar act involving moral turpitude; (2) Executive has been convicted of a felony; (3) Executive is determined to have breached a material representation of Executive contained in this Agreement; or (4) Executive is in default in the performance of Executive's material obligations, services or duties hereunder, and fails to cure such default within fifteen (15) days after receiving written notice from the Company detailing such default;

                        8.14                 By the Company, without cause, at any time during the term of this Agreement upon fifteen (15) days prior written notice to Executive;

8.1.5

By Executive if the Company is in default of its material obligations or duties hereunder and fails to cure such default within fifteen (15) days after receiving written notice from Executive detailing such default;  or

8.1.6

By Executive, without cause, at any time during the term of this Agreement upon one hundred and twenty (120) days prior written notice to the Company.

8.2

Effect on Compensation.  

8.2.1

Except as specifically set forth in this Section, in the event of any termination under Section 8.1, Executive (or, in the event of Executive's death, his estate) shall be entitled to receive compensation accrued and payable to him as of the date of termination or death, and all other amounts payable and other benefits hereunder shall thereupon cease.  

8.2.2

If Executive's employment is terminated pursuant to Sections 8.1.4 or 8.1.5, then Executive shall be entitled to continue to receive payment of his base salary under Section 3.1 for a period of eighteen (18) months after the date of termination.  In addition, Executive shall be entitled to receive a bonus under Section 3.2 relating to the year of termination (to the extent the Company's performance for that year requires payment of such a bonus), with the amount of such bonus to be prorated based on the date of Executive's termination.  The Company, at its option, may elect to satisfy this obligation by the lump sum payment to Executive of an amount equal to the net present value of such salary and bonus payments, using as the discount rate the then-current bank prime rate (as published in the Western edition of the Wall Street Journal).  The Company shal l also provide or pay for the continuation or replacement of any group health, life or disability insurance coverage contemplated by Section 3.4 for a period of eighteen (18) months after the date of termination.

8.2.3

Amounts payable to Executive under Section 8.2.2, if any, shall be subject to applicable tax withholding and other deductions.  The Company's obligations under Section 8.2.2, if any, shall immediately terminate in the event of a violation by Executive of his obligations under Section 6 hereof.

8.2.4

The parties agree that the compensation contemplated by this Section 8.2 shall be in full consideration of any and all claims whatsoever that Executive might have against the Company with respect to the employment of Executive or the termination thereof, whether under this Agreement, or otherwise under law.  If requested by the Company, Executive will execute and deliver a full and binding legal release of the Company in exchange for the payment of such compensation.

8.3

Special Termination Upon Change in Control.

8.3.1

For the purposes of this Section 8.3, the term "Change in Control" shall have the meaning set forth in the Plan.

8.3.2                In the event of a Change in Control, Executive shall have the right to terminate his employment under this Agreement upon thirty (30) days prior written notice to the Company; provided, however, that unless Executive delivers such written notice to the Company within sixty (60) days after the closing or completion of the Change in Control, this right shall expire.  The covenants contained in Section 6 shall remain in effect notwithstanding such termination.

8.3.3

If Executive exercises the right to terminate his employment pursuant to Section 8.3.2, the Company shall pay Executive an amount equal to the total of (i) one year of his then annual base salary, plus (ii) any bonus he would be entitled to receive from the Company for the then-current fiscal year, if the Company meets the requisite performance goals, with the amount of such bonus to be prorated based on the date of Executive's termination, plus (iii) one year of the then-applicable premiums payable for Executive with respect to any group health, life or disability insurance plans of the Company in which Executive is a participant at the time of termination.  This amount shall be payable to Executive in equal bi-monthly installments over the twelve (12) months following the effective date of termination (using a reasonable estimate for the bonus component) and shall be subject to applicable tax withholding and other deductions.

8.3.4

Any provision in this Agreement to the contrary notwithstanding, in no event will Executive receive a payment which would trigger the excise taxes and disallowance of deductions contemplated by Sections 280G and 4999 of the Internal Revenue Code of 1986, as amended (the "Code").  In the event that any amount calculated hereunder would result in such a payment, such amount shall be reduced to the largest amount that would not result in such a payment.  This reduction shall apply to any and all compensation, including compensation pursuant to stock option grants governed by separate agreement between the Company and Executive.  If, at the time of any such payment, no stock of the Company is readily tradable on an established securities market or otherwise, then the Company agrees to use its best efforts to cause such payment to meet the exemption set forth in Sections 280G(b)(5)(A)(ii) and (B) of the Code, so that no reduction will be required hereunder.

9.

REPRESENTATIONS AND WARRANTIES OF EXECUTIVE

            Executive represents and warrants that: there are no agreements or arrangements, whether written or oral, that would be breached by Executive upon execution of this Agreement or that would impair or prevent Executive from rendering exclusive services to the Company during the term hereof; Executive has not made and will not make any commitment or do any act in conflict with this Agreement; no person shall have a cause of action against the Company or Executive by reason of the execution or performance of this Agreement by the Company or Executive.  The parties agree that the foregoing are material representations of Executive.

10.

GENERAL PROVISIONS

10.1

Amendments; Waivers.  This Agreement may be amended only by agreement in writing of all parties.  No waiver of any provision nor consent to any exception to the terms of this Agreement shall be effective unless in writing and signed by the party to be bound and then only to the specific purpose, extent and instance so provided.

10.2

Entire Agreement.  This Agreement constitutes the entire agreement among the parties pertaining to the subject matter hereof and supersedes all prior agreements and understandings of the parties in connection therewith.

10.3

Governing Law.  This Agreement and the legal relations between the parties shall be governed by and construed in accordance with the laws of the State of California applicable to contracts made and performed in such State.  

10.4

Arbitration.  Any controversy, dispute and/or claim arising out of, relating to or having any relationship or connection whatsoever with employment with the Company or termination of such employment, whether based in tort, contract, statutory or equitable law, or otherwise, shall be resolved by final and binding arbitration.  The arbitration shall be conducted by a single neutral arbitrator and shall take place in Santa Barbara, California.  The arbitrator shall be selected by mutual agreement of the Company and Executive.  If the Company and Executive are not able to agree, either or both of them shall petition the Santa Barbara Superior Court for the appointment of an arbitrator, and such appointment shall be binding upon them.  The arbitration shall be conducted in accordance with California Code of Civil Procedure Section 1282.2.  Discovery may be had upon application to the arbitrator, who shall allow such discovery as he/she may determine is reasonably necessary to enable each party to vindicate their claims and shall have the power to enforce his/her discovery orders by such means as he/she deems appropriate.  The arbitrator shall issue a written, reasoned decision that reveals the essential findings and conclusions on which the award is based.  The arbitrator shall have the power to award any remedy authorized by the laws related to the claims asserted in the arbitration, including reasonable attorneys' fees and costs if authorized by such laws.  Judgment on the award rendered by the arbitrator may be entered in the Santa Barbara Superior Court.  The Company shall pay the administrative fees and arbitrator's fees incurred in any such arbitration. All documents submitted as part of any arbitration that contain or reference any Confidential Information shall be treated as though filed under seal in a court of law; accordingly such documents shall be (i) submitted confidentially, (ii) kept confidential by the parties hereto and the arbitrator, and (iii) returned to the submitting party promptly after the arbitration award becomes final.  THE COMPANY AND EXECUTIVE UNDERSTAND THAT BY AGREEING TO BINDING ARBITRATION, EACH IS EXPRESSLY WAIVING THE RIGHT TO SUE IN COURT AND THE RIGHT TO A JURY TRIAL TO WHICH THEY MAY OTHERWISE BE ENTITLED BY LAW.  

            10.5     Receipt of Agreement.  Each of the parties hereto acknowledges that he or it has read this Agreement in its entirety and does hereby acknowledge receipt of a fully executed copy thereof. A fully executed copy shall be an original for all purposes, and is a duplicate original.

10.6

Notices.  Any written notice required or permitted to be given shall be deemed delivered either when personally delivered or when mailed, registered or certified, postage prepaid with return receipt requested, if to Executive, addressed to Executive at the last residence address of Executive as shown in the records of the Company, and if to the Company, addressed to the Board at the principal office of the Company.

10.7

Severability.  If any provision of this Agreement is determined to be invalid, illegal or unenforceable by any governmental entity, the remaining provisions of this Agreement to the extent permitted by law shall remain in full force and effect.

10.8

Interpretation.  The Company and Executive agree that any rule of law or any legal decision that would require interpretation of any claimed ambiguities in this Agreement against the party that drafted it has no application and is expressly waived.

IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement in Santa Barbara, California, as of the date first above written.

NETLOJIX COMMUNICATIONS, INC., a

Delaware corporation

By:   /s/ JAMES P. PISANI

         James P. Pisani, President

EXECUTIVE

/s/  ANTHONY E. PAPA   

       Anthony E. Papa

EXHIBIT A

OUTSIDE SERVICES

Next2 Partners, LLC

ETC Travel Partners, LLC

Surtreat West, LLC

EXHIBIT B

BONUSES

Bonus with respect to financial performance of the Company for the last three quarters of the fiscal year ending December 31, 2001.

Maximum amount of bonus:  $186,375.

Financial performance objectives:  Set forth on the Statement of Quarterly Objectives 2001 attached as the following page. Where multiple objectives are shown, such Statement reflects the relative weighting of each objective.

Payment of bonus:  Initial payments shall be made on a quarterly basis, no later than 45 days after the end of the quarter.  The maximum quarterly bonus payment would be $43,487.50 (70% of one quarter of the maximum annual amount), if 100% of the quarterly objectives are achieved. Similarly, the quarterly bonus payment would be $21,743.75 if objectives accounting for only 50% of the total weighting were achieved.  No later than ninety days after the end of fiscal year 2001, the Company will pay executive a true-up bonus payment in the maximum amount of $55,912.50 (30% of the maximum annual amount).  This true-up bonus payment shall be reduced proportionately by the weighted share of any quarterly objective not achieved.  

Bonus with respect to financial performance of the Company for subsequent fiscal years.

Maximum amount of bonus:  $248,500 as increased pursuant to Section 3.1.

Financial performance objectives:  To be negotiated in good faith by the parties consistent with the objectives set forth for 2001 and approved by the Board.

Payment of bonus:  Same method as for 2001 bonus, except that quarterly payments are made at 80% of one quarter of the maximum annual amount if 100% of the quarterly objectives are achieved, and the true-up payment amount reflects 20% of the maximum annual amount.

NetLojix Executive Bonus Schedule

Quarterly Objectives 2001

Anthony E. Papa - CEO

Q2 - - Ending June 30, 2001

• Achievement of Financial Budget EBITDA - 50%

• Settlement of Major Litigation claims - 30%

• Reorganization of Accounting Department - 20%

Q3 - - Ending September 30, 2001

• Achievement of Financial Budget EBITDA - 50%

• New Cash Flow Reporting Implementation - 25%

• Implementation of New Help Desk Operating Plan - 25%

Q4 - - Ending December 31, 2001

• Achievement of Financial Budget EBITDA - 50%

• Implementation of NetBill Expansion - 25%

• Support Magic Customer Management System Implementation Completion - 25%

 

EX-10

Exhibit 10.2

EMPLOYMENT AGREEMENT

THIS EMPLOYMENT AGREEMENT (this "Agreement") is made and entered into as of September 10, 2001, by and between NETLOJIX COMMUNICATIONS, INC., a Delaware corporation (the "Company"), and JAMES P. PISANI ("Executive").

RECITALS

A.

Executive has been employed by the Company for many years and has served as its President, Chief Operating Officer and Secretary since February 1998.  During Executive's tenure, he has substantially improved the business and operations of the Company.

B.

The Company and Executive desire to enter into this Agreement to assure the Company of the con­tinuing and exclusive services of Executive and to set forth the rights and duties of the parties hereto.

AGREEMENT

NOW, THEREFORE, in consideration of the premises and the mutual covenants, terms and conditions set forth herein, the parties hereto agree as follows:

1.

EMPLOYMENT

1.1

Position and Duties.  During the term hereof, the Company hereby employs Executive, and Executive hereby accepts employment, as the President, Chief Operating Officer and Secretary of the Company.  Executive's primary duties will be to oversee the overall business and operations of the Company and its affiliates, in accordance with the policies established by the Company's Board of Directors (the "Board").  Executive will also perform those duties and possess those powers customarily performed and possessed by the President, Chief Operating Officer and Secretary, including general executive duties and other powers and duties assigned by law, regulations or practice to such offices, or otherwise imposed by the policies or Bylaws of the Company.  Executive will faithfully perform his duties to the best of his ability in accordance with the reasonable directions of the Company as given through the Board.

            1.2       Full Time and Loyalty.  Executive will devote his full business time, ability, attention and loyalty to the business of the Company during the term of this Agreement, and will not, directly or indirectly, render any services of a business, commercial, or professional nature to any other person, firm, corporation, or organization for compensation without the prior written consent of the Company.  The Company hereby acknowledges and consents to Executive's investment in and provision of services to the entities identified on Exhibit A hereto. Executive will not be interested, directly or indirectly, in any form, whether as an employee, officer, director, shareholder, partner, investor, or in any other form or capacity, in any business or enterprise  which is competitive with the business of the Company.  Nothing contained herein shall limit Executive's ability as an investor to hold and make investments in securities of any corporation that is registered on a national securities exchange or actively traded in a generally recognized over-the-counter market, provided his equity interest therein does not exceed 1% of the outstanding shares or interests in such corporation.

1.3

Place of Employment.  Unless the parties agree otherwise in writing, during the term of this Agreement, Executive shall perform the services required by this Agreement at the Company's offices located in, or within 25 miles of, Santa Barbara, California; provided, however, that the Company may from time to time require Executive to travel temporarily to other locations on the Company's business, as reasonably necessary.  Executive shall not be required to relocate his principal residence from Santa Barbara, California.

1.4

Facilities.  The Company shall provide Executive with an office, computer, secretarial or technical help, and such other facilities, equipment, supplies and services as are reasonably required for his position and adequate for the performance of his duties.

2.

TERM  

Unless earlier terminated by either party as hereinafter provided in Section 8, the term of Executive's employment by the Company pursuant to this Agreement shall be for a period of three (3) years and shall be deemed to have commenced on April 1, 2001 (the "Effective Date").  On each anniversary of the Effective Date, the term of this Agreement shall automatically be extended for an additional one (1) year unless, on or before such anniversary, the Company gives notice in writing to Executive that the term shall not be so extended.  By way of illustration, on the first anniversary of the Effective Date on April 1, 2002, the term of this Agreement shall automatically be extended for an additional one (1) year ending April 1, 2005, unless the Company gives written notice to Executive on or before April 1, 2002, that the term shall not be so extended, in which case the term shall end on April 1, 2004.

3.

COMPENSATION; FRINGE BENEFITS

3.1

Base Salary.  The Company shall pay Executive a base salary during the term of this Agreement at the rate of $248,500 per year.  Executive's base salary shall be paid on a bi-weekly or semi-monthly basis in accordance with the Company's payroll practices established from time to time.  Executive's base salary shall increase by a minimum of three percent (3%) on each anniversary of the Effective Date.  Executive may receive such other increases in his salary in addition to those set forth above as the Board may approve from time to time.

3.2

Bonus Compensation.  In addition to the base salary, Executive shall be entitled to receive bonuses based on the financial performance of the Company as set forth in Exhibit B hereto.

3.3

Paid Vacation Leave.  Executive shall be entitled to annual vacation leave in accordance with the Company's vacation policy as in effect from time to time, during which vacation leave his salary shall be paid in full.  

            3.4        Other Fringe Benefits.  During the employment term, Executive shall be eligible to participate on the same basis as other management employees of the Company in (i) any group health, life or disability insurance plans, and (ii) any retirement, pension or profit-sharing plans, maintained by the Company for the benefit of its employees.  In addition, Executive shall be entitled to receive such other benefits as are accorded to employees of the Company from time to time by the Company.

3.5

Stock Options.  Executive shall be awarded stock options to purchase a total of 400,000 shares of the Company's common stock pursuant to the Company's 1998 Stock Incentive Plan, as amended (the "Plan").  Such options shall be incentive stock options to the extent permitted by the Internal Revenue Code of 1986, as amended. This option grant shall be evidenced by an Incentive Stock Option Agreement in the form attached hereto as Exhibit C.

3.6

Restricted Stock.  Executive shall be awarded 100,000 shares of restricted stock pursuant to the Plan.  This restricted stock grant shall be evidenced by an Restricted Stock Agreement in the form attached hereto as Exhibit D.

3.7

Taxes.  Compensation paid to Executive under this Section 3 shall be subject to deductions as required or permitted by federal or state law, including withholding for federal and state tax purposes.  All payments received hereunder by Executive shall be reported on his federal and state tax returns as compensation for employment in a manner consistent with this Agreement.

4.

EXPENSES

During the term of Executive's employment hereunder, Executive shall be entitled to receive prompt reimbursement for all reasonable expenses incurred by Executive in performing services hereunder, including all expenses of travel while on business or at the request of and in the service of the Company, provided that such expenses are incurred and accounted for in accordance with the policies and procedures established by the Company.  The Company agrees to indemnify Executive, as an officer and director of the Company, to the fullest extent permitted by Section 145 of the Delaware General Corporation Law and by the Company's Certificate of Incorporation and Bylaws as in effect on the date hereof.

5.

COMPLIANCE WITH POLICIES OF THE COMPANY

Except as otherwise provided in this Agreement, Executive shall be subject to and shall comply with all policies and procedures of the Company which are applicable to the Company's employees generally.  Such policies shall include, without limitation, the Company's insider trading policy and those policies contained in any employee handbook adopted by the Company, as the same may be modified from time to time.

6.

CONFIDENTIAL INFORMATION AND RESTRICTIONS

6.1

Confidential Information.  Executive acknowledges that he will have access to confidential information of the Company and its affiliates including, without limitation, information with respect to (i) customer and vendor identities, preferences and specifications, (ii) the past, present and future confidential business relationships, business opportunities and business plans of the Company and its affiliates, and (iii) the historical financial information, financial projections and strategic plans of the Company and its affiliates (collectively, the "Confidential Information").  Executive acknowledges and agrees that the Confidential Information constitutes trade secrets of the Company.

            6.2       Agreement Not to Disclose or Use.  Executive shall, at all times during the term hereof and thereafter, hold in strict confidence and not disclose to any person or entity with­out the express prior authorization of the Company, any and all Confidential Information of the Company.  Executive agrees that, other than as required in the course of his employment by the Company,  he will not at any time (including after termination of his employment here­under) make use of any of the above, or use such information for his own benefit or to the detriment of the Company.  Upon termination of his employment, Executive shall deliver to the Company all documents, records, note­books, work papers, and all similar repositories containing any information con­ce rning the Company, whether prepared by Executive, the Company or anyone else.  

6.3

Incorporation of Other Agreements.  This Agreement will further incorporate any and all provisions with respect to confidentiality, trade secrets and data to which Company may be required to cause its employees to agree under the terms and provisions of any contract entered into by the Company with any third party.

6.4

No Solicitation of Employees.  Executive fur­ther agrees that during the term hereof and for a period of twelve (12) months thereafter, he will not, directly or indirectly, for himself, or as agent, or on behalf of or in conjunction with any other person, firm, partnership, corpo­ration or other entity, other than the Company, solicit or induce any employee of the Company or its affiliates to leave such employment or cause anyone else to do so.  

7.

ASSIGNMENT

Executive shall not have any right to delegate or transfer any duty or obligation to be per­formed by him hereunder to any third party, nor to assign or transfer the right, if any, to receive payments hereunder.  The Company's rights hereunder may be assigned to any successor to the business of the Company on condition that the assignee agree in writing to assume all of the obligations of the Company hereunder.

8.

TERMINATION

8.1

Termination Events.  The employment of Executive hereunder, but not the covenants contained in Section 6, may be terminated at any time:

8.1.1

By mutual agreement;

8.1.2

By the Company if Executive dies or becomes physically or mentally disabled (the term "disabled" as used herein shall mean any mental or physical illness or disability that renders Executive unable to perform the essential functions of his position hereunder, after reasonable accommodation of such disability by the Company);

8.1.3

By the Company, for cause, if (1) Executive has committed any material act of dishonesty, fraud or willful misrepresentation or any similar act involving moral turpitude; (2) Executive has been convicted of a felony; (3) Executive is determined to have breached a material representation of Executive contained in this Agreement; or (4) Executive is in default in the performance of Executive's material obligations, services or duties hereunder, and fails to cure such default within fifteen (15) days after receiving written notice from the Company detailing such default;

                       8.1.4                 By the Company, without cause, at any time during the term of this Agreement upon fifteen (15) days prior written notice to Executive;

8.1.5

By Executive if the Company is in default of its material obligations or duties hereunder and fails to cure such default within fifteen (15) days after receiving written notice from Executive detailing such default;  or

8.1.6

By Executive, without cause, at any time during the term of this Agreement upon one hundred and twenty (120) days prior written notice to the Company.

8.2

Effect on Compensation.  

8.2.1

Except as specifically set forth in this Section, in the event of any termination under Section 8.1, Executive (or, in the event of Executive's death, his estate) shall be entitled to receive compensation accrued and payable to him as of the date of termination or death, and all other amounts payable and other benefits hereunder shall thereupon cease.  

8.2.2

If Executive's employment is terminated pursuant to Sections 8.1.4 or 8.1.5, then Executive shall be entitled to continue to receive payment of his base salary under Section 3.1 for a period of eighteen (18) months after the date of termination.  In addition, Executive shall be entitled to receive a bonus under Section 3.2 relating to the year of termination (to the extent the Company's performance for that year requires payment of such a bonus), with the amount of such bonus to be prorated based on the date of Executive's termination.  The Company, at its option, may elect to satisfy this obligation by the lump sum payment to Executive of an amount equal to the net present value of such salary and bonus payments, using as the discount rate the then-current bank prime rate (as published in the Western edition of the Wall Street Journal).  The Company shal l also provide or pay for the continuation or replacement of any group health, life or disability insurance coverage contemplated by Section 3.4 for a period of eighteen (18) months after the date of termination.

8.2.3

Amounts payable to Executive under Section 8.2.2, if any, shall be subject to applicable tax withholding and other deductions.  The Company's obligations under Section 8.2.2, if any, shall immediately terminate in the event of a violation by Executive of his obligations under Section 6 hereof.

8.2.4

The parties agree that the compensation contemplated by this Section 8.2 shall be in full consideration of any and all claims whatsoever that Executive might have against the Company with respect to the employment of Executive or the termination thereof, whether under this Agreement, or otherwise under law.  If requested by the Company, Executive will execute and deliver a full and binding legal release of the Company in exchange for the payment of such compensation.

8.3

Special Termination Upon Change in Control.

8.3.1

For the purposes of this Section 8.3, the term "Change in Control" shall have the meaning set forth in the Plan.

8.3.2                In the event of a Change in Control, Executive shall have the right to terminate his employment under this Agreement upon thirty (30) days prior written notice to the Company; provided, however, that unless Executive delivers such written notice to the Company within sixty (60) days after the closing or completion of the Change in Control, this right shall expire.  The covenants contained in Section 6 shall remain in effect notwithstanding such termination.

8.3.3

If Executive exercises the right to terminate his employment pursuant to Section 8.3.2, the Company shall pay Executive an amount equal to the total of (i) one year of his then annual base salary, plus (ii) any bonus he would be entitled to receive from the Company for the then-current fiscal year, if the Company meets the requisite performance goals, with the amount of such bonus to be prorated based on the date of Executive's termination, plus (iii) one year of the then-applicable premiums payable for Executive with respect to any group health, life or disability insurance plans of the Company in which Executive is a participant at the time of termination.  This amount shall be payable to Executive in equal bi-monthly installments over the twelve (12) months following the effective date of termination (using a reasonable estimate for the bonus component) and shall be subject to applicable tax withholding and other deductions.

8.3.4

Any provision in this Agreement to the contrary notwithstanding, in no event will Executive receive a payment which would trigger the excise taxes and disallowance of deductions contemplated by Sections 280G and 4999 of the Internal Revenue Code of 1986, as amended (the "Code").  In the event that any amount calculated hereunder would result in such a payment, such amount shall be reduced to the largest amount that would not result in such a payment.  This reduction shall apply to any and all compensation, including compensation pursuant to stock option grants governed by separate agreement between the Company and Executive.  If, at the time of any such payment, no stock of the Company is readily tradable on an established securities market or otherwise, then the Company agrees to use its best efforts to cause such payment to meet the exemption set forth in Sections 280G(b)(5)(A)(ii) and (B) of the Code, so that no reduction will be required hereunder.

9.

REPRESENTATIONS AND WARRANTIES OF EXECUTIVE

            Executive represents and warrants that: there are no agreements or arrangements, whether written or oral, that would be breached by Executive upon execution of this Agreement or that would impair or prevent Executive from rendering exclusive services to the Company during the term hereof; Executive has not made and will not make any commitment or do any act in conflict with this Agreement; no person shall have a cause of action against the Company or Executive by reason of the execution or performance of this Agreement by the Company or Executive.  The parties agree that the foregoing are material representations of Executive.

10.

GENERAL PROVISIONS

10.1

Amendments; Waivers.  This Agreement may be amended only by agreement in writing of all parties.  No waiver of any provision nor consent to any exception to the terms of this Agreement shall be effective unless in writing and signed by the party to be bound and then only to the specific purpose, extent and instance so provided.

10.2

Entire Agreement.  This Agreement constitutes the entire agreement among the parties pertaining to the subject matter hereof and supersedes all prior agreements and understandings of the parties in connection therewith.

10.3

Governing Law.  This Agreement and the legal relations between the parties shall be governed by and construed in accordance with the laws of the State of California applicable to contracts made and performed in such State.  

10.4

Arbitration.  Any controversy, dispute and/or claim arising out of, relating to or having any relationship or connection whatsoever with employment with the Company or termination of such employment, whether based in tort, contract, statutory or equitable law, or otherwise, shall be resolved by final and binding arbitration.  The arbitration shall be conducted by a single neutral arbitrator and shall take place in Santa Barbara, California.  The arbitrator shall be selected by mutual agreement of the Company and Executive.  If the Company and Executive are not able to agree, either or both of them shall petition the Santa Barbara Superior Court for the appointment of an arbitrator, and such appointment shall be binding upon them.  The arbitration shall be conducted in accordance with California Code of Civil Procedure Section 1282.2.  Discovery may be had upon application to the arbitrator, who shall allow such discovery as he/she may determine is reasonably necessary to enable each party to vindicate their claims and shall have the power to enforce his/her discovery orders by such means as he/she deems appropriate.  The arbitrator shall issue a written, reasoned decision that reveals the essential findings and conclusions on which the award is based.  The arbitrator shall have the power to award any remedy authorized by the laws related to the claims asserted in the arbitration, including reasonable attorneys' fees and costs if authorized by such laws.  Judgment on the award rendered by the arbitrator may be entered in the Santa Barbara Superior Court.  The Company shall pay the administrative fees and arbitrator's fees incurred in any such arbitration. All documents submitted as part of any arbitration that contain or reference any Confidential Information shall be treated as though filed under seal in a court of law; accordingly such documents shall be (i) submitted confidentially, (ii) kept confidential by the parties hereto and the arbitrator, and (iii) returned to the submitting party promptly after the arbitration award becomes final.  THE COMPANY AND EXECUTIVE UNDERSTAND THAT BY AGREEING TO BINDING ARBITRATION, EACH IS EXPRESSLY WAIVING THE RIGHT TO SUE IN COURT AND THE RIGHT TO A JURY TRIAL TO WHICH THEY MAY OTHERWISE BE ENTITLED BY LAW.  

            10.5     Receipt of Agreement.  Each of the parties hereto acknowledges that he or it has read this Agreement in its entirety and does hereby acknowledge receipt of a fully executed copy thereof. A fully executed copy shall be an original for all purposes, and is a duplicate original.

10.6

Notices.  Any written notice required or permitted to be given shall be deemed delivered either when personally delivered or when mailed, registered or certified, postage prepaid with return receipt requested, if to Executive, addressed to Executive at the last residence address of Executive as shown in the records of the Company, and if to the Company, addressed to the Board at the principal office of the Company.

10.7

Severability.  If any provision of this Agreement is determined to be invalid, illegal or unenforceable by any governmental entity, the remaining provisions of this Agreement to the extent permitted by law shall remain in full force and effect.

10.8

Interpretation.  The Company and Executive agree that any rule of law or any legal decision that would require interpretation of any claimed ambiguities in this Agreement against the party that drafted it has no application and is expressly waived.

IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement in Santa Barbara, California, as of the date first above written.

NETLOJIX COMMUNICATIONS, INC., a

Delaware corporation

By: /s/ ANTHONY E. PAPA
                Anthony E. Papa,

Chief Executive Officer

EXECUTIVE

/s/ JAMES P. PISANI

James P. Pisani

EXHIBIT A

OUTSIDE SERVICES

Next2 Partners, LLC

ETC Travel Partners, LLC

Surtreat West, LLC

EXHIBIT B

BONUSES

Bonus with respect to financial performance of the Company for the last three quarters of the fiscal year ending December 31, 2001.

Maximum amount of bonus:  $186,375.

Financial performance objectives:  Set forth on the Statement of Quarterly Objectives 2001 attached as the following page. Where multiple objectives are shown, such Statement reflects the relative weighting of each objective.

Payment of bonus:  Initial payments shall be made on a quarterly basis, no later than 45 days after the end of the quarter.  The maximum quarterly bonus payment would be $43,487.50 (70% of one quarter of the maximum annual amount), if 100% of the quarterly objectives are achieved. Similarly, the quarterly bonus payment would be $21,743.75 if objectives accounting for only 50% of the total weighting were achieved.  No later than ninety days after the end of fiscal year 2001, the Company will pay executive a true-up bonus payment in the maximum amount of $55,912.50 (30% of the maximum annual amount).  This true-up bonus payment shall be reduced proportionately by the weighted share of any quarterly objective not achieved.  

Bonus with respect to financial performance of the Company for subsequent fiscal years.

Maximum amount of bonus:  $248,500 as increased pursuant to Section 3.1.

Financial performance objectives:  To be negotiated in good faith by the parties consistent with the objectives set forth for 2001 and approved by the Board.

Payment of bonus:  Same method as for 2001 bonus, except that quarterly payments are made at 80% of one quarter of the maximum annual amount if 100% of the quarterly objectives are achieved, and the true-up payment amount reflects 20% of the maximum annual amount.

NetLojix Executive Bonus Schedule
Quarterly Objectives 2001

James P. Pisani - President & COO

Q2 - - Ending June 30, 2001

• Achievement of Financial Budget EBITDA - 50%

• Completion of the SB Data Center - 25%

• Completion of Service Contract Overhaul and Standardization - 25%

Q3 - - Ending September 30, 2001

• Achievement of Financial Budget EBITDA - 50%

• Implementation of New Help Desk Operating Plan - 25%

• Reorganization of IT Services Division - 25%

Q4 - - Ending December 31, 2001

• Achievement of Financial Budget EBITDA - 50%

• Completion and Launch of SiteLojix Management Platform - 25%

• Support Magic Customer Management System Implementation Completion - 25%

 

EX-10

Exhibit 10.3

September 13, 2001

Sent via Facsimile (805) 884-6311 and U.S. Mail

Mr. Anthony Papa, CEO

Mr. Craig Clark, CFO

Netlojix Communications, Inc.

Netlojix Telecom, Inc.

Remote Lojix/PCSI, Inc.

501 Bath Street

Santa Barbara, California 93101

Dear Messrs, Papa and Clark

Coast Business Credit has approved the following modifications to your Amended and Restated Loan and Security Agreement dated May 30, 2000.

·

• waiver of the minimum interest provision based on $1MM in borrowings for the remainder of the contract through 01/31/02 maturity date.

• waiver of prepayment penalties.

Please let me know if you have any questions regarding this matter.

Sincerely yours,

/s/ Bill Sorotsky

Bill Sorotsky

Vice President