|SECURITIES
AND EXCHANGE COMMISSIONWashington,
DC 20549


Form 10-Q


QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15 (d) OFTHE
SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTER ENDEDSEPTEMBER
30, 2001


COMMISSION
FILE NO.: 000-22035


METRO INFORMATION
SERVICES, INC.(Exact name of registrant as specified in its charter)
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|VIRGINIA(State of incorporation) | 54-1112301(I.R.S. Employer Identification Number)
|-------------------------------- | -------------------------------------------------

|POST OFFICE BOX 8888, VIRGINIA BEACH, VIRGINIA(Address of principal executive office) | 23450(Zip Code)
|------------------------------------------------------------------------------------- | ---------------

|(757) 486-1900
(Registrants telephone number, including area code)


Indicate
by check mark whether the registrant 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
has been subject to the filing requirements for the past 90 days. Yes [X]   No  [_]


As
of October 26, 2001, the registrant had issued and outstanding 15,409,472 shares
of Common Stock, $.01 par value.
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|METRO
INFORMATION SERVICES, INC.FORM 10-Q


Table of
Contents
|-------------------------------------------------------------

|           |  | PageNumber                                                                
|---------- |  | --------------------------------------------------------------------------
|PART I.    |  | FINANCIAL INFORMATION:                                                    
|          
|ITEM 1.    |  | Consolidated Statements of Income for the                                 
|           |  | Three Months and Nine Months Ended September 30, 2000 and 2001 (unaudited)
|          
|           |  | Consolidated Balance Sheets as of                                         
|           |  | December 31, 2000 and September 30, 2001 (unaudited)                      
|          
|           |  | Consolidated Statement of Changes in Shareholders Equity for the         
|           |  | Nine Months Ended September 30, 2001 (unaudited)                          
|          
|           |  | Consolidated Statements of Cash Flows for the                             
|           |  | Nine Months Ended September 30, 2000 and 2001 (unaudited)                 
|          
|           |  | Notes to Consolidated Financial Statements (unaudited)                    
|          
|ITEM 2.    |  | Managements Discussion and Analysis                                      
|           |  | of Financial Condition and Results of Operations                          
|          
|ITEM 3.    |  | Quantitative and Qualitative Disclosures about Market Risk                
|          
|PART II.   |  | OTHER INFORMATION                                                         
|          
|SIGNATURES |  |                                                                           

|2
|-

|PART I. FINANCIAL
INFORMATION:


ITEM 1.
Financial Statements



METRO
INFORMATION SERVICES, INC. AND SUBSIDIARIES
Consolidated Statements of Income (unaudited)
|----------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                                      | Three monthsended September 30, | Nine monthsended September 30,
|----------------------------------------------------- | ------------------------------- | ------------------------------
|
|Revenue                                               |                                 | $ 77,879,673                  
|Cost of revenue                                       |                                 | 54,265,344                    
|                                                      |                                 |                               
|Gross profit                                          |                                 | 23,614,329                    
|                                                      |                                 |                               
|Selling, general and administrative expenses          |                                 | 17,270,771                    
|Depreciation expense                                  |                                 | 783,709                       
|Amortization expense (Note 3)                         |                                 | 1,204,897                     
|                                                      |                                 |                               
|Total operating expenses                              |                                 | 19,259,377                    
|Restructuring charge (Note 6)                         |                                 | (329,721                      
|                                                      |                                 |                               
|Operating income                                      |                                 | 4,684,673                     
|                                                      |                                 |                               
|Interest income                                       |                                 | 7,063                         
|Interest expense (Note 4)                             |                                 | (2,381,898                    
|                                                      |                                 |                               
|Net interest expense                                  |                                 | (2,374,835                    
|                                                      |                                 |                               
|Other income (Note 6)                                 |                                 |                              
|                                                      |                                 |                               
|Income before income taxes                            |                                 | 2,309,838                     
|Income taxes                                          |                                 | 1,131,821                     
|                                                      |                                 |                               
|Net income                                            |                                 | $   1,178,017                 
|                                                      |                                 |                               
|Net income per share (Note 5):                        |                                
|Basic                                                 |                                 | $            0.08             
|                                                      |                                 |                               
|Diluted                                               |                                 | $            0.08             
|                                                      |                                 |                               
|Weighted average number of shares of common           |                                
|stock and potential dilutive  securities outstanding: |                                
|Basic                                                 |                                 | 15,123,255                    
|                                                      |                                 |                               
|Diluted                                               |                                 | 15,123,281                    
|                                                      |                                 |                               

|See accompanying notes to
consolidated financial statements.


3
|----------------------------------------------------------------

|METRO
INFORMATION SERVICES, INC. AND SUBSIDIARIESConsolidated
Balance Sheets
|----------------------------------------------------------------------------

|                                              | December 31,2000 | September 30,2001
|--------------------------------------------- | ---------------- | -----------------
|
|Assets                                        |                  |                  
|Current assets:                               |                 
|Cash and cash equivalents                     |                  | $       603,699  
|Accounts receivable, net                      |                  | 54,923,035       
|Prepaid expenses                              |                  | 2,378,173        
|Other current assets, net (Note 2)            |                  | 1,044,095        
|Deferred income taxes                         |                  | 2,193,480        
|                                              |                  |                  
|Total current assets                          |                  | 61,142,482       
|Property and equipment, net                   |                  | 11,889,307       
|Goodwill and other intangibles, net  (Note 3) |                  | 115,972,945      
|Other assets                                  |                  | 275,091          
|                                              |                  |                  
|Total assets                                  |                  | $189,279,825     
|                                              |                  |                  
|                                              |                 
|Liabilities and Shareholders Equity          |                 
|Current liabilities:                          |                 
|Accounts payable                              |                  | $    4,029,196   
|Accrued compensation and benefits             |                  | 14,466,277       
|                                              |                  |                  
|Total current liabilities                     |                  | 18,495,473       
|Line of credit facilities (Note 4)            |                  | 83,443,021       
|Other long-term liabilities (Note 7)          |                  |                 
|Deferred income taxes                         |                  | 2,404,451        
|                                              |                  |                  
|Total liabilities                             |                  | 104,342,945      
|                                              |                  |                  
|Shareholders equity:                         |                 
|Preferred stock, $0.01 par value; authorized  |                 
|1,000,000 shares; none issued and outstanding |                  |                 
|Common stock, $0.01 par value; authorized     |                 
|50,000,000 shares; issued and outstanding     |                 
|15,222,712 shares at December 31, 2000,       |                 
|15,404,472 shares at September 30, 2001       |                  | 152,227          
|Paid in capital                               |                  | 40,995,597       
|Retained earnings                             |                  | 43,789,056       
|Accumulated other comprehensive loss (Note 7) |                  |                 
|                                              |                  |                  
|Total shareholders equity                    |                  | 84,936,880       
|                                              |                  |                  
|Total liabilities and shareholders equity    |                  | $189,279,825     
|                                              |                  |                  

|See accompanying notes to
consolidated financial statements.
4
|--------------------------------------------------------------

|METRO INFORMATION
SERVICES, INC. AND SUBSIDIARIESConsolidated Statement of Changes in Shareholders Equity
(unaudited)
|----------------------------------------------------------------------------------------------------------------------

|                                     | Shareholders Equity
|------------------------------------ | --------------------
|
|
|Balance as of December 31, 2000      |                     
|Net proceeds from issuance of        |                     
|shares of common stock under         |                     
|Employee Stock Purchase Plan         |                     
|Net income                           |                     
|Accumulated other comprehensive loss |                     
|                                     |                     
|Balance as of September 30, 2001     |                     
|                                     |                     

|See accompanying notes to consolidated
financial statements.
5
|--------------------------------------------------------------

|METRO INFORMATION
SERVICES, INC. AND SUBSIDIARIESConsolidated Statements of Cash Flows (unaudited)
|--------------------------------------------------------------------------------------------------

|                                                                         | Nine monthsended September 30,
|------------------------------------------------------------------------ | ------------------------------
|
|Cash flows from operating activities:                                    |                               
|Net income                                                               |                               
|Adjustments to reconcile net income to net                               |                               
|cash provided by operating activities:                                   |                               
|Depreciation and amortization - cost of revenue                          |                               
|Depreciation and amortization - operating expenses                       |                               
|Net loss on sale of property and equipment                               |                               
|Net gain on sale of offices                                              |                               
|Deferred income taxes                                                    |                               
|Provision for doubtful accounts                                          |                               
|Changes in operating assets and liabilities increasing                   |                               
|(decreasing) cash, net of the effects of acquisitions:                   |                               
|Accounts receivable                                                      |                               
|Prepaid expenses                                                         |                               
|Other current assets, net                                                |                               
|Other assets                                                             |                               
|Accounts payable                                                         |                               
|Accrued compensation and benefits                                        |                               
|                                                                         |                               
|Net cash provided by operating activities                                |                               
|                                                                         |                               
|Cash flows from investing activities:                                    |                               
|Acquisition of property and equipment                                    |                               
|Acquisition of computer software                                         |                               
|Acquisition of businesses                                                |                               
|Proceeds from sale of offices                                            |                               
|Proceeds from sale of property and equipment                             |                               
|                                                                         |                               
|Net cash used in investing activities                                    |                               
|                                                                         |                               
|Cash flows from financing activities:                                    |                               
|Net repayments under line of credit                                      |                               
|Proceeds from issuance of shares to Employee Stock Purchase Plan         |                               
|Proceeds from issuance of shares to Employee Incentive Stock Option Plan |                               
|                                                                         |                               
|Net cash used in financing activities                                    |                               
|                                                                         |                               
|Net decrease in cash and cash equivalents                                |                               
|Cash and cash equivalents at beginning of period                         |                               
|                                                                         |                               
|Cash and cash equivalents at end of period                               |                               
|                                                                         |                               
|Supplemental disclosure of cash flow information:                        |                               
|Cash paid for interest                                                   |                               
|                                                                         |                               
|Cash paid for income taxes                                               |                               
|                                                                         |                               

|See accompanying notes to
consolidated financial statements.
6
|--------------------------------------------------------------

|METRO
INFORMATION SERVICES, INC. AND SUBSIDIARIESNotes to
Consolidated Financial Statements(unaudited)


1.     Basis of Presentation


The
information presented as of September 30, 2001 and for the three-month and
nine-month periods ended September 30, 2000 and 2001, is unaudited, but, in the
opinion of the Companys management, the accompanying unaudited
consolidated financial statements contain all adjustments (consisting only of
normal recurring adjustments) which the Company considers necessary for the fair
presentation of the Companys financial position as of September 30, 2001
and the results of its operations and its cash flows for the three-month and
nine-month periods ended September 30, 2000 and 2001. The consolidated financial
statements included herein have been prepared in accordance with generally
accepted accounting principles and the instructions to Form 10-Q and Rule 10-01
of Regulation S-X. Accordingly, certain information and footnote disclosures
normally included in financial statements prepared in accordance with accounting
principles generally accepted in the United States of America have been
condensed or omitted. These consolidated financial statements should be read in
conjunction with the Companys audited consolidated financial statements
for the year ended December 31, 2000, which were included as part of the
Companys Annual Report on Form 10-K (File No. 000-22035). Certain 2000
amounts have been reclassified for comparability with the 2001 financial
statement presentation.


Results
for the interim periods presented are not necessarily indicative of results that
may be expected for the entire year.


2.     Other Current Assets


The
Tennessee Department of Revenue completed a tax audit during 2000. The audit
resulted in the Companys receipt of a Notice of Assessment on September
29, 2000 that proposed the imposition of additional Tennessee sales and use
taxes and related interest and penalty attributable to the performance by
Company employees of services in the State of Tennessee, which the Department
determined to be taxable as computer software. In the Notice, the
Department assessed sales and use tax of $2,357,147, which the Company paid in
October 2000. Under Tennessee law, the ultimate consumer is responsible for
paying the assessed sales and use tax. Accordingly, the Company has billed the
assessed amount to its customers. A portion of this amount may be uncollectible
and the Company has recorded a reserve. At December 31, 2000 and September 30,
2001, other current assets consist of the following:
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                     | December 31, 2000 |            | September 30, 2001 |         
|------------------------------------ | ----------------- | ---------- | ------------------ | --------
|Gross sales and use tax receivable   |                   | $1,630,381 |                    | $561,219
|Less allowance for doubtful accounts |                   | 586,286    |                    | 407,175 
|                                     |                   |            |                    |         
|Net sales and use tax receivable     |                   | $1,044,095 |                    | $154,044
|Other taxes receivable               |                   |           |                    | 124,493 
|                                     |                   |            |                    |         
|Total other current assets           |                   | $1,044,095 |                    | $278,537
|                                     |                   |            |                    |         

|3.     Goodwill
and Other Intangible Assets


Goodwill
and other intangible assets represent the excess of cost over fair value of net
tangible assets acquired through acquisitions and are amortized on a
straight-line basis over their estimated useful lives, generally 30 years and 3
to 20 years, respectively. Management periodically assesses whether there has
been a permanent impairment in the value of goodwill and other intangible
assets. Impairment is determined by comparing anticipated undiscounted future
cash flows to the carrying value of the related goodwill and other intangible
assets. If such assets are considered impaired, the impairment is measured as
the amount by which the carrying amount of the assets exceeds the fair value of
the assets.


7
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.     Credit Facilities


The Company maintains
credit facilities of $125,000,000. The facilities are provided in equal amounts
of $35,000,000 by three banks and $20,000,000 by a fourth bank. The outstanding
balance on these facilities as of September 30, 2001 was $66,752,108. The
facilities mature in June 2005 and may be extended each year for an additional
year. Until June 2005, interest, but not principal, is payable monthly. The
interest rates on the Companys facilities change from time to time. Two of
the facilities allow the Company to select among prime rate and London Interbank
Offered Rate (LIBOR) based interest rates while the other two have only LIBOR
based interest rates. All of the facilities have interest rates that increase as
the balance outstanding under the facilities increases. The Company has selected
LIBOR based rates for the third quarter 2001, and the rates on such borrowings
ranged from 4.3% to 6.5% on September 30, 2001. The facilities also contain
fees, ranging from 0.125% to 0.380% annually, which are charged on the unused
portion of the facilities. The facilities are collateralized by accounts
receivable of the Company.


The
credit facilities contain several covenants, including one requiring the
maintenance of a certain tangible net worth ratio, which limits the amount of
dividends that can be paid. The covenants also impose limits on incurring other
debt, limit the amount borrowed to a multiple of adjusted earnings before
interest, taxes, depreciation and amortization and require a certain debt
service coverage ratio to be maintained. Amounts advanced under the facilities
can be used for acquisitions and general working capital purposes. Quarterly
testing dates are required for these covenants. These covenants may prevent the
Company from borrowing the full amount of the credit facilities or trigger a
default under the credit facilities.


As
discussed in Note 7, the Company entered into a merger agreement with
Keane, Inc. (AMEX: KEA). Prior to entering into the merger agreement, Metro
was negotiating with its lenders regarding financial covenants under its credit
facilities. Since entering into the merger agreement, Metro has suspended these
negotiations. There can be no assurance that Metro would be able to resume and
complete these negotiations with its lenders by December 31, 2001 if the merger
with Keane were not to occur. If Metro were not able to renegotiate with its
lenders prior to December 31, 2001, Metro would be in breach of the loan
covenants under its credit facilities. In that event, the interest rate under
these facilities would increase to two points above the prime rate
and all amounts then outstanding would be immediately due and payable.


The
Maximum Funded Debt to EBITDA ratio under our credit facilities is 4.0 to 1.0
through September 30, 2001. At September 30, 2001, our Funded Debt to EBITDA
ratio stood at 3.5 to 1.0. As earnings fall this ratio increases. On December
31, 2001 our credit facilities require us to reduce our Funded Debt to EBITDA
ratio to 3.0 to 1.0 or less. If the merger with Keane is completed, Metros
outstanding debt is expected to be paid down or renegotiated before December 31,
2001 to avoid default. As of September 30, 2001, approximately $7.8 million was
available for additional borrowing without default.


Effective
April 2, 2001, the Company entered into a series of interest rate swaps with a
notional amount of $50,000,000. The purpose of these swaps was to hedge the
Companys exposure to variability in future cash flows by converting the
variable interest rate on a portion of its outstanding credit facilities to a
fixed interest rate. The fixed interest rate of the swaps is 5.35%.
Interest rates for similar instruments were less than 5.35% on September 30,
2001. As a result, Metro recorded both a liability and an unrecognized loss
in accumulated other comprehensive loss in
shareholders equity of $2,326,152, which represents the
fair value of the swaps at September 30, 2001.

8
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|5.     Earnings Per Share


The
following reconciles the numerators and denominators of the basic and diluted
earnings per share computations of net income:
|------------------------------------------------------------------------------------------------------------------------------------------------------------

|For the Three Months Ended September 30, 2000 | Net Income(Numerator) | SharesOutstanding(Denominator) | EarningsPer Share
|--------------------------------------------- | --------------------- | ------------------------------ | -----------------
|Basic Earnings Per Share                      |                       | $1,178,017                     |                  
|                                              |                       |                                |                  
|Effect of Dilutive Securities - Incentive     |                      
|Stock Options deemed outstanding              |                       |                                |                  
|                                              |                       |                                |                  
|Diluted Earnings Per Share                    |                       | $1,178,017                     |                  
|                                              |                       |                                |                  

|For the Three Months Ended September 30, 2001 | Net Income(Numerator) | SharesOutstanding(Denominator) | EarningsPer Share
|--------------------------------------------- | --------------------- | ------------------------------ | -----------------
|Basic Earnings Per Share                      |                       | $291,963                       |                  
|                                              |                       |                                |                  
|Effect of Dilutive Securities - Incentive     |                      
|Stock Options deemed outstanding              |                       |                                |                  
|                                              |                       |                                |                  
|Diluted Earnings Per Share                    |                       | $291,963                       |                  
|                                              |                       |                                |                  

|For the Nine Months Ended September 30, 2000 | Net Income(Numerator) | SharesOutstanding(Denominator) | EarningsPer Share
|-------------------------------------------- | --------------------- | ------------------------------ | -----------------
|Basic Earnings Per Share                     |                       | $3,489,078                     |                  
|                                             |                       |                                |                  
|Effect of Dilutive Securities - Incentive    |                      
|Stock Options deemed outstanding             |                       |                                |                  
|                                             |                       |                                |                  
|Diluted Earnings Per Share                   |                       | $3,489,078                     |                  
|                                             |                       |                                |                  

|For the Nine Months Ended September 30, 2001 | Net Income(Numerator) | SharesOutstanding(Denominator) | EarningsPer Share
|-------------------------------------------- | --------------------- | ------------------------------ | -----------------
|Basic Earnings Per Share                     |                       | $292,579                       |                  
|                                             |                       |                                |                  
|Effect of Dilutive Securities - Incentive    |                      
|Stock Options deemed outstanding             |                       |                                |                  
|                                             |                       |                                |                  
|Diluted Earnings Per Share                   |                       | $292,579                       |                  
|                                             |                       |                                |                  

|6.     Restructuring Liabilities


On
May 4, 2001, the Companys Executive Management approved a plan to reduce
the work force at the Corporate office to bring corporate operating expenses
more in line with the lower consultant count. The plan affected all Corporate
Departments and Operations personnel attached to the Corporate Office. A second
cost reduction plan was approved June 18, 2001. This exit plan involved three
offices. The plan resulted in the sale of the St. Louis office and the
combination of two offices with two other offices. The sale of the St. Louis
office resulted in a $1,000,000 gain before tax during the three months ended
June 30, 2001. The Company recorded a total restructuring charge of $904,000
($488,160 or $0.03 per share net of tax benefit) during the three months ended
June 30, 2001.


In
July 2001, management approved the closure and sale of the Seattle office. The
plan resulted in an additional restructuring charge of $91,469 ($49,393, net of
tax) and a $200,000 gain before tax during the three months ended September 30,
2001.


Restructuring
charges for the three plans totaled $995,452, ($537,544, net of tax), for the
nine months ended September 30, 2001. The charge represents managements
estimate of the ultimate obligations associated with executing the plans at the
time the estimates were made. The restructuring charges for costs to exit
certain facilities may change. The Company expects to complete all steps in the
three restructuring plans by May 4, 2002, June 18, 2002 and July 2002,
respectively.
9
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|The
following table shows the initial accruals made by the Company and the remaining
liability as of September 30, 2001:
|------------------------------------------------------------------------------------------------------------------------

|                                  | InitialBalance | Costs incurredthroughSeptember 30,2001 | Revision toestimates | Balance as ofSeptember 30,2001
|--------------------------------- | -------------- | -------------------------------------- | -------------------- | ------------------------------
|Cost to exit certain facilities   |                | $186,234                               |                      | $  83,424                     
|Severance and termination related |               
|accruals                          |                | 809,218                                |                      | 795,686                       
|                                  |                |                                        |                      |                               
|Total restructuring costs         |                | $995,452                               |                      | $879,110                      
|                                  |                |                                        |                      |                               

|7.     Financial Instruments


The
fair value of interest rate swap agreements is estimated using quotes from Bank
of America derivative brokers. The Company entered into the swap agreements to
fix its interest rate on $50,000,000 of outstanding long-term debt. The fixed
interest rate of the swaps is 5.35%. Interest rates for similar instruments were
less than 5.35% on September 30, 2001. As a result, Metro recorded both a
liability and an unrecognized loss in accumulated other comprehensive loss in
shareholders equity of $2,326,152, which represents the fair value of the
swaps at September 30, 2001.
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Term of swap agreements          |  | April 2, 2001  June 1, 2005 | 
|-------------------------------- |  | ---------------------------- | 
|Notional amount                  |  | $ 50,000,000                 | 
|Fixed interest rate              |  | 5.35%                        | 
|Fair value at September 30, 2001 |  | $ (2,326,152)                | 
|Net unrecognized loss            |  | $ (2,326,152)                | 

|8.     Other Matters


On
August 20, 2001, Metro signed a definitive agreement with Keane, Inc. under
which Keane intends to acquire Metro in a stock-for-stock merger transaction.
The transaction has been approved by Keanes and Metros respective
boards of directors. The merger has been approved by regulatory authorities and
requires the approval of Metros shareholders. The special meeting for
Metros shareholders to approve the merger is scheduled for November 30,
2001. Under a separate agreement, John Fain, founder, chairman and CEO of Metro,
has agreed to vote shares, which represent 40% of Metros outstanding
shares, in favor of the merger.

10
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|PART I


ITEM 2:



MANAGEMENTS
DISCUSSION AND ANALYSIS OFFINANCIAL
CONDITION AND RESULTS OF OPERATIONS


Cautionary
statement under the Safe-Harbor provisions of the Private Securities
Litigation Reform Act of 1995: Included in this report and other information
presented by management from time to time, including, but not limited to, annual
reports to shareholders, quarterly shareholder letters, filings with the
Securities and Exchange Commission, news releases, analysts conference
calls and investor presentations, are forward-looking statements about business
strategies, market potential, future financial performance and other matters
which reflect managements expectations as of the date made. Without
limiting the foregoing, the words believes, anticipates,
plans, expects, seeks and similar
expressions are intended to identify forward-looking statements. Future events
and the Companys actual results could differ materially from the results
reflected in these forward-looking statements. There are a number of important
factors that could cause the Companys actual results to differ materially
from those indicated by such forward-looking statements. These factors include,
without limitation: the Companys ability to attract, develop and retain
qualified consultants, the Companys ability to effectively identify,
manage and integrate acquisitions, changes in consultant utilization and
productivity rates, the Companys ability to acquire or develop additional
service offerings, client decisions to reduce or increase IT services
outsourcing, early termination of client contracts without penalty, changes in
the Companys dependence on significant clients, changes in gross margins
due to a variety of factors (including increased wage and benefit costs that are
not offset by bill rate increases), the types of services performed by the
Company during a particular period, competition and the Companys planned
merger into Keane, Inc. (AMEX: KEA). Please refer to a discussion of these and
other factors in the Companys Annual Report on Form 10-K for the fiscal
year ended December 31, 2000 and other Securities and Exchange Commission
filings. The Company disclaims any intent or obligation to update publicly these
forward-looking statements, whether as a result of new information, future
events or otherwise.


The
following should be read in conjunction with the Consolidated Financial
Statements and Notes thereto included elsewhere in this report. The
Companys fiscal year ends on December 31.


Overview


Metro
Information Services, Inc. provides a wide range of information technology
(IT) consulting and custom software development services and
solutions in 33 metropolitan markets in the United States and Puerto Rico. The
Companys 1,808 consultants, 60% of whom were salaried on September 30,
2001, work on all aspects of computer systems and applications development.
Services and solutions performed by Metro include application systems
development and maintenance, IT architecture and engineering, systems
consulting, project outsourcing (including managed services) and general support
services. The Company supports all major computer technology platforms
(client/server, network, mainframe, Internet and mid-range environments) and
supports client projects using a broad range of software applications. For
example, the Company custom develops applications in Java, HTML, ASP and other
Web-related languages as well as Visual Basic, C++, Oracle, Informix and DB2.
The Company also implements and supports Windows 2000, Windows NT, Novell and
UNIX based network environments and supports numerous other application
environments.


Metros
clients operate in a wide variety of industries including communications,
distribution, retail, financial services, government, health care, information
technology, manufacturing, transportation, leisure and utilities. The Company
emphasizes long-term relationships with its clients rather than one-time
projects or assignments. During the 12 months ended September 30, 2001, the
Company performed IT services for 621 clients (excluding clients that generated
less than $25,000 in revenue during such period).


IT
services are primarily provided by the Company through supplemental IT services
arrangements and, to a lesser extent, through project outsourcing arrangements.
Substantially all services are billed on a time and materials basis. During the
three months ended September 30, 2001, the Company estimates that supplemental
IT services accounted for more than 85% and project outsourcing accounted for
less than 15% of the Companys revenue, although the Company wants to
increase the percentage of project outsourcing it performs.


Between
September 30, 2000 and September 30, 2001, the number of full time consultants
decreased by 27.3% from 2,488 to 1,808 as demand for IT consultants slowed. In
addition, between September 30, 2000 and September 30, 2001, the Company
increased the average billing rates charged to clients for consultants in an
attempt to keep pace with the increased costs of consultants. However, bill
rates did not keep pace with the increased cost of pay rates.
11
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|The
Companys past financial performance should not be relied on as an
indication of future performance. Period-to-period comparisons of the
Companys financial results are not necessarily meaningful indicators of
future performance.


Results of
Operations


The
following table sets forth the percentage of revenue and the percentage change
from the prior period of certain items reflected in the statements of income for
the:
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                             | Percentage of Revenue
|-------------------------------------------- | ---------------------
|
|
|Revenue                                      |                      
|Cost of revenue                              |                      
|                                             |                      
|Gross profit                                 |                      
|                                             |                      
|Selling, general and administrative expenses |                      
|Depreciation expense                         |                      
|Amortization expense                         |                      
|                                             |                      
|Total operating expenses                     |                      
|                                             |                      
|Restructuring charge                         |                      
|                                             |                      
|Operating income                             |                      
|                                             |                      
|Net interest expense                         |                      
|                                             |                      
|Other income                                 |                      
|                                             |                      
|Income before income taxes                   |                      
|Income taxes                                 |                      
|                                             |                      
|Net income                                   |                      
|                                             |                      

|                                             | Percentage Change2001 over 2000
|-------------------------------------------- | -------------------------------
|
|Revenue                                      |                                
|Cost of revenue                              |                                
|Gross profit                                 |                                
|Selling, general and administrative expenses |                                
|Depreciation expense                         |                                
|Amortization expense                         |                                
|Total operating expenses                     |                                
|Restructuring charge                         |                                
|Operating income                             |                                
|Net interest expense                         |                                
|Other income                                 |                                
|Income before income taxes                   |                                
|Income taxes                                 |                                
|Net income                                   |                                

|Three Months Ended
September 30, 2001 Compared to Three Months Ended September 30, 2000


Revenue.Revenue decreased $15.8 million, or 20.3%, to $62.1 million for the three
months ended September 30, 2001 from $77.9 million for the three months ended
September 30, 2000. The decline in revenue is a result of a declining consultant
count and a slow-down in demand for information technology services.


Cost
of revenue.Cost of revenue decreased $9.5 million, or 17.5%, to $44.8
million for the three months ended September 30, 2001 from $54.3 million for the
three months ended September 30, 2000. As a percentage of revenue, cost of
revenue increased to 72.2% for the three months ended September 30, 2001 from
69.7% for the three months ended September 30, 2000. This increase is primarily
due to increases in pay rates and health related benefit costs of salaried
consultants. Non-billable time increased for salaried consultants for the three
months ended September 30, 2001 compared to the three months ended September 30,
2000. Salaried consultants are paid even when not billing.
12
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Gross
profit.Gross profit decreased $6.3 million, or 26.9%, to $17.3 million for
the three months ended September 30, 2001 from $23.6 million for the three
months ended September 30, 2000. As a percentage of revenue, gross profit
decreased to 27.8% for the three months ended September 30, 2001 as compared to
30.3% for the three months ended September 30, 2000. The decline in revenue,
combined with the increased cost of revenue as a percentage of sales, lowered
gross profit for the three months ended September 30, 2001.


Selling,
general and administrative expenses.Selling, general and administrative
expenses decreased $3.9 million, or 22.7%, to $13.4 million for the three months
ended September 30, 2001 from $17.3 million for the three months ended September
30, 2000. As a percentage of revenue, selling, general and administrative
expenses decreased to 21.5% for the three months ended September 30, 2001 from
22.2% for the three months ended September 30, 2000. Cost reduction initiatives
continued during the three months ended September 30, 2001 to bring selling,
general and administrative expenses in line with reduced revenue levels. With
the number of consultants decreasing, cost reductions were necessary. Selling,
general and administrative expenses also include $153,000 of costs related to
the Companys planned fourth quarter merger with Keane, Inc.


Depreciation
expense.Depreciation expense increased $118,000, or 15.0%, to $902,000 for
the three months ended September 30, 2001 from $784,000 for the three months
ended September 30, 2000. This increase is primarily attributable to
depreciation on additions to computer equipment and software. As a percentage of
revenue, depreciation expense increased to 1.5% during the three months ended
September 30, 2001 from 1.0% for the three months ended September 30, 2000.


Amortization
expense.Amortization expense increased $62,000, or 5.1%, to $1.3 million
for the three months ended September 30, 2001 from $1.2 million for the three
months ended September 30, 2000. This increase is attributable to amortization
of goodwill and other intangible assets related to the Companys
acquisitions completed during 1999. As a percentage of revenue, amortization
expense increased to 2.0% for the three months ended September 30, 2001 from
1.5% for the three months ended September 30, 2000.


Restructuring
charge.For the three months ended September 30, 2001, the Company recorded
a restructuring charge of $92,000 related to cost reduction initiatives as
compared to $330,000 of income for the three months ended September 30, 2000.
The income in 2000 resulted from a change in estimate of the restructuring
liability recorded in the second quarter of 2000. These costs consist of
employee severance pay and benefits and lease termination costs. The charge
represents managements estimate of the ultimate obligations associated
with executing the plans at the time the estimates were made. Third quarter 2001
earnings includes the sale of one of the Companys offices that resulted in
a $200,000 gain before tax. See Other income. The Company
expects to complete all steps in the restructuring plans by second quarter 2002.


Operating
income.Operating income decreased $3.0 million, or 64.5%, to $1.7 million
for the three months ended September 30, 2001 from $4.7 million for the three
months ended September 30, 2000. As a percentage of revenue, operating income
decreased to 2.7% for the three months ended September 30, 2001 from 6.0% for
the three months ended September 30, 2000. The decline in operating income
margin is primarily the result of lower gross margins offset by reductions in
selling, general and administrative expenses as noted above.


Interest
income.Interest income decreased by $2,000, or 32.8%, to $5,000 for the
three months ended September 30, 2001 from $7,000 for the three months ended
September 30, 2000.


Interest
expense.Interest expense decreased by $1.3 million, or 55.0%, to $1.1
million for the three months ended September 30, 2001 from $2.4 million for the
three months ended September 30, 2000. As a percentage of revenue, interest
expense decreased to 1.7% for the three months ended September 30, 2001 from
3.0% for the three months ended September 30, 2000. This change reflects a
decrease in the average level of borrowings during the period and decreases in
interest rates.


Other
income.Other income increased $200,000, for the three months ended
September 30, 2001 from $0 for the three months ended September 30, 2000. As a
percentage of revenue, other income was 0.3% for the three months ended
September 30, 2001. The sale of one of the Companys offices resulted in a
$200,000 gain before tax during the three months ended September 30, 2001. The
sale is part of Metros cost reduction initiatives that began in May 2001.
13
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Income
before income taxes.Income before income taxes decreased $1.5 million, or
65.6%, to $794,000 for the three months ended September 30, 2001 from $2.3
million for the three months ended September 30, 2000. As a percentage of
revenue, income before income taxes decreased to 1.3% for the three months ended
September 30, 2001 from 3.0% for the three months ended September 30, 2000.


Income
taxes. The Companys effective tax rate increased to 63.2% for the
three months ended September 30, 2001 as compared to 49.0% for the three months
ended September 30, 2000. The rate increase is the result of nondeductible
merger-related expenses, which increased the Companys taxable income above
previous estimates, and nonfederal income taxes. Income taxes decreased $630,000,
or 55.6%, to $502,000 for the three months ended September 30, 2001 from $1.1
million for the three months ended September 30, 2000. As a percentage of
revenue, income taxes decreased to 0.8% for the three months ended September 30,
2001 from 1.5% for the three months ended September 30, 2000. These decreases
are a result of the earnings decline the Company has experienced over the last
12 months.


Net
income. Net income decreased $886,000, or 75.2%, to $292,000 for the three
months ended September 30, 2001 from $1.2 million for the three months ended
September 30, 2000. As a percentage of revenue, net income decreased to 0.5% for
the three months ended September 30, 2001 from 1.5% for the three months ended
September 30, 2000.


Earnings
per share. Diluted earnings per share decreased $0.06, or 75.0%, to $0.02
for the three months ended September 30, 2001 from $0.08 for the three months
ended September 30, 2000.


Nine Months Ended
September 30, 2001 Compared to Nine Months Ended September 30, 2000


Revenue.Revenue
decreased $25.2 million, or 10.7%, to $210.7 million for the nine months ended
September 30, 2001 from $235.9 million for the nine months ended September 30,
2000. The decline in revenue is a result of a declining consultant count and a
slow-down in demand for information technology services.


Cost
of revenue.Cost of revenue decreased $14.8 million, or 8.9%, to $152.2
million for the nine months ended September 30, 2001 from $167.0 million for the
nine months ended September 30, 2000. This increase is primarily due to
increases in pay rates and health related benefit costs. As a percentage of
revenue, cost of revenue increased to 72.2% for the nine months ended September
30, 2001 from 70.8% for the nine months ended September 30, 2000.


Gross
profit.Gross profit decreased $10.4 million, or 15.1%, to $58.5 million for
the nine months ended September 30, 2001 from $68.9 million for the nine months
ended September 30, 2000. As a percentage of revenue, gross profit decreased to
27.8% for the nine months ended September 30, 2001 from 29.2% for the nine
months ended September 30, 2000. The decline in revenue, combined with the
increased cost of revenue as a percentage of sales, lowered gross profit for the
nine months ended September 30, 2001.


Selling,
general and administrative expenses.Selling, general and administrative
expenses decreased $3.8 million, or 7.5%, to $47.3 million for the nine months
ended September 30, 2001 from $51.1 million for the nine months ended September
30, 2000. As a percentage of revenue, selling, general and administrative
expenses increased to 22.5% for the nine months ended September 30, 2001 from
21.7% for the nine months ended September 30, 2000. Cost reduction initiatives
implemented in the second and third quarter of 2001 continued to bring selling,
general and administrative expenses in line with reduced revenue levels. With
the number of consultants decreasing, cost reductions were necessary. Of these
costs, a restructuring charge of $995,000 is reported as a separate line item
(see Restructuring charge. below). Selling, general and
administrative expenses also includes $153,000 of merger related costs. These
costs relate to the Companys planned merger with Keane, Inc.


Depreciation
expense.Depreciation expense increased $237,000, or 9.8%, to $2.6 million
for the nine months ended September 30, 2001 from $2.4 million for the nine
months ended September 30, 2000. This increase is primarily attributable to
depreciation on additions to computer equipment and software. As a percentage of
revenue, depreciation expense increased to 1.3% for the nine months ended
September 30, 2001 from 1.0% for the nine months ended September 30, 2000.


Amortization
expense.Amortization expense increased $286,000, or 8.1%, to $3.8 million
for the nine months ended September 30, 2001 from $3.5 million for the nine
months ended September 30, 2000. This increase is attributable to amortization
of goodwill and other intangible assets related to the Companys
acquisitions completed during 1999. As a percentage of revenue, amortization
expense increased to 1.8% for the nine months ended September 30, 2001 from 1.5%
for the nine months ended September 30, 2000.
14
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Restructuring
charge.For the nine months ended September 30, 2001, the Company recorded a
restructuring charge of $995,000 before tax related to cost reduction
initiatives as compared to a $417,000 restructuring charge for the nine months
ended September 30, 2000. These costs consist of employee severance pay and
benefits and lease termination costs. The charge represents managements
estimate of the ultimate obligations associated with executing the plans at the
time the estimates were made. The plans included the sale of two of the
Companys offices resulting in a $1,200,000 gain before tax during the nine
months ended September 30, 2001. See Other income. The
Company expects to complete all steps in the restructuring plans by second
quarter 2002.


Operating
income.Operating income decreased $7.7 million, or 67.6%, to $3.7 million
for the nine months ended September 30, 2001 from $11.4 million for the nine
months ended September 30, 2000. As a percentage of revenue, operating income
decreased to 1.7% for the nine months ended September 30, 2001 from 4.8% for the
nine months ended September 30, 2000. The decline in operating income margin is
primarily the result of lower gross margins offset by reductions in selling,
general and administrative expenses as noted above.


Interest
income.Interest income decreased by $56,000, or 63.2%, to $32,000 for the
nine months ended September 30, 2001 from $88,000 for the nine months ended
September 30, 2000.


Interest
expense.Interest expense decreased by $1.5 million, or 29.2% to $3.7
million for the nine months ended September 30, 2001 from $5.2 million for the
nine months ended September 30, 2000. As a percentage of revenue, interest
expense decreased to 1.8% for the three months ended September 30, 2001 from
2.2% for the three months ended September 30, 2000. This change reflects a
decrease in the average level of borrowings during the period and decreases in
interest rates.


Other
income.Other income increased $1.2 million for the nine months ended
September 30, 2001 from $0 for the nine months ended September 30, 2000. As a
percentage of revenue, other income was 0.5% for the nine months ended September
30, 2001. The sale of two of the Companys offices resulted in a $1,200,000
gain before tax during the nine months ended September 30, 2001. The sale of the
offices was part of cost reduction initiatives that began in May 2001.


Income
before income taxes.Income before income taxes decreased $5.0 million, or
80.7%, to $1.2 million for the nine months ended September 30, 2001 from $6.2
million for the nine months ended September 30, 2000. As a percentage of
revenue, income before income taxes decreased to 0.5% for the nine months ended
September 30, 2001 from 2.6% for the nine months ended September 30, 2000.


Income
taxes. The Companys effective tax rate was 75.6% for the nine months
ended September 30, 2001 and 43.8% for the nine months ended September 30, 2000.
The rate increase is the result of nondeductible merger-related expenses, which
increased the Companys taxable income above previous estimates, and
nonfederal income taxes. Income taxes decreased $1.8 million, or 66.6%, to
$909,000 for the nine months ended September 30, 2001 from $2.7 million for the
nine months ended September 30, 2000. As a percentage of revenue, income taxes
decreased to 0.4% for the nine months ended September 30, 2001 from 1.1% for the
nine months ended September 30, 2000. These decreases are a result of the
earnings decline the Company has experienced over the last 12 months.


Net
income. Net income decreased $3.1 million, or 91.6%, to $293,000 for the
nine months ended September 30, 2001 from $3.5 million for the nine months ended
September 30, 2000. As a percentage of revenue, net income decreased to 0.1% for
the nine months ended September 30, 2001 from 1.5% for the nine months ended
September 30, 2000.


Earnings
per share. Diluted earnings per share decreased $0.21, or 91.3%, to $0.2 for
the nine months ended September 30, 2001 from $0.23 for the nine months ended
September 30, 2000.

15
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Selected
Quarterly Results and Seasonality


The
following table sets forth certain quarterly operating information for each of
the 13 quarters ending with the quarter ended September 30, 2001, both in
dollars and as a percentage of revenue. This information was derived from the
unaudited consolidated financial statements of the Company which, in the opinion
of management, were prepared on the same basis as the consolidated financial
statements contained elsewhere in this report and include all adjustments,
consisting of normal recurring adjustments, which management considers necessary
for the fair presentation of the information for the periods presented. The
financial data shown below should be read in conjunction with the consolidated
financial statements and notes thereto included in this report. Results for any
fiscal quarter are not necessarily indicative of results for the full year or
for any future quarter.
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|          | Gross Profit | Operating Income
|--------- | ------------ | ----------------
|
|
|1998:     |              |                 
|September |              | 56,593          
|December  |              | 57,799          
|1999:     |             
|March     |              | 72,473          
|June      |              | 78,309          
|September |              | 81,253          
|December  |              | 82,611          
|2000:     |             
|March     |              | 80,197          
|June      |              | 77,812          
|September |              | 77,880          
|December  |              | 77,702          
|2001:     |             
|March     |              | 78,767          
|June      |              | 69,849          
|September |              | 62,046          

|Metros
operating results are adversely affected when client facilities close due to
holidays or inclement weather. The Company generally experiences a certain
amount of seasonality in the fourth quarter due to the number of holidays and
closings of client facilities during that quarter. Further, the Company
generally experiences lower operating results in the first quarter due in part
to the timing of unemployment and FICA tax accruals and delays in clients
contract renewals related to clients budget approval processes.


Liquidity
and Capital Resources


The
Company funds its operations primarily from cash generated by operations. Net
cash provided by operations was $15,913,367 for the nine months ended September
30, 2001 and consisted primarily of non-cash items of $7,319,297 and a decrease
in accounts receivable of $10,527,518, offset by a decrease in accrued
compensation and benefits of $2,584,304. The Company had working capital of
$32,466,104 at September 30, 2001 compared to $42,647,009 at December 31, 2000.


Net
cash used in investing activities was $469,175 for the nine months ended
September 30, 2001. The Company spent $1,684,227 on normal acquisitions of
property and equipment used in operations. Cash received from the sale of
offices for the nine months ended September 30, 2001 was $1,200,000.


The Company maintains
credit facilities of $125,000,000. The facilities are provided in equal amounts
of $35,000,000 by three banks and $20,000,000 by a fourth bank. The outstanding
balance on these facilities as of September 30, 2001 was $66,752,108, a
reduction of $16,690,913 from the balance at December 31, 2000. The facilities
mature in June 2005 and may be extended each year for an additional year. Until
June 2005, interest, but not principal, is payable monthly. The interest rates
on the Companys facilities change from time to time. Two of the facilities
allow the Company to select among prime rate and London Interbank Offered Rate
(LIBOR) based interest rates while the other two have only LIBOR based interest
rates. All of the facilities have interest rates that increase as the balance
outstanding under the facilities increases. The Company has selected 30-day
LIBOR based rates for the third quarter 2001, and the rates on such borrowings
ranged from 4.3% to 6.5% on September 30, 2001. The facilities also contain
fees, ranging from 0.125% to 0.380% annually, which are charged on the unused
portion of the facilities. The facilities are collateralized by accounts
receivable of the Company.
16
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|The
credit facilities contain several covenants, including one requiring the
maintenance of a certain tangible net worth ratio, which limits the amount of
dividends that can be paid. The covenants also impose limits on incurring other
debt, limit the amount borrowed to a multiple of adjusted earnings before
interest, taxes, depreciation and amortization and require a certain debt
service coverage ratio to be maintained. Amounts advanced under the facilities
can be used for acquisitions and general working capital purposes. Quarterly
testing dates are required for these covenants. These covenants may prevent the
Company from borrowing the full amount of the credit facilities or trigger a
default under the credit facilities.


Prior
to entering into the merger agreement with Keane, Inc., Metro was negotiating
with its lenders regarding financial covenants under its credit facilities.
Since entering into the merger agreement, Metro has suspended these
negotiations. There can be no assurance that Metro would be able to resume and
complete these negotiations with its lenders by December 31, 2001 if the merger
with Keane were not to occur. If Metro were not able to renegotiate with its
lenders prior to December 31, 2001, Metro would be in breach of the loan
covenants under its credit facilities. In that event, the interest rate under
these facilities would increase to two points above the prime rate
and all amounts then outstanding would be immediately due and payable.


The
Maximum Funded Debt to EBITDA ratio under our credit facilities is 4.0 to 1.0
through September 30, 2001. At September 30, 2001, our Funded Debt to EBITDA
ratio stood at 3.5 to 1.0. As earnings fall, this ratio increases. On December
31, 2001, our credit facilities require us to reduce our Funded Debt to EBITDA
ratio to 3.0 to 1.0 or less. If the merger with Keane is completed, Metros
outstanding debt is expected to be paid down or renegotiated before December 31,
2001 to avoid default. As of September 30, 2001, approximately $7.8 million was
available for additional borrowing without default.


Effective
April 2, 2001, the Company entered into a series of interest rate swaps with a
notional amount of $50,000,000. The purpose of these swaps was to hedge the
Companys exposure to variability in future cash flows by converting the
variable interest rate on a portion of its outstanding credit facilities to a
fixed interest rate. The fixed interest rate of the swaps is 5.35%. Interest
rates for similar instruments were less than 5.35% on September 30, 2001. As a
result, Metro recorded both a liability and an unrecognized loss in accumulated
other comprehensive loss in shareholders equity of $2,326,152, which
represents the fair value of the swaps at September 30, 2001.


The
Company sold 181,760 shares of stock under the Metro Information Services, Inc.
Employee Stock Purchase Plan for an aggregate purchase price of $726,952 during
the nine months ended September 30, 2001 and 133,760 shares for $1,133,642
during the nine months ended September 30, 2000.


Recent
Accounting Pronouncements


In
July 2001, the FASB issued Statement No. 141, Business Combinations, and
Statement No. 142, Goodwill and Other Intangible Assets. Statement 141
requires that the purchase method of accounting be used for all business
combinations initiated after June 30, 2001 as well as all purchase method
business combinations completed after June 30, 2001. Statement 141 also
specifies criteria intangible assets acquired in a purchase method business
combination must meet to be recognized and reported apart from goodwill, noting
that any purchase price allocable to an assembled workforce may not be accounted
for separately. Statement 142 will require that goodwill and intangible assets
with indefinite useful lives no longer be amortized, but instead tested for
impairment at least annually in accordance with the provisions of Statement 142.
Statement 142 will also require that intangible assets with definite useful
lives be amortized over their respective estimated useful lives to their
estimated residual values, and reviewed for impairment in accordance with SFAS
No. 144, Accounting for the Impairment or Disposal of Long-lived Assets,which was issued in August 2001.


The
Company is required to adopt the provisions of Statement 141 immediately, except
with regard to business combinations initiated prior to July 1, 2001, which it
expects to account for using the pooling-of-interests method, and Statement 142
effective January 1, 2002. Furthermore, any goodwill and any intangible asset
determined to have an indefinite useful life that are acquired in a purchase
business combination completed after June 30, 2001 will not be amortized, but
will continue to be evaluated for impairment in accordance with the appropriate
pre-Statement 142 accounting literature. Goodwill and intangible assets acquired
in business combinations completed before July 1, 2001 will continue to be
amortized prior to the adoption of Statement 142.
17
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Statement
141 will require upon adoption of Statement 142, that the Company evaluate its
existing intangible assets and goodwill that were acquired in a prior purchase
business combination, and to make any necessary reclassifications in order to
conform with the new criteria in Statement 141 for recognition apart from
goodwill. Upon adoption of Statement 142, the Company will be required to
reassess the useful lives and residual values of all intangible assets acquired
in purchase business combinations, and make any necessary amortization period
adjustments by the end of the first interim period after adoption. In addition,
to the extent an intangible asset is identified as having an indefinite useful
life, the Company will be required to test the intangible asset for impairment
in accordance with the provisions of Statement 142 within the first interim
period. Any impairment loss will be measured as of the date of adoption and
recognized as the cumulative effect of a change in accounting principle in the
first interim period.


In
connection with the transitional goodwill impairment evaluation, Statement 142
will require the Company to perform an assessment of whether there is an
indication that goodwill is impaired as of the date of adoption. To accomplish
this the Company must identify its reporting units and determine the carrying
value of each reporting unit by assigning the assets and liabilities, including
the existing goodwill and intangible assets, to those reporting units as of the
date of adoption. The Company will then have up to six months from the date of
adoption to determine the fair value of each reporting unit and compare it to
the reporting units carrying amount. To the extent a reporting units
carrying amount exceeds its fair value, an indication exists that the reporting
units goodwill may be impaired and the Company must perform the second
step of the transitional impairment test. In the second step, the Company must
compare the implied fair value of the reporting units goodwill, determined
by allocating the reporting units fair value to all of its assets
(recognized and unrecognized) and liabilities in a manner similar to a purchase
price allocation in accordance with Statement 141, to its carrying amount, both
of which would be measured as of the date of adoption. This second step is
required to be completed as soon as possible, but no later than the end of the
year of adoption. Any transitional impairment loss will be recognized as the
cumulative effect of a change in accounting principle in the Companys
statement of earnings.


As
of the date of adoption, the Company expects to have unamortized goodwill in the
amount of $97.0 million and unamortized identifiable intangible assets in the
amount of $13.9 million, all of which will be subject to the transition
provisions of Statements 141 and 142. Amortization expense related to goodwill
was $4.8 million and $3.8 million for the year ended December 31, 2000 and the
nine months ended September 30, 2001, respectively. Because of the extensive
effort needed to comply with adopting Statements 141 and 142, it is not
practicable to reasonably estimate the impact of adopting these Statements on
the Companys financial statements at the date of this report, including
whether any transitional impairment losses will be required to be recognized as
the cumulative effect of a change in accounting principle.


On
July 5, 2001, the FASB issued Statement No. 143, Accounting for Asset
Retirement Obligations,effective for fiscal years beginning after June 5,
2002, with earlier application encouraged. Initiated in 1994 as a project to
account for the costs of nuclear decommissioning, the Board expanded the scope
to include similar closure or removal-type costs in other industries that are
incurred at any time during the life of an asset. The adoption of this statement
is not expected to have a material impact on the Companys financial
statements.


In August 2001, the FASB issued Statement No. 144, Accounting for the
Impairment or Disposal of Long-lived Assets,which addresses financial
accounting and reporting for the impairment or disposal of long-lived assets and
supersedes Statement No. 121, Accounting for the Impairment of Long-lived
Assets and for Long-lived Assets to be Disposed of. Statement 144 also
supersedes the accounting and reporting provisions of APB Opinion No. 30,
Reporting the Results of Operations-Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions,for the disposal of a segment of a business.
However, Statement 144 retains the requirement in Opinion No. 30 to report
separately discontinued operations and extends that reporting to include a
component of an entity that either has been disposed of or is
classified for sale. Statement 144 iseffective for financial statements
issued for fiscal years beginning after December 15, 2001 and early adoption is
permitted. The adoption of Statement 144 is not expected to have a material
impact on the Companys financial statements.



ITEM 3.
Quantitative and Qualitative Disclosures about Market Risk


The
Company is exposed to market risk due to variable interest rates on the
Companys credit facilities. Actions taken during 1999 and 2000 by the
Federal Reserve to increase interest rates increased the Companys interest
rate costs. In 2001, the Federal Reserve has decreased interest rates. The
Company has entered into interest rate hedges on $50,000,000 of the credit
facilities, effective April 2, 2001, to reduce the variability of the
Companys cash flows due to fluctuations in interest rates. The fixed
interest rate of the swaps is 5.35%. Interest rates for similar instruments were
less than 5.35% on September 30, 2001. As a result, we recorded both a liability
and an unrecognized loss in accumulated other comprehensive loss in
shareholders equity of $2,326,152, which represents the fair value of the
swaps at September 30, 2001. On September 30, 2001, the hedge instruments were
considered fully effective.18
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----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|The
Company experienced slower demand for its services during 2001. During economic
slowdowns, the risk of bad debts increases. Additional amounts have been reserved
in the allowance for doubtful accounts for uncollectible accounts during 2001.
Current economic conditions could result in additional accounts becoming
doubtful that are current and considered collectible as of September 30, 2001.
Accounts receivable will be monitored closely during the remainder of 2001 to
determine if additional increases to the allowance for doubtful accounts are
necessary.


The
Companys exposure to market risk from other types of financial
instruments, such as accounts payable, is not material.
19
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|PART II. OTHER
INFORMATION:



ITEM 1. LEGAL
PROCEEDINGS


None


ITEM 2.
CHANGES IN SECURITIES AND USE OF PROCEEDS


None


ITEM 3. DEFAULTS
UPON SENIOR SECURITIES


Not
applicable


ITEM 4. SUBMISSION OF
MATTERS TO A VOTE OF SECURITY HOLDERS


None


ITEM 5. OTHER
INFORMATION


None


ITEM 6.
EXHIBITS AND REPORTS ON FORM 8-K
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | (a) |  | Exhibits
required by Item 601 of Regulation S-K:
| |  | --- |  | ------------------------------------------------

| | 2.1
Agreement and plan of merger, dated August 20, 2001, incorporated by reference to Exhibit
2.1 of Form 8-K
| | -------------------------------------------------------------------------------------------------------------

| | 10.1
Stockholders agreement, dated August 20, 2001, among Keane, Inc., Veritas Acquisition
Corp. and John H. Fain, incorporated by reference to Exhibit 10.1 of Form 8-K/A
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | (b) |  | Reports
on Form 8-K during third quarter of 2001:
| |  | --- |  | -------------------------------------------------

| | Report
dated August 21, 2001 reporting under Item 5 the agreement and plan of merger among
Keane, Inc., Veritas Acquisition Corp. and Metro Information Services, Inc.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------

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|--

|SIGNATURES


Pursuant
to the requirements of the Securities Exchange Act of 1934, the Company has duly
caused this Form 10-Q to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Virginia Beach, Commonwealth of Virginia on the
5thday of November, 2001.
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | By: | Metro Information Services, Inc. /s/ John H. Fain
John H. FainPrincipal Executive Officer | 
| | --- | ------------------------------------------------------------------------------------------------------- | 

| | By: | /s/ Robert J. Eveleigh
Robert J. EveleighPrincipal Financial Officer | 
| | --- | ---------------------------------------------------------------------------------- | 

|21
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