|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 ENDEDJUNE 30, 2001


COMMISSION
FILE NO.: 000-22035


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

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

|POST OFFICE BOX 8888, VIRGINIA BEACH, VIRGINIA | 23450     
|---------------------------------------------- | ----------
|(Address of principal executive office)        | (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 July 26, 2001 the registrant had issued and outstanding 15,337,760 shares of
Common Stock, $.01 par value.


1
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

---

|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 Six Months Ended June 30, 2000 and 2001 (unaudited) | 3         
|           |                                                                                                                      |           
|           | Consolidated Balance Sheets as of
      December 31, 2000 and June 30, 2001 (unaudited)                              | 4         
|           |                                                                                                                      |           
|           | Consolidated Statement of Changes in Shareholders Equity for the
     Six Months Ended June 30, 2001 (unaudited)    | 5         
|           |                                                                                                                      |           
|           | Consolidated Statements of Cash Flows for the
     Six Months Ended June 30, 2000 and 2001 (unaudited)               | 6         
|           |                                                                                                                      |           
|           | Notes to Consolidated Financial Statements (unaudited)                                                               | 7         
|           |                                                                                                                      |           
|ITEM 2.    | Managements Discussion and Analysisof Financial Condition and Results of Operations                                 | 10        
|           |                                                                                                                      |           
|ITEM 3.    | Quantitative and Qualitative Disclosures about Market Risk                                                           | 17        
|           |                                                                                                                      |           
|PART II.   | OTHER INFORMATION                                                                                                    | 19        
|           |                                                                                                                      |           
|SIGNATURES |                                                                                                                      | 21        

|2
|-

---

|PART I. FINANCIAL INFORMATION:


ITEM 1. Financial Statements


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

|                                                                                                                            |  |                  
|--------------------------------------------------------------------------------------------------------------------------- |  | -----------------
|2000                                                                                                                        |  | 2001             
|Revenue                                                                                                                     |  | $ 77,812,334     
|Cost
      of revenue                                                                                                       |  | 54,948,513       
|                                                                                                                            |  |                  
|Gross
      profit                                                                                                          |  | 22,863,821       
|                                                                                                                            |  |                  
|Selling,
      general and administrative expenses
      (Note 6)                                                           |  | 16,724,600       
|Depreciation
      expense                                                                                                  |  | 856,410          
|Amortization
      expense (Note 3)                                                                                         |  | 1,166,537        
|                                                                                                                            |  |                  
|Total
      operating expenses                                                                                              |  | 18,747,547       
|Restructuring
      charge (Note 6)                                                                                         |  | 746,600          
|                                                                                                                            |  |                  
|Operating
      income                                                                                                      |  | 3,369,674        
|                                                                                                                            |  |                  
|Interest
      income                                                                                                       |  | 35,442           
|Interest
      expense (Note 4)                                                                                             |  | (1,460,042       
|                                                                                                                            |  |                  
|Net
      interest expense                                                                                                  |  | (1,424,600       
|                                                                                                                            |  |                  
|Other
      income (Note 6)                                                                                                 |  |                 
|                                                                                                                            |  |                  
|Income
      before income taxes                                                                                            |  | 1,945,074        
|Income
      taxes                                                                                                          |  | 797,480          
|                                                                                                                            |  |                  
|Net
      income                                                                                                            |  | $   1,147,594    
|                                                                                                                            |  |                  
|Net
      income per share:                                                                                                 |  |                  
|Basic                                                                                                                       |  | $            0.08
|                                                                                                                            |  |                  
|Diluted                                                                                                                     |  | $            0.08
|                                                                                                                            |  |                  
|Weighted
      average number of shares of common
        stockand
      potential dilutive securities
        outstanding: |  |                  
|Basic                                                                                                                       |  | 15,074,268       
|                                                                                                                            |  |                  
|Diluted                                                                                                                     |  | 15,074,268       
|                                                                                                                            |  |                  

|See accompanying notes to
consolidated financial statements.



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

|METRO INFORMATION
SERVICES, INC. AND SUBSIDIARIES Consolidated Balance Sheets (unaudited)
|-----------------------------------------------------------------------------------------

|                                                    | December
      31,
      2000 | June
      30,
      2001
|--------------------------------------------------- | ----------------------------- | -------------------------
|Assets                                              |                               | (Unaudited)              
|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               
|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,       |                              
|15,337,760
      shares at June 30, 2001            |                               | 152,227                  
|Paid
      in capital                               |                               | 40,995,597               
|Retained
      earnings                             |                               | 43,789,056               
|                                                    |                               |                          
|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)
|----------------------------------------------------------------------------------------------------------------------

|                                     
|-------------------------------------
|Common
Stock                         
|Shares                               
|Balance
      as of December 31, 2000
|                                     
|Net
      proceeds from issuance of  
|shares
      of common stock under   
|Employee
      Stock Purchase Plan   
|                                     
|Net
      income                     
|                                     
|                                     
|Balance
      as of June 30, 2001    
|                                     

|See accompanying notes to
consolidated financial statements.




5
|------------------------------------------------------------------

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

|                                                                               | 
|------------------------------------------------------------------------------ | 
|2000                                                                           | 
|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                               | 
|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                                                     | 
|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 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 June 30, 2001 and for the three-month and six-month
periods ended June 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 June 30, 2001 and the results of its
operations and its cash flows for the three-month and six-month periods ended
June 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 June 30, 2001,
other current assets consist of the following:
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                          
|------------------------------------------
|Gross
      sales and use tax receivable  
|Less
      allowance for doubtful accounts
|                                          
|Net
      sales and use tax receivable    
|Other
      taxes receivable              
|                                          
|Total
      other current assets          
|                                          

|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 June 30, 2001 was $75,129,646. 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 second quarter 2001, and the rates on such borrowings ranged from
4.9% to 6.5% on June 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.


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.
Accounting for these interest rate swaps did not have a material impact on the
Companys quarterly financial statements.


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.


The
Maximum Funded Debt to EBITDA ratio under our credit facilities is 4.0 to 1.0
through September 30, 2001. At June 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. The Company plans to reduce its debt level, reduce expenses
and negotiate a more favorable ratio by December 31, 2001 to avoid default under
its credit facilities at December 31, 2001. A default could have a material
adverse effect on the Companys business. The Company is currently
negotiating with its banks to restructure the credit facilities. As of June 30,
2001, approximately $10.9 million was available for additional borrowing without
default.
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|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 June 30, 2000        | Net Income
(Numerator) | Shares
Outstanding
(Denominator) | Earnings
Per Share
|----------------------------------------------- | ---------------------- | -------------------------------- | ------------------
|Basic
      Earnings Per Share                  |                        | $1,147,594                       |                   
|                                                |                        |                                  |                   
|Effect
      of Dilutive Securities - Incentive |                       
|Stock
      Options deemed outstanding          |                        |                                  |                   
|                                                |                        |                                  |                   
|Diluted
      Earnings Per Share                |                        | $1,147,594                       |                   
|                                                |                        |                                  |                   

|For
      the Three Months Ended June 30, 2001                                           | Net Income
(Numerator) | Shares
Outstanding
(Denominator) | Earnings
Per Share
|---------------------------------------------------------------------------------------- | ---------------------- | -------------------------------- | ------------------
|Basic
      Earnings Per Share                                                           |                        | $167,230                         |                   
|                                                                                         |                        |                                  |                   
|Effect
      of Dilutive Securities - Incentive
        Stock Options deemed outstanding |                        |                                  |                   
|                                                                                         |                        |                                  |                   
|Diluted
      Earnings Per Share                                                         |                        | $167,230                         |                   
|                                                                                         |                        |                                  |                   

|8
|-

|
|

|For the
      Six Months Ended June 30, 2000                                             | Net
Income
(Numerator) | Shares
Outstanding
(Denominator) | Earnings
Per Share
|---------------------------------------------------------------------------------------- | ---------------------- | -------------------------------- | ------------------
|Basic
      Earnings Per Share                                                           |                        | $2,311,061                       |                   
|                                                                                         |                        |                                  |                   
|Effect
      of Dilutive Securities  Incentive
        Stock Options deemed outstanding |                        |                                  |                   
|                                                                                         |                        |                                  |                   
|Diluted
      Earnings Per Share                                                         |                        | $2,311,061                       |                   
|                                                                                         |                        |                                  |                   

|For
the Six Months Ended June 30, 2001                                                   | Net Income
(Numerator) | Shares
Outstanding
(Denominator) | Earnings
Per Share
|---------------------------------------------------------------------------------------- | ---------------------- | -------------------------------- | ------------------
|Basic
      Earnings Per Share                                                           |                        | $     616                        |                   
|                                                                                         |                        |                                  |                   
|Effect
      of Dilutive Securities - Incentive
        Stock Options deemed outstanding |                        |                                  |                   
|                                                                                         |                        |                                  |                   
|Diluted
      Earnings Per Share                                                         |                        | $     616                        |                   
|                                                                                         |                        |                                  |                   

|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) for the two plans, which appears in the Statements of
Income under the caption Restructuring Charge. The charge represents
managements estimate of the ultimate obligations associated with executing
the plan at the time the estimates were made. The restructuring charge for costs
to exit certain facilities may change. The Company expects to complete all steps
in the two restructuring plans by May 4, 2002 and June 18, 2002, respectively.


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

|                                                 | Initial
Balance | Costs
incurred
through
June 30, 2001 | Revision
to
estimates | Balance
as of
June 30, 2001
|------------------------------------------------ | --------------- | ------------------------------------ | --------------------- | ---------------------------
|Cost
      to exit certain facilities            |                 | $124,034                             |                       | $                         
|Severance
      and termination related accruals |                 | 779,949                              |                       | 435,962                    
|                                                 |                 |                                      |                       |                            
|Total
      restructuring costs                  |                 | $903,983                             |                       | $   435,962                
|                                                 |                 |                                      |                       |                            

|As
a result of the closings and mergers, the Company identified leasehold
improvements that it would retire or abandon. The carrying value of these
retired and abandoned assets has been adjusted to net realizable value in
accordance with Financial Accounting Standards Board Opinion No. 121 and the
adjustment has been included as an expense in the second quarter 2001 Statements
of Income under the caption Selling, general and administrative
expenses. This adjustment totaled $26,000 ($14,040 net of tax benefit).


9
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|PART IITEM 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 and competition. 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 34 metropolitan markets in the United States and Puerto Rico. The
Companys 1,988 consultants, 61% of whom were salaried on June 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 June 30, 2001, the Company
performed IT services for 651 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 June 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.


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

|Between
June 30, 2000 and June 30, 2001, the number of full time consultants decreased
by 20.0% from 2,470 to 1,988. Management expects the impact of the second
quarter slowdown will also be felt in the third quarter. Third quarter 2001
revenue is expected to be $62 to $64 million. In addition, between June 30, 2000
and June 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.


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      
|-------------------------------------------------- |  | ---------------------------
|                                                   |  | Three
Months Ended
June 30,
|                                                   |  |                            
|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
      Change 
      2001 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                                   |                                              

|11
|--

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


Revenue.Revenue decreased $8.0 million, or 10.2%, to $69.8 million for the three
months ended June 30, 2001 from $77.8 million for the three months ended June
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 $4.0 million, or 7.4%, to $50.9
million for the three months ended June 30, 2001 from $54.9 million for the
three months ended June 30, 2000. As a percentage of revenue, cost of revenue
increased to 72.8% for the three months ended June 30, 2001 from 70.6% for the
three months ended June 30, 2000. This increase is primarily due to increases in
health and benefit costs of salaried consultants. Non-billable time increased
for salaried consultants for the three months ended June 30, 2001 compared to
the three months ended June 30, 2000. Salaried consultants are paid even when
not billing.


Gross
profit.Gross profit decreased $3.9 million, or 17.0%, to $19.0 million for
the three months ended June 30, 2001 from $22.9 million for the three months
ended June 30, 2000. As a percentage of revenue, gross profit decreased to 27.2%
for the three months ended June 30, 2001 as compared to 29.4% for the three
months ended June 30, 2000. The decline in revenue, combined with the increased
cost of revenue, lowered gross profit for the three months ended June 30, 2001.


Selling,
general and administrative expenses.Selling, general and administrative
expenses decreased $1.6 million, or 9.4%, to $15.1 million for the three months
ended June 30, 2001 from $16.7 million for the three months ended June 30, 2000.
As a percentage of revenue, selling, general and administrative expenses
increased to 21.7% for the three months ended June 30, 2001 from 21.5% for the
three months ended June 30, 2000. Cost reduction initiatives were implemented
during the three months ended June 30, 2001 to bring selling, general and
administrative expenses closer to historical levels. With the number of
consultants decreasing, cost reduction strategies were necessary. One time
costs for these strategies totaled $930,000 before tax. Of these costs, a
restructuring charge of $904,000 is reported as a separate line item (see
Restructuring charge. below) and $26,000 is included in selling,
general and administrative expenses. The $26,000 represents a write-down of the
value of retired or abandoned assets to net realizable value in accordance with
Financial Accounting Standards Board Opinion No. 121.


Depreciation
expense.Depreciation expense increased $44,000, or 5.1%, to $900,000 for
the three months ended June 30, 2001 from $856,000 for the three months ended
June 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% during the three months ended June 30,
2001 from 1.1% for the three months ended June 30, 2000.


Amortization
expense.Amortization expense increased $114,000, or 9.8%, to $1.3 million
for the three months ended June 30, 2001 from $1.2 million for the three months
ended June 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 three months ended June 30, 2001 from 1.5% for the three months ended
June 30, 2000.


Restructuring
charge.For the three months ended June 30, 2001, the Company recorded a
restructuring charge of $904,000 related to the cost reduction initiatives
approved May 4, 2001 and June 18, 2001. These costs consist of employee
severance pay and benefits, lease termination costs and excess fixed assets. The
charge represents managements estimate of the ultimate obligations
associated with executing the plans at the time the estimates were made. The
Company expects to complete all steps in the restructuring plans by May 4, 2002
and June 18, 2002, respectively. The June 18, 2001 plan included the sale of one
of the Companys offices resulting in a $1,000,000 gain before tax during
the three months ended June 30, 2001.


Operating
income.Operating income decreased $2.6 million, or 78.1%, to $737,000 for
the three months ended June 30, 2001 from $3.4 million for the three months
ended June 30, 2000. As a percentage of revenue, operating income decreased to
1.1% for the three months ended June 30, 2001 from 4.3% for the three months
ended June 30, 2000. The decline in operating income margin is primarily the
result of lower gross margins.


12
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Interest
income.Interest income decreased by $32,000, or 91.7%, to $3,000 for the
three months ended June 30, 2001 from $35,000 for the three months ended June
30, 2000.


Interest
expense.Interest expense decreased by $213,000, or 14.6%, to $1.2 million
for the three months ended June 30, 2001 from $1.5 million for the three months
ended June 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 $1.0 million, for the three months ended June
30, 2001 from $0 for the three months ended June 30, 2000. As a percentage of
revenue, other income was 1.4% for the three months ended June 30, 2001. The
sale of one of the Companys offices resulted in a $1,000,000 gain before
tax during the three months ended June 30, 2001. The sale of the office was part
of the cost reduction strategies initiatives approved May 4, 2001 and June 18,
2001.


Income
before income taxes.Income before income taxes decreased $1.4 million, or
74.7%, to $493,000 for the three months ended June 30, 2001 from $1.9 million
for the three months ended June 30, 2000. As a percentage of revenue, income
before income taxes decreased to 0.7% for the three months ended June 30, 2001
from 2.5% for the three months ended June 30, 2000.


Income
taxes. The Companys effective tax rate increased to 46.0% for the
three months ended June 30, 2001 as compared to 41.0% for the three months ended
June 30, 2000. The rate increase is the result of higher than expected
nondeductible expenses, which increased the Companys taxable income above
previous estimates, and nonfederal income taxes. Current tax expense is
calculated using book income plus permanent differences times the effective tax
rate. Income taxes decreased $472,000 or 59.2%, to $325,000 for the three months
ended June 30, 2001 from $797,000 for the three months ended June 30,
2000. As a percentage of revenue, income taxes decreased to 0.5% for the three
months ended June 30, 2001 from 1.0% for the three months ended June 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 $980,000, or 85.4%, to $167,000 for the three
months ended June 30, 2001 from $1.2 million for the three months ended June 30,
2000. As a percentage of revenue, net income decreased to 0.2% for the three
months ended June 30, 2001 from 1.5% for the three months ended June 30, 2000.


Earnings
per share. Diluted earnings per share decreased $0.07, or 87.5%, to $0.01
for the three months ended June 30, 2001 from $0.08 for the three months ended
June 30, 2000.


Six
Months Ended June 30, 2001 Compared to Six Months Ended June 30, 2000


Revenue.Revenue decreased $9.4 million, or 5.9%, to $148.6 million for the six
months ended June 30, 2001 from $158.0 million for the six months ended June 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 $5.3 million, or 4.7%, to $107.4
million for the six months ended June 30, 2001 from $112.7 million for the six
months ended June 30, 2000. This increase is primarily due to increases in
health and benefit costs of salaried consultants. As a percentage of revenue,
cost of revenue increased to 72.3% for the six months ended June 30, 2001 from
71.3% for the six months ended June 30, 2000.


Gross
profit.Gross profit decreased $4.1 million, or 9.0%, to $41.2 million for
the six months ended June 30, 2001 from $45.3 million for the six months ended
June 30, 2000. As a percentage of revenue, gross profit decreased to 27.7% for
the six months ended June 30, 2001 from 28.7% for the six months ended June 30,
2000. The decline in revenue combined with the increased cost of revenue,
lowered gross profit for the six months ended June 30, 2001.


Selling,
general and administrative expenses.Selling, general and administrative
expenses remained at $33.9 million for the six months ended June 30, 2001
compared to the six months ended June 30, 2000. As a percentage of revenue,
selling, general and administrative expenses increased to 22.8% for the six
months ended June 30, 2001 from 21.4% for the six months ended June 30, 2000.
Cost reduction initiatives were implemented during the second quarter ended June
30, 2001 to bring selling, general and administrative expenses closer to
historical levels. With the number of consultants decreasing, cost reduction
strategies were necessary. One time costs for these strategies totaled $930,000
before tax. Of these costs, a restructuring charge of $904,000 is reported as a
separate line item (see Restructuring charge. below) and $26,000 is
included in selling, general and administrative expenses. The $26,000 represents
a write-down of the value of retired or abandoned assets to net realizable value
in accordance with Financial Accounting Standards Board Opinion No. 121.


13
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Depreciation
expense.Depreciation expense increased $119,000, or 7.3%, to $1,762,000 for
the six months ended June 30, 2001 from $1,643,000 for the six months ended June
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 1.2% for the six months ended June 30, 2001 from 1.0% for
the six months ended June 30, 2000.


Amortization
expense.Amortization expense increased $224,000, or 9.6%, to $2.5 million
for the six months ended June 30, 2001 from $2.3 million for the six months
ended June 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 1.7%
for the six months ended June 30, 2001 from 1.5% for the six months ended June
30, 2000.


Restructuring
charge.For the six months ended June 30, 2001, the Company recorded a
restructuring charge of $904,000 related to the cost reduction initiatives
approved May 4, 2001 and June 18, 2001. These costs consist of employee
severance pay and benefits, lease termination costs and excess fixed assets. The
charge represents managements estimate of the ultimate obligations
associated with executing the plans at the time the estimates were made. The
Company expects to complete all steps in the restructuring plans by May 4, 2002
and June 18, 2002, respectively. The June 18, 2001 plan included the sale of one
of the Companys offices resulting in a $1,000,000 gain before tax during
the six months ended June 30, 2001.


Operating
income.Operating income decreased $4.7 million, or 69.8%, to $2.0 million
for the six months ended June 30, 2001 from $6.7 million for the six months
ended June 30, 2000. As a percentage of revenue, operating income decreased to
1.4% for the six months ended June 30, 2001 from 4.3% for the six months ended
June 30, 2000. The decline in operating income margin is primarily the result of
lower gross margins.


Interest
income.Interest income decreased by $53,000, or 65.8%, to $28,000 for the
six months ended June 30, 2001 from $81,000 for the six months ended June 30,
2000.


Interest
expense.Interest expense decreased by $217,000, or 7.6% to $2.6 million for
the six months ended June 30, 2001 from $2.8 million for the six months ended
June 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 $1.0 million, for the six months ended June
30, 2001 from $0 for the six months ended June 30, 2000. As a percentage of
revenue, other income was 0.7% for the six months ended June 30, 2001. The sale
of one of the Companys offices resulted in a $1,000,000 gain before tax
during the six months ended June 30, 2001. The sale of the office was part of
the cost reduction initiatives approved May 4, 2001 and June 18, 2001.


Income
before income taxes.Income before income taxes decreased $3.5 million, or
89.6%, to $407,000 for the six months ended June 30, 2001 from $3.9 million for
the six months ended June 30, 2000. As a percentage of revenue, income before
income taxes decreased to 0.3% for the six months ended June 30, 2001 from 2.5%
for the six months ended June 30, 2000.


Income
taxes. The Companys effective tax rate was 46% for the six months
ended June 30, 2001 and 41% for the six months ended June 30, 2000. The rate
increase is the result of higher than expected nondeductible expenses, which
increased the Companys taxable income above previous estimates, and
nonfederal income taxes. Current tax expense is calculated using book income
plus permanent differences times the effective tax rate. Income taxes decreased
$1.2 million or 74.4%, to $407,000 for the six months ended June 30, 2001 from
$1.6 million for the six months ended June 30, 2000. As a percentage of revenue,
income taxes decreased to 0.3% for the six months ended June 30, 2001 from 1.0%
for the six months ended June 30, 2000. These decreases are a result of the
earnings decline the Company has experienced over the last 12 months.


14
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Net
income. Net income decreased $2.3 million, or 100%, to $616 for the six
months ended June 30, 2001 from $2.3 million for the six months ended June 30,
2000. As a percentage of revenue, net income decreased to 0.0% for the six
months ended June 30, 2001 from 1.5% for the six months ended June 30, 2000.


Earnings
per share. Diluted earnings per share decreased $0.15, or 100%, to $0.0 for
the six months ended June 30, 2001 from $0.15 for the six months ended June 30,
2000.


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 June 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:     |  |                    |                        |       
|June      |  | 52,391             |                        | 16,375
|September |  | 56,593             |                        | 17,296
|December  |  | 57,799             |                        | 17,553
|1999:     |  |                    |                        |       
|March     |  | 72,473             |                        | 20,970
|June      |  | 78,309             |                        | 23,023
|September |  | 81,253             |                        | 24,020
|December  |  | 82,611             |                        | 23,951
|2000:     |  |                    |                        |       
|March     |  | 80,197             |                        | 22,411
|June      |  | 77,812             |                        | 22,864
|September |  | 77,880             |                        | 23,614
|December  |  | 77,702             |                        | 23,135
|2001:     |  |                    |                        |       
|March     |  | 78,767             |                        | 22,212
|June      |  | 69,849             |                        | 18,973

|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 $8,754,195 for the six months ended June 30,
2001 and consisted primarily of non-cash items of $5,194,817 and a decrease in
accounts receivable of $4,542,799, offset by a decrease in accrued compensation
and benefits of $1,701,261. The Company had working capital of $38,726,735 at
June 30, 2001 compared to $42,647,009 at December 31, 2000.


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

|Net
cash used in investing activities was $1,439,138 for the six months ended June
30, 2001. The Company spent $1,439,138 on normal acquisitions of property and
equipment used in operations.


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 June 30, 2001 was $75,129,646, a reduction of
$8,313,375 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 second quarter 2001, and the rates on such borrowings
ranged from 4.9% to 6.5% on June 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.


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.
Accounting for these interest rate swaps did not have a material impact on the
Companys quarterly financial statements.


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.


The
Maximum Funded Debt to EBITDA ratio under our credit facilities is 4.0 to 1.0
through September 30, 2001. At June 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. The Company plans to reduce its debt level, reduce expenses
and negotiate a more favorable ratio by December 31, 2001 to avoid default under
its credit facilities at December 31, 2001. A default could have a material
adverse effect on the Companys business. The Company is currently
negotiating with its banks to restructure the credit facilities. As of June 30,
2001, approximately $10.9 million was available for additional borrowing without
default.


The
Company sold 115,048 shares of stock under the Metro Information Services, Inc.
Employee Stock Purchase Plan for an aggregate purchase price of $486,788 during
the six months ended June 30, 2001 and 83,760 shares for $841,442 during the six
months ended June 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. 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of.


16
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|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.


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.


And
finally, any unamortized negative goodwill existing at the date Statement 142 is
adopted must be written off as the cumulative effect of a change in accounting
principle.


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 $3.3 million and $1.8 million for the year ended December 31, 2000 and the
six months ended June 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.




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. At the
measurement date, a mark to market adjustment was not necessary and the hedge
instruments were considered fully effective.


17
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|The
Company experienced slower demand for its services during the second quarter of
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 the first half of 2001. Current economic
conditions could result in additional accounts becoming doubtful that are
current and considered collectible as of June 30, 2001. Accounts receivable will
be monitored closely during 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.


18
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|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
|------- |  | ---------------------------------------------------

| |  | At the
Annual Meeting of Shareholders of Metro Information Services, Inc. held on June 12, 2001
the following matters were voted on with the results indicated below.
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | 1) Election
of one Class 1 Director to serve for a term expiring 2003 or until a successor is elected.
| |  | ------------------------------------------------------------------------------------------------------

| | FOR                    | WITHHELD  
| | ---------------------- | ----------
| | John
      R.Turbyfill | 14,287,143

| |  | Election
of two Class 2 Directors to serve for a term expiring 2004 or until a successor is
elected.
| |  | ----------------------------------------------------------------------------------------------------

| | FOR                           | WITHHELD  
| | ----------------------------- | ----------
| | Ray
            E. Becker     | 14,151,289
| | Andrew
            J. Downing | 13,287,980

| |  | The term
of office of directors John H. Fain, Robert J. Eveleigh and A. Eugene Loving, Jr.
continued after the meeting.
| |  | -----------------------------------------------------------------------------------------------------------------------

| |  | 2) Amendment
of the Metro Information Services, Inc. Employee Stock Purchase Plan.
| |  | ----------------------------------------------------------------------------------

|FOR        | AGAINST | ABSTAIN | BROKER
      NON-VOTES
|---------- | ------- | ------- | ----------------------
|12,500,165 |         | 379,812 |                       

| |  | 3) Approval
of the Amended and Restated Metro Information Services, Inc. 1997 Stock Option Plan.
| |  | ------------------------------------------------------------------------------------------------

|FOR        | AGAINST | ABSTAIN   | BROKER
      NON-VOTES
|---------- | ------- | --------- | ----------------------
|11,862,537 |         | 1,016,076 |                       

| |  | 4) Ratification
of the appointment of KPMG LLP as Independent Auditors for the Company for the year
ending December 31, 2001.
| |  | -----------------------------------------------------------------------------------------------------------------------------

| | FOR        | AGAINST | ABSTAIN | 
| | ---------- | ------- | ------- | 
| | 14,317,913 |         | 217,342 | 

|ITEM 5. |  | OTHER INFORMATION
|------- |  | -----------------

| |  | None
| |  | ----

|19
|--

|
|

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

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

| |  | 10.1   Employment
Agreement dated as of May 9, 2001 between Registrant and Scott D. Mayo.
| |  | -----------------------------------------------------------------------------------------

| |  | 10.2   Employment
Agreement dated as of May 9, 2001 between Registrant and Mark W. Scofield.
| |  | --------------------------------------------------------------------------------------------

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

| |  | None
| |  | ----

|20
|--

|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
8th day of August, 2001.
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                                                              |                                                                                | Metro
      Information Services, Inc. 
      By                        /s/
      John H. Fain
|----------------------------------------------------------------------------- | ------------------------------------------------------------------------------ | ----------------------------------------------------------------------------------------------
|                                                                              |                                                                               
|John
      H. Fain
                         Principal
      Executive Officer
|                                                                             
|By                    /s/
      Robert J. Eveleigh                           
|                                                                              |                                                                               
|                                                                              | Robert
      J. Eveleigh
                    Principal
      Financial Officer
|                                                                             

|21
|--