Nexus will continue to own all trains on the network
Two bidders have been shortlisted to operate trains and stations on the Tyne and Wear Metro.
Germany's DB Regio and an in-house team from network owner Nexus will now be asked to revise their tenders for the contract which starts in April 2010.
The successful contractor will manage and maintain services, trains and stations for seven to nine years.
Nexus will continue to own all trains, set fares and co-ordinate improvements to the Metro's 60 stations.
Ken Mackay, director of rail and infrastructure at Nexus, said: "Both bidders could offer a very high standard of public service in both price and quality.
"We will now seek to find the 'best of the best' by asking each to further revise and confirm their proposals.
"These bidders stand out for their strong understanding of the Metro Operations business, commitment to improve customer service, and impressive plans to upgrade the Metrocar train fleet while maintaining high standards of punctuality and reliability on our behalf."
Unions have expressed concern at the process, claiming the network - used by about 40 million people each year - is being privatised.