<PAGE>

                     U.S. SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                   FORM 10-QSB

(Mark One)

[X]  QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
     OF 1934

                      For the Quarter Ended March 31, 2002.

                                       OR

[_]  TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
     OF 1934

For the transition period from _____ to _____

Commission file number:  000-29995
                         ---------


                           DIRECT III MARKETING, INC.
         ---------------------------------------------------------------
        (Exact name of small business issuer as specified in its charter)

                Delaware                                 33-0851387
     --------------------------------        ----------------------------------
    (State or other jurisdiction of         (IRS employer identification number)
     incorporation or organization)

         12760 High Bluff Drive, Suite 210, San Diego, California 92130
         --------------------------------------------------------------
                    (Address of principal executive offices)

                                 (858) 793-4151
               --------------------------------------------------
              (Registrant's telephone number, including area code)

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

Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the last practicable date: Shares of Common Stock, $0.001
par value, outstanding on March 31, 2002: 9,656,417, including treasury shares.

Transitional Small Business Format:  YES [_] NO [X]

<PAGE>

                                TABLE OF CONTENTS
<TABLE>
<CAPTION>

                                                                                                              Page
<S>                                                                                                           <C>
PART I. FINANCIAL INFORMATION ...............................................................................    1

     Item 1. Financial Statements ...........................................................................    1
             Consolidated Balance Sheets ....................................................................    1
             Consolidated Statements of Operations ..........................................................    2
             Consolidated Statement of Stockholders' Equity (Deficit) .......................................    3
             Consolidated Statements of Cash Flows ..........................................................    4
             Notes to Consolidated Financial Statements .....................................................    5

     Item 2. Management's Discussion and Analysis of Financial Condition and
             Results of Operations ..........................................................................    7

PART II. OTHER INFORMATION ..................................................................................    8

     Item 1. Legal Proceedings ..............................................................................    8

     Item 2. Changes In Securities ..........................................................................    8

     Item 3. Defaults Upon Senior Securities ................................................................    8

     Item 4. Submission of Matters to a Vote of Security Holders ............................................    8

     Item 5. Other Information ..............................................................................    8

     Item 6. Exhibits and Reports on Form 8-K ...............................................................    8
</TABLE>

                                       i

<PAGE>

PART I.  FINANCIAL INFORMATION

Item 1.  Financial Statements


                           DIRECT III MARKETING, INC.

                          Consolidated Balance Sheets

<TABLE>
<CAPTION>
                                                                                                   March 31,            December 31,
                                                                                                      2002                 2001
                                                                                                  (Unaudited)            (Audited)

                                                   ASSETS
<S>                                                                                             <C>                   <C>
Student loans, net                                                                              $ 181,003,571         $  44,446,940
Warehouse loan facility advances                                                                    6,036,327             4,232,634
Cash and cash equivalents                                                                             695,354             1,705,113
Interest and other receivables                                                                      1,162,801               339,376
Property and equipment, net                                                                           995,253               409,957
Deferred financing costs                                                                              153,333               115,556
Other                                                                                                 221,448               174,729
                                                                                                -------------         -------------

Total assets                                                                                    $ 190,268,087         $  51,424,305
                                                                                                =============         =============

                               LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)

Liabilities
   Accounts payable                                                                             $   1,935,611         $     530,842
   Accured expenses and other liabilities                                                           1,990,270               190,375
   Warehouse loan facility                                                                        190,000,000            50,000,000
                                                                                                -------------         -------------

Total liabilities                                                                                 193,925,881            50,721,217
                                                                                                -------------         -------------

Commitments and contingencies                                                                               -                     -


Stockholders' equity (deficit):
   Preferred stock-$.001 par value, 10,000,000 shares authorized                                            -                     -
   Common stock-$.001 par value, 40,000,000 shares authorized
     9,656,417 and 9,156,417 shares issued and outstanding, respectively                                9,656                 9,156
   Additional paid in capital                                                                       6,684,227             6,214,727
   Accumulated deficit                                                                            (10,351,677)           (5,520,795)
                                                                                                -------------         -------------
Total stockholders' equity (deficit)                                                               (3,657,794)              703,088
                                                                                                -------------         -------------

Total liabilities and stockholders' equity (deficit)                                            $ 190,268,087         $  51,424,305
                                                                                                =============         =============
</TABLE>

                See accompanying notes to financial statements

                                       1

<PAGE>

                           DIRECT III MARKETING, INC.

                      Consolidated Statements of Operations

               For the Three Months Ended March 31, 2002 and 2001

                                   (Unaudited)

<TABLE>
<CAPTION>
                                                           2002                 2001
                                                   -------------------- ------------------
<S>                                                 <C>                  <C>
Interest income:
    Student loans, net                              $        1,250,260   $              -
    Investments                                                 24,008                  -
                                                   -------------------- ------------------
                                                             1,274,268                  -
Cost of interest income:
    Interest and related expenses                              670,942                  -
    Loan servicing and other fees                              443,189                  -
                                                   -------------------- ------------------
                                                             1,114,131                  -

Net interest income                                            160,137                  -
                                                   -------------------- ------------------

Other income
    Gain on sale of student loans                                4,076                  -
    Other                                                        1,858              8,906
                                                   -------------------- ------------------
Total other income                                               5,934              8,906

Operating expenses:
    General and administrative                               1,497,673            386,824
    Sales and marketing                                      3,498,480             42,993
                                                   -------------------- ------------------
Total operating expenses                                     4,996,153            429,817
                                                   -------------------- ------------------

Loss before income tax provision                            (4,830,082)          (420,911)

Income tax provision                                               800                800
                                                   -------------------- ------------------

Net loss                                            $       (4,830,882)  $       (421,711)
                                                   ==================== ==================

Net loss per share:

    Basic and diluted                               $            (0.51)  $          (0.10)
                                                   ==================== ==================

Weighted average common shares outstanding:

    Basic and diluted                                        9,406,417          4,410,250
                                                   ==================== ==================
</TABLE>

                 See accompanying notes to financial statements

                                       2

<PAGE>

                           DIRECT III MARKETING, INC.

            Consolidated Statement of Stockholders' Equity (Deficit)

                    For the Three Months Ended March 31, 2002

                                   (Unaudited)

<TABLE>
<CAPTION>
                                      Common Stock                   Additional         Accumulated
                                 Number of
                                  Shares            Amount         Paid in Capital       (Deficit)             Total
                            -----------------  -----------------  -----------------  -----------------  -----------------
<S>                              <C>            <C>                <C>                <C>                <C>
Balance
    December 31, 2001             9,156,417     $       9,156      $   6,214,727      $  (5,520,795)     $     703,088


Issuance of common stock            500,000               500            469,500                               470,000


Net loss
    March 31, 2002                                                                       (4,830,882)        (4,830,882)
                            -----------------  -----------------  -----------------  -----------------  -----------------

Balance
    March 31, 2002                9,656,417     $       9,656      $   6,684,227      $ (10,351,677)     $  (3,657,794)
                            =================  =================  =================  =================  =================
</TABLE>

                 See accompanying notes to financial statements

                                       3

<PAGE>

                           DIRECT III MARKETING, INC.

                      Consolidated Statements of Cash Flows

               For the Three Months Ended March 31, 2002 and 2001

                                   (Unaudited)


<TABLE>
<CAPTION>
                                                             2002                 2001
                                                   --------------------   ------------------
<S>                                                 <C>                        <C>
Cash flows from operating activities:
    Net loss                                        $        (4,830,882)     $      (421,711)
    Adjustments to reconcile net loss to net cash
      used by operations:
        Depreciation and amortization                            66,326                1,284
      (Increase) decrease  in assets:
         Interest and other receivables                        (823,425)                 400
         Other assets                                          (105,306)                (523)
      Increase (decrease) in liabilities:
         Accounts payable                                     1,404,768               82,876
         Accrued expenses                                     1,799,895                2,516
                                                   --------------------   ------------------
Net cash used by operating activities                        (2,488,624)            (335,158)
                                                   --------------------   ------------------

Cash flows from investing activities:
    Purchase of student loans                              (136,556,631)                   -
    Warehouse loan facility advances                         (1,803,693)                   -
    Acquisition of property and equipment                      (630,811)                   -
                                                   --------------------   ------------------
Net cash used in investing activities                      (138,991,135)                   -
                                                   --------------------   ------------------

Cash flows from financing activities:
    Proceeds from credit facility                           140,000,000              850,000
    Notes receivable from stockholders                                -               (3,865)
    Proceeds from issuance of stock                             470,000                    -
                                                   --------------------   ------------------
Net cash provided by financing activities                   140,470,000              846,135
                                                   --------------------   ------------------

Net increase in cash                                         (1,009,759)             510,977

Cash and cash equivalents at beginning of period              1,705,113              279,181
                                                   --------------------   ------------------

Cash and cash equivalents at end of period          $           695,354      $       790,158
                                                   ====================   ==================
</TABLE>

                 See accompanying notes to financial statements

                                       4

<PAGE>

                           Direct III Marketing, Inc.
                   Notes to Consolidated Financial Statements

                                 March 31, 2002
                                   (Unaudited)

Note 1 - Statement of Accounting Principles

         The financial results included in this report are stated in conformity
         with accounting principles generally accepted in the United States and
         are unaudited but include all normal recurring adjustments that Direct
         III Marketing, Inc. (the Company), considers necessary for a fair
         presentation of the results for such periods. These interim figures are
         not necessarily indicative of results for a full year.

         These financial statements include the accounts of Direct III
         Marketing, Inc., Student Loan Xpress, Inc., a wholly owned subsidiary
         of the Company, Grad Partners, Inc., a wholly owned subsidiary of the
         Company, and Grad Partners Premier, LLC. Grad Partners, Inc. is the
         sole member of Grad Partners Premier, LLC. All significant
         intercompany accounts and transactions have been eliminated in
         consolidation.

         Refer to the financial statements in the Form 10KSB, filed March 29,
         2002, for the year ended December 31, 2001 for additional details of
         the financial position of Direct III Marketing, Inc., as well as a
         description of the accounting policies which have been continued
         without material change. The details included in the notes have not
         changed except as a result of normal transactions in the interim and
         the events mentioned in the footnotes below.

         Certain accounts in the prior year financial statements have been
         reclassified for comparative purposes to conform to presentation in the
         current-year financial statements.

Note 2 - Liquidity and Business Risk

         The Company's ability to continue business is subject to a variety of
         factors, which include, among other things, the Company's ability to
         raise working capital and to generate profitable operations from the
         student loan business. The accompanying financial statements have been
         prepared assuming the Company will continue as a going concern and will
         be able to fund Company operations and any possible settlement required
         by the arbitration described in Note 6, below.

Note 3 - Warehouse Loan Facility and Student Loans

         There is a warehouse loan facility with a financial institution to fund
         the purchase of student loans. The maximum facility amount is
         $350,000,000. $190,000,000 has been advanced as of March 31, 2002.
         Interest shall accrue during the collection period at the CP Rate or
         the Alternate Base Rate as defined in the Indenture. The Alternate Base
         Rate is the higher of the prime rate or the Federal Funds Rate plus
         0.50%. The CP Rate is determined using the discount rate for Commercial
         Paper Notes and related commissions and fees. As of March 31, 2002, the
         Company had purchased student loans of approximately $181,000.000. The
         Company has recorded a loan loss reserve of approximately $216,000.

Note 4 - Indenture Fees

         There are certain fees payable in connection with the Indenture. These
         are commitment fees, program fees, an annual administration fee, and
         certain Indenture Trustee fees. Where applicable, these fees are
         expensed over the appropriate time period.

                                       5

<PAGE>

Note 5 - Sale of Common Stock

        During the quarter ended March 31, 2002 the Company received proceeds of
        $470,000, net of issuance costs, related to the purchase of 500,000
        shares of common stock.

Note 6 - Acquisition

        The Company had a signed letter of intent on January 26, 2001 to acquire
        a student loan marketing company for cash and shares of common stock of
        the Company. The acquisition was not consummated and the Company has
        agreed to arbitrate the possible payment of a break-up fee of $500,000.
        Management believes the Company will be successful on the merits of the
        issues being arbitrated.

                                       6

<PAGE>

Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.

The Management's Discussion and Analysis of Financial Condition and Results of
Operations should be read in conjunction with, and is qualified in its entirety
by, the Company's Financial Statements and the Notes thereto included in this
report. This discussion contains certain forward-looking statements that involve
substantial risks and uncertainties. When used in this report, the words
"anticipate," "believe," "estimate," "expect" and similar expressions as they
relate to the Company or its management are intended to identify such
forward-looking statements. The Company's actual results, performance or
achievements could differ materially from those expressed in, or implied by,
these forward-looking statements due to, among other things, changes in the
interest rate or changes in the regulations relating to federal guarantees of
student loans. Historical operating results are not necessarily indicative of
the trends in operating results for any future period.

The Company was organized and commenced operations in March 1999. The Company is
in the business of providing products, services and solutions to the Federally
guaranteed student loan industry. The Company intends on becoming a full service
provider of financial aid products to students, parents and schools. This will
include, but is not limited to, student financial aid counseling, debt
management, loan origination, loan servicing and secondary market liquidity
management. The Company will also look at unique acquisitions that can provide
for the marketing, origination and servicing of federally guaranteed student
loans where management's experience and expertise can accelerate the
acquisition's growth prospects.

In September 2001, through its wholly-owned subsidiaries Grad Partners, Inc. and
Education Funding Resources, LLC (formerly known as Grad Partners Premier, LLC),
the Company began operations related to originating, purchasing, and providing
services related to the student loan industry. In January 2002, the Company
initiated business operation of its subsidiary, Student Loan Xpress, Inc., which
focuses on marketing the Company's student loan business to colleges and
universities. The Company, through these subsidiaries, will originate or
purchase Federal Family Education Loan Program (FFELP) student loans that are
eligible for guarantee from the Department of Education, HEAL (Health Education
Assistance Loan) loans eligible for guarantee by the Secretary of Health and
Human Services, Federally guaranteed consolidation loans and certain other
eligible student loans. To facilitate originating and purchasing of student
loans, in August 2001, the Company arranged a warehouse loan facility with a
financial institution. Additionally, the Company has established relationships
with certain entities to act as administrator, indenture trustee, eligible
lender trustee, and servicer for the student loans.

RESULTS OF OPERATIONS

For the three months ended March 31, 2002 and 2001

Revenue

The revenues of the Company are generated from the spread between interest
earned on student loans and the cost of borrowing. Student loan operations
during the three months ended March 31, 2002 resulted in gross interest income
of $1,274,268 and interest costs of $1,114,131 resulting in net interest income
of $160,137. The Company began purchasing and marketing student loans in
September, 2001. No revenues were generated during the three months ended March
31, 2001 nor were any related loan financing expenses incurred. In addition, the
Company can generate revenues through the sale of student loans. During the
three months ended March 31, 2002 approximately $4,100 was booked as gain on the
sale of student loans. No revenues were generated from the sale of student loans
during the three months ended March 31, 2001.

General and Administrative Expenses

The Company incurred general and administrative expenses of approximately
$1,498,000 and $387,000 for the three months ended March 31, 2002 and 2001,
respectively. General and administrative expenses are those expenses associated
with the infrastructure that supports the student loan operations, including but
not limited to, consulting, rents and utilities, office supplies, and the
Company's administrative and research and development employees. The increase in
general and administrative expenses in the first quarter of 2002 compared with
2001 was due to additional expenses incurred in connection with the continued
growth of the Company's operations related to originating and purchasing student
loans. These increases included the addition of general and administrative, as
well as, research and development staff, consulting expenses and legal costs
necessary to facilitate the Company's rapid growth. General and administrative
expenses for the quarter ended March 31, 2001 were related to potential
acquisitions.

The Company anticipates that it will incur increased general and administrative
expenses as its operations continue to grow.

Sales and Marketing Expenses

The Company incurred sales and marketing expenses of approximately $3,498,000
and $43,000 for the three months ended March 31, 2002 and 2001, respectively.
Sales and marketing expenses include costs incurred in marketing the Company's
student loan services through marketing partners, direct mailings and sales and
call center employees. The increase in sales and marketing expenses in the first
quarter of 2002 compared with 2001 was due to additional expenses incurred in
connection with setting up and expansion of the student loan operations through
increased sales and call center staff, an increased volume of applications
processed by the Company's marketing partners and an increased direct marketing
effort through direct mailings. Sales and marketing expenses for the quarter
ended March 31, 2001 were related to potential acquisitions.

Other Income

Other income (primarily interest income not related to the Company's student
loan business) was approximately $1,858 and $8,900 for the three months ended
March 31, 2002 and 2001, respectively. The decrease in other income is due to
lower cash balances and lower interest rates for the three months ended March
31, 2002.

Net Losses

We incurred net losses of approximately $4,831,000 and $422,000 for the three
months ended March 2002 and 2001, respectively. The increase in net losses in
2002 from 2001 was attributable to increased operating and marketing expenses as
the result of the continued growth of our student loan operations in the quarter
ended March 31, 2002.

Acquisition

Effective January 26, 2001, the Company had a signed letter of intent to acquire
a student loan marketing company for cash and shares of common stock of the
Company. The acquisition was not consummated and the Company has agreed to
arbitrate the possible payment of a break-up fee of $500,000. Management
believes, but cannot assure, that the Company will not have to make any payments
related to the break-up fee.

Liquidity and Capital Resources

At March 31, 2002, the Company had cash and cash equivalents of approximately
$695,354 (excluding warehouse loan facility advances). Since inception the
Company has financed its operations from debt and equity financings. During the
three months ended March 31, 2002, the Company used cash of approximately
$2,490,000 to fund its operations. During the three months ended March 31, 2002,
the Company acquired property and equipment of approximately $631,000. As of
March 31, 2002, the Company has been advanced $190,000,000 from the warehouse
loan facility to purchase student loans. As of March 31, 2002, the Company had
purchased approximately $180,000,000 in student loans. During the quarter ended
March 31, 2002, the Company received proceeds of $470,000, net of issuance
costs, related to the purchase of 500,000 shares of common stock for $1.00 per
share.

Management believes that the Company has sufficient cash available to meet
expenses in the foreseeable future, including the potential payment, if any, of
the break-up fee relating to the acquisition discussed above. In the opinion of
management, the Company will be able to improve its profitability and continue
to raise adequate capital to meet its working capital requirements. The Company
has a $500,000 line of credit available for working capital needs. Management
believes additional working capital, if needed, can be raised through an
additional private security offering.

<PAGE>

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

        Effective January 26, 2001, the Company had a signed letter of intent to
acquire a student loan marketing company for cash and shares of common stock of
the Company. The acquisition was not consummated and the Company has agreed to
arbitrate the possible payment of a break-up fee of $500,000. Management
believes, but cannot assure, that the Company will not have to make any payments
related to the break-up fee.

Item 2. Changes In Securities

    During the quarter ended March 31, 2002, the Company received proceeds of
$470,000, net of issuance costs, related to the sale of 500,000 shares of common
stock for $1.00 per share and the issuance of warrants for an additional 250,000
shares. These warrants have an exercise price of $1.00 per share and are
exercisable for three years from the date of issuance. This sale was made
pursuant to an exemption from registration under Section 4(2) of the Securities
Act of 1933.

     During the quarter ended March 31, 2002, the Company granted additional
stock options under its Stock Option Plan. The Company granted incentive stock
options during the quarter for the purchase of 773,500 shares at the fair market
value at date of grant. All employee stock options granted vest over three years
and expire at the end of ten years. The exercise price was determined by the
Compensation Committee of the Board of Directors pursuant to the provisions of
the Stock Option Plan.

Item 3. Defaults Upon Senior Securities

        Not Applicable.

Item 4. Submission of Matters to a Vote of Security Holders

        Not Applicable.

Item 5. Other Information

        Not Applicable.

Item 6. Exhibits and Reports on Form 8-K

        Not Applicable.

                                       9

<PAGE>

                                   SIGNATURES

     In accordance with Section 13 or 15(d) of the Securities Exchange Act of
1934, the Registrant has duly caused this Report to be signed on its behalf by
the undersigned in the capacity indicated, hereunto duly authorized.

Date: May 13, 2002                     DIRECT MARKETING, INC.


                                       By: /s/ James G. Clark

                                               _________________________________
                                       Name:   James G. Clark
                                       Title:  Chief Financial Officer
                                               (Principal Financial and
                                               Accounting Officer)

                                       10