<PAGE>

                      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 June 30, 2001.


                                       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
 incorporation or organization)                           identification number)

        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 August 1, 2001:  4,410,250.

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 For the Three Months ended June 30, 2001
             and 2000...............................................................................   2
             Consolidated Statements of Stockholders' Equity (Deficit)..............................   3
             Consolidated Statements of Cash Flows..................................................   4
             Consolidated Statements of Operations For the Six Months ended June 30, 2001
             and 2000...............................................................................   5
             Notes to Consolidated Financial Statements.............................................   6

     Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations..   8

PART II. OTHER INFORMATION..........................................................................  11

     Item 1. Legal Proceedings......................................................................  11

     Item 2. Changes In Securities..................................................................  11

     Item 3. Defaults Upon Senior Securities........................................................  11

     Item 4. Submission of Matters to a Vote of Security Holders....................................  11

     Item 5. Other Information......................................................................  11

     Item 6. Exhibits and Reports on Form 8-K.......................................................  11
</TABLE>
<PAGE>

                         PART I. FINANCIAL INFORMATION

ITEM 1. Financial Statements

                          DIRECT III MARKETING, INC.

                          Consolidated Balance Sheets


<TABLE>
<CAPTION>
                                                                                  June 30,          December 31,
                                                                                    2001                2000
                                                                                 (Unaudited)          (Audited)
<S>                                                                              <C>                <C>
                                                     ASSETS

Current assets:
     Cash                                                                       $    275,627        $    279,181
     Accounts receivable                                                                 400                 800
     Prepaid expenses                                                                 35,432              49,315
                                                                                ------------        ------------
Total current assets                                                                 311,459             329,296
                                                                                ------------        ------------

Property and equipment, net                                                           96,449              18,940
                                                                                ------------        ------------

Other assets                                                                           9,694               4,259
                                                                                ------------        ------------

Total assets                                                                    $    417,602        $    352,495
                                                                                ============        ============

                                 LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)

Current liabilities:
     Accounts payable                                                           $     38,183        $     60,159
     Accrued expenses                                                                127,862              31,238
     Other current liabilities                                                         5,009               1,364
     Notes payable                                                                   850,000                   -
                                                                                ------------        ------------
Total current liabilities                                                          1,021,054              92,761
                                                                                ------------        ------------

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
        4,410,250 shares issued and outstanding,                                       4,410               4,410
     Additional paid in capital                                                    1,875,590           1,875,590
     Retained deficit                                                             (2,249,384)         (1,393,927)
                                                                                ------------        ------------
                                                                                    (369,384)            486,073
     Less notes receivable from stockholders                                        (234,068)           (226,339)
                                                                                ------------        ------------
Total stockholders' equity (deficit)                                                (603,452)            259,734
                                                                                ------------        ------------
Total liabilities and stockholders' equity (deficit)                            $    417,602        $    352,495
                                                                                ============        ============
</TABLE>

                 See accompanying notes to financial statements

                                       1
<PAGE>

                          DIRECT III MARKETING, INC.

                     Consolidated Statements of Operations

               For the Three Months Ended June 30, 2001 and 2000

                                  (Unaudited)

<TABLE>
<CAPTION>
                                                                                            2001                 2000
                                                                                     -------------------  -------------------
<S>                                                                                  <C>                  <C>
Revenue                                                                                      $        -           $        -


Operating expenses:
     General and administrative                                                                 224,409              106,031
     Legal and professional                                                                     198,797               23,953
     Interest expense                                                                            17,456                6,532
     Depreciation                                                                                 1,421                  935
                                                                                             ----------           ----------
        Total operating expenses                                                                442,083              137,451
                                                                                             ----------           ----------

Operating loss                                                                                 (442,083)            (137,451)

Other income - interest income                                                                    8,337               17,823
                                                                                             ----------           ----------

Loss before income tax provision                                                               (433,746)            (119,628)

Income tax provision                                                                                  -                    -
                                                                                             ----------           ----------
Net loss                                                                                     $ (433,746)          $ (119,628)
                                                                                             ==========           ==========
Net loss per share:

     Basic                                                                                   $   (0.098)          $   (0.027)
                                                                                             ==========           ==========
     Diluted                                                                                 $   (0.098)          $   (0.027)
                                                                                             ==========           ==========
Weighted average common shares outstanding:

     Basic                                                                                    4,410,250            4,408,294
                                                                                             ==========           ==========
     Diluted                                                                                  4,410,250            4,408,294
                                                                                             ==========           ==========
</TABLE>

                See accompanying notes to financial statements

                                       2
<PAGE>

                          DIRECT III MARKETING, INC.

           Consolidated Statements of Stockholders' Equity (Deficit)

                    For the Six Months Ended June 30, 2001
                                  (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, 2000                     4,410,250         $ 4,410         $ 1,875,590       $ (1,393,927)          $  486,073




Net loss
     June 30, 2001                                                                                 (855,457)            (855,457)
                                      --------------  --------------  ------------------  -----------------  -------------------


Balance                                    4,410,250           4,410           1,875,590         (2,249,384)            (369,384)



Notes receivable
     from stockholders                                                          (234,068)                               (234,068)
                                      --------------  --------------  ------------------  -----------------  -------------------

Balance
     June 30, 2001                         4,410,250         $ 4,410         $ 1,641,522       $ (2,249,384)          $ (603,452)
                                      ==============  ==============  ==================  =================  ===================
</TABLE>

                See accompanying notes to financial statements

                                       3
<PAGE>

                          DIRECT III MARKETING, INC.


                    Consolidated Statements of Cash Flows

                For the Six Months Ended June 30, 2001 and 2000
                                  (Unaudited)

<TABLE>
<CAPTION>
                                                                                            2001                 2000
                                                                                     ------------------   ------------------
<S>                                                                                  <C>                  <C>
Cash flows from operating activities:
     Net loss                                                                                $ (855,457)          $ (269,024)
     Adjustments to reconcile net loss to net cash
        used by operations:
            Depreciation and amortization                                                         2,705                1,797
        (Increase) decrease in assets:
            Accounts receivable                                                                     400                1,183
            Prepaid expenses                                                                     13,883               16,350
            Other assets                                                                         (5,435)             (64,515)
        Increase (decrease) in liabilities:
            Accounts payable                                                                    (21,976)               4,504
            Accrued expenses                                                                    100,270              (26,835)
                                                                                     ------------------   ------------------
Net cash used by operating activities                                                          (765,610)            (336,540)
                                                                                     ------------------   ------------------

Cash flows from investing activities:
     Note receivable related to planned acquisition                                                   -             (350,000)
     Acquisition of property and equipment                                                      (80,215)              (2,203)
                                                                                     ------------------   ------------------
Net cash used in investing activities                                                           (80,215)            (352,203)
                                                                                     ------------------   ------------------

Cash flows from financing activities:
     Payment of credit facility                                                                       -             (305,100)
     Proceeds from credit facility                                                              850,000                    -
     Notes receivable from stockholders                                                          (7,729)              (7,729)
     Proceeds from issuance of stock                                                                  -            1,597,500
                                                                                     ------------------   ------------------
Net cash provided by financing activities                                                       842,271            1,284,671
                                                                                     ------------------   ------------------

Net (decrease) increase in cash                                                                  (3,554)             595,928

Cash and cash equivalents at beginning of period                                                279,181                  742
                                                                                     ------------------   ------------------

Cash and cash equivalents at end of period                                                    $ 275,627           $  596,670
                                                                                     ==================   ==================
</TABLE>

                See accompanying notes to financial statements

                                       4

<PAGE>

                          DIRECT III MARKETING, INC.

                     Consolidated Statements of Operations

                For the Six Months Ended June 30, 2001 and 2000
                                  (Unaudited)

<TABLE>
<CAPTION>
                                                                                            2001                 2000
                                                                                     ------------------   ------------------
<S>                                                                                  <C>                  <C>
Revenue                                                                                      $        -           $        -


Operating expenses:
     General and administrative                                                                 411,853              212,156
     Legal and professional                                                                     428,577               64,182
     Interest expense                                                                            28,765               14,916
     Depreciation                                                                                 2,705                1,797
                                                                                     ------------------   ------------------
        Total operating expenses                                                                871,900              293,051
                                                                                     ------------------   ------------------

Operating loss                                                                                 (871,900)            (293,051)

Other income - interest income                                                                   17,243               24,827
                                                                                     ------------------   ------------------

Loss before income tax provision                                                               (854,657)            (268,224)

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

Net loss                                                                                     $ (855,457)          $ (269,024)
                                                                                     ==================   ==================

Net loss per share:

     Basic                                                                                   $   (0.194)          $   (0.065)
                                                                                     ==================   ==================

     Diluted                                                                                 $   (0.194)          $   (0.065)
                                                                                     ==================   ==================

Weighted average common shares outstanding:

     Basic                                                                                    4,410,250            4,132,327
                                                                                     ==================   ==================

     Diluted                                                                                  4,410,250            4,132,327
                                                                                     ==================   ==================
</TABLE>

                See accompanying notes to financial statements

                                       5

<PAGE>

                           Direct III Marketing, Inc.
                   Notes to Consolidated Financial Statements
                                 June 30, 2001
                                  (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. and Grad Partners, Inc., a wholly owned subsidiary of
         the Company that was incorporated by the Company in Delaware on October
         3, 2000. All significant intercompany accounts and transactions have
         been eliminated in consolidation.

         Refer to the financial statements in the Form 10KSB, filed April 2,
         2001, for the year ended December 31, 2000 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.

Note 2 - Liquidity and Business Risk

         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 5, below. The Company's ability to
         continue business in its present form 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.

         In August, 2001 Direct III Marketing, Inc. was advanced $600,000 by two
         officers of the Company. These senior promissory notes bear interest at
         12.5% per year, with interest only payments payable quarterly. The two
         officers received stock purchase warrants in connection with this
         transaction entitling each officer to purchase 300,000 shares of voting
         common stock at an exercise price equal to $1.25 per share. However, if
         the senior promissory notes are paid in full prior to September 1,
         2001, the officers are entitled to purchase 200,000 shares of voting
         common stock at an exercise price equal to $1.50 per share. These
         warrants are exercisable for five years.

         As of July, 2001, there is an agreement with an outside party to sell
         on a best efforts basis 3,200,000 shares of Direct III common stock at
         $1.00 per share and 1,600,000 common stock warrants exercisable at
         $1.00 per share through a private placement memorandum.

Note 3 - Notes Payable

         The Company executed notes with individuals for $850,000. These loans
         accrue interest at the rate of 8% and are due June 30, 2002. The
         promissory notes are convertible into common stock at June 30, 2002 at
         a price of $2.00 per share. One note holder received a stock purchase
         warrant for 25,000 shares of common stock at $4.00 per share.

                                       6
<PAGE>

Note 4 - Incentive Stock Options

         The Company granted additional incentive stock options on January 5,
         2001, for the purchase of 10,000 shares at $4.00 per share for a term
         of 10 years.

Note 5 - 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.

Note 6 - Subsequent Event

         The Company granted incentive stock options on July 1, 2001 for the
         purchase of 935,000 shares at $1.40 per share and on July 16, 2001 for
         the purchase of 80,000 shares at $2.00 per share.

                                       7
<PAGE>

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

         The following discussion should be read in conjunction with, and is
qualified in its entirety by, the 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. Historical operating results are
not necessarily indicative of the trends in operating results for any further
period.

         We were organized and commenced operations in March 1999. To this day,
our efforts have been principally devoted to identifying acquisitions of
companies in direct marketing, internet marketing, telemarketing, and raising
capital, as well as acquisitions and operations related to student loan
marketing.

         Our plan of operation for the next 12 months will consist of continuing
to search for acquisitions that meet the Company's business model as well as
developing the student loan marketing capabilities of Grad Partners, Inc., a
wholly owned subsidiary.

         Our actual merger activities may vary significantly from current plans
depending on numerous factors, including changes in the costs of such activities
from current estimates, determinations as to commercial potential and the status
of the competitive marketplace.  The focus and direction of our operations will
also be dependent upon the establishment of agreeable arrangements with other
companies, the availability of financing and other factors.

RESULTS OF OPERATIONS

For the Three Months ended June 30, 2001 and 2000
-------------------------------------------------

Revenue

         We have not generated any revenues from inception and we do not
anticipate generating any revenues until an acquisition is consummated.

General and Administrative Expenses

         We incurred general and administrative expenses of approximately
$224,000 and $106,000 for the three months ended June 30, 2001 and 2000,
respectively. The increase in general and administrative expenses in the first
quarter of 2001 compared with 2000 was due to additional expenses incurred in
connection with potential acquisitions in 2001 as well as increased operations
of the wholly owned subsidiary, Grad Partners, Inc.

Legal and Professional Expenses

         The Company incurred legal and professional expenses of approximately
$199,000 and $24,000 for the three months ended June 30, 2001 and 2000,
respectively. The increase in legal and professional fees in the first quarter
of 2001 compared with 2000 was due to additional expenses related to potential
acquisitions in 2001 as well as increased consulting fees associated with Grad
Partners, Inc.

                                       8
<PAGE>

Interest Expense

     We incurred interest expense of approximately $17,500 and $6,500 for the
three months ended June 30, 2001, and 2000, respectively. Interest expense
increased for the quarter ended June 30, 2001 compared with June 30, 2000 due to
new promissory notes to individuals for $850,000.

Interest Income

     Interest income was approximately $8,300 and $17,800 for the three months
ended June 30, 2001 and 2000, respectively.  The decrease in interest income is
due to the decrease in available cash.

Net Losses

     For the quarter ended June 30, 2001, the Company incurred a net loss of
approximately $434,000 compared to a net loss of approximately $120,000 for the
same period in 2000.  The increased net loss in 2001 compared with 2000 was
attributable to increased operating expenses incurred in analysis and due
diligence of potential acquisitions and the increased operations of Grad
Partners, Inc.

For the Six Months ended June 30, 2001 and 2000
-----------------------------------------------

Revenue

     We have not generated any revenues from inception and we do not anticipate
generating any revenues until an acquisition is consummated.

General and Administrative Expenses

     We incurred general and administrative expenses of approximately $412,000
and $212,000 for the six months ended June 30, 2001 and 2000, respectively.  The
increase in general and administrative expenses for 2001 compared with 2000 was
due to additional expenses incurred in connection with potential acquisitions in
2001 as well as increased operations of the wholly owned subsidiary, Grad
Partners, Inc.

Legal and Professional Expenses

     The Company incurred legal and professional expenses of approximately
$429,000 and $64,000 for the six months ended June 30, 2001 and 2000,
respectively. The increase in legal and professional fees for 2001 compared with
2000 was due to additional expenses related to potential acquisitions in 2001 as
well as increased consulting fees associated with Grad Partners, Inc.

Interest Expense

     We incurred interest expense of approximately $29,000 and $15,000 for the
six months ended June 30, 2001, and 2000, respectively. Interest expense
increased for the six months ended June 30, 2001 compared with June 30, 2000 due
to new promissory notes to individuals for $850,000.

Interest Income

     Interest income was approximately $17,000 and $25,000 for the six months
ended June 30, 2001 and 2000, respectively.  The decrease in interest income is
due to the decrease in available cash.

                                       9
<PAGE>

Net Losses

     For the six months ended June 30, 2001, the Company incurred a net loss of
approximately $855,000 compared to a net loss of approximately $269,000 for the
same period in 2000. The increased net loss in 2001 compared with 2000 was
attributable to increased operating expenses incurred in analysis and due
diligence of potential acquisitions and the increased operations of Grad
Partners, Inc.

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 the Company will be successful on the merits of the issues being
arbitrated.

Liquidity and Capital Resources

     At June 30, 2001, we had cash of approximately $275,000.  Since inception
we have financed our operations from debt and equity financings.  During the
three months ended June 30, 2001, we used cash of approximately $431,000 to fund
our operating activities. During the six months ended June 30, 2001 we used cash
of approximately $765,000 to fund our operating activities. In January and
February, 2001, the Company received proceeds from promissory notes of $850,000.
During the three months ended June 30, 2001, the Company acquired property and
equipment of approximately $4,000 and had capitalizable web site development
costs of approximately $76,000.

     In August, 2001 Direct III Marketing, Inc. was advanced $600,000 by two
officers of the Company. These senior promissory notes bear interest at 12.5%
per year, with interest only payments payable quarterly. The two officers
received stock purchase warrants in connection with this transaction entitling
each officer to purchase 300,000 shares of voting common stock at an exercise
price equal to $1.25 per share. However, if the senior promissory notes are paid
in full prior to September 1, 2001, the officers are entitled to purchase
200,000 shares of voting common stock at an exercise price equal to $1.50 per
share. These warrants are exercisable for five years.

     As of July, 2001, there is an agreement with an outside party to sell on a
best efforts basis  3,200,000 shares of Direct III common stock at $1.00 per
share and 1,600,000 common stock warrants exercisable at $1.00 per share through
a private placement memorandum.

     We believe that we have 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.

                                      10
<PAGE>

                          PART II. OTHER INFORMATION

Item 1. Legal Proceedings

        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.

Item 2. Changes In Securities

        The Company did not issue any securities during the quarter ending June
30, 2001.

Item 3. Defaults Upon Senior Securities

        Not Applicable.

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

        At the 2001 Annual Meeting of Stockholders of the Company held on May
16, 2001, the stockholders elected the five nominees for the Board of Directors
nominated by the Board -- Robert deRose, Michael H. Shaut, James G. Clark,
Douglas L. Feist and Martin A. Mayer. Additionally, the stockholders approved
the Company's Stock Option Plan that had previously been approved by the
directors.

        Voting for the election of directors and the Stock Option Plan proposal
was as follows:

<TABLE>
<CAPTION>
                           R. DeRose        M. Shaut         J. Clark         D. Feist       M. Mayer       Stock Option Plan
-----------------------------------------------------------------------------------------------------------------------------
<S>                        <C>              <C>              <C>              <C>             <C>            <C>
For:                         3,462,992        3,462,992        3,462,992       3,462,992      3,462,992           2,839,516
Against:                            --               --               --              --             --             623,476
Abstentions/ Broker                 --               --               --              --             --                  --
Non-Votes:
</TABLE>

   Proxies were solicited on behalf of the Company by its officers and employees
as indicated in the Company's definitive proxy statement dated April 13, 2001.

Item 5. Other Information

        Not Applicable.

Item 6. Exhibits and Reports on Form 8-K

        Not Applicable.

                                      11
<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:  August 14, 2001                           DIRECT MARKETING, INC.


                                                 By: /s/ James G. Clark
                                                     ---------------------------
                                                 Name:   James G. Clark
                                                 Title:  Chief Financial Officer
                                                 (Principal Financial and
                                                  Accounting Officer)

                                      12