---





UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



Form 10-Q



(Mark One)



xQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934



For the quarterly period ended June 30,
2012



or



£  TRANSITION REPORT PURSUANT
TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934



For the transition period from ___________
to __________



Commission file
number000-54123



3PEA INTERNATIONAL, INC.

(Exact name of small business issuer as
specified in its charter)



|Nevada                                                         | 95-4550154                       
|-------------------------------------------------------------- | ---------------------------------
|(State or other jurisdiction of incorporation or organization) | (IRS Employer Identification No.)



1700 W Horizon Ridge Parkway, Suite 102,

Henderson, Nevada89012

(Address of principal
executive offices)



(702) 453-2221

(Issuer’s telephone
number, including area code)

_______________________________________________________

(Former name, former address and former
fiscal year, if changed since last report)



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.xYes
£ No



Indicate by check mark whether the
registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or
for such shorter period that the registrant was required to submit and post such files).x



Indicate by check mark whether the registrant is a large accelerated
filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large
accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange
Act.



Large accelerated filer £Accelerated
filer £ Non-accelerated filer £ Smaller reporting companyx



Indicate by check mark whether the
registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes £  Nox



State the number of shares outstanding of each of the issuer’s
classes of common equity, as of the latest practicable date: 38,585,891 shares as of July 16, 2012.





1











3PEA INTERNATIONAL, INC.



FORM 10-Q REPORT INDEX





|PART I.  FINANCIAL INFORMATION                                                                  | 2 
|----------------------------------------------------------------------------------------------- | --
|Item 1.  Financial Statements                                                                   | 2 
|Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations. | 8 
|Item 3.  Quantitative and Qualitative Disclosures about Market Risk.                            | 16
|Item 4.  Controls and Procedures.                                                               | 16
|PART II.  OTHER INFORMATION.                                                                    | 16
|Item 1.  Legal Proceedings.                                                                     | 16
|Item 1A.  Risk Factors.                                                                         | 16
|Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds.                           | 16
|Item 3.  Defaults upon Senior Securities.                                                       | 16
|Item  4. Mine Safety Disclosures                                                                | 17
|Item 5.  Other Information.                                                                     | 17
|Item 6.  Exhibits.                                                                              | 17
|SIGNATURES                                                                                      | 17





2











PART I.  FINANCIAL INFORMATION

Item 1.  Financial Statements

3PEA INTERNATIONAL, INC.

CONSOLIDATED BALANCE SHEET

JUNE 30, 2012 AND DECEMBER 31, 2011

(UNAUDITED)



|                                                                                                                                                                     |  | June 30, 2012 |            | December 31, 2011
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------- | ---------- | -----------------
|ASSETS                                                                                                                                                               |  |               |            |                  
|                                                                                                                                                                     |  |               |            |                  
|Current assets                                                                                                                                                       |  |               |            |                  
|Cash                                                                                                                                                                 |  | $             | 117,621    |                  
|Cash Restricted                                                                                                                                                      |  |               | 5,450,084  |                  
|Accounts Receivable                                                                                                                                                  |  |               | 2,107,178  |                  
|Prepaid Expenses                                                                                                                                                     |  |               | –          |                  
|Other receivables                                                                                                                                                    |  |               | 4,125      |                  
|Total current assets                                                                                                                                                 |  |               | 7,679,008  |                  
|                                                                                                                                                                     |  |               |            |                  
|Fixed assets, net                                                                                                                                                    |  |               | 86,737     |                  
|                                                                                                                                                                     |  |               |            |                  
|Intangible and other assets                                                                                                                                          |  |               |            |                  
|Deposits                                                                                                                                                             |  |               | 3,551      |                  
|Intangible assets, net                                                                                                                                               |  |               | 249,992    |                  
|                                                                                                                                                                     |  |               |            |                  
|Total assets                                                                                                                                                         |  | $             | 8,019,288  |                  
|                                                                                                                                                                     |  |               |            |                  
|LIABILITIES AND STOCKHOLDERS' DEFICIT                                                                                                                                |  |               |            |                  
|                                                                                                                                                                     |  |               |            |                  
|Current liabilities                                                                                                                                                  |  |               |            |                  
|Accounts payable and accrued liabilities                                                                                                                             |  | $             | 2,578,742  |                  
|Customer card funding                                                                                                                                                |  |               | 5,450,084  |                  
|Notes payable- related parties                                                                                                                                       |  |               | 538,000    |                  
|Convertible note payable                                                                                                                                             |  |               | 10,000     |                  
|Notes payable                                                                                                                                                        |  |               | 264,400    |                  
|Total current liabilities                                                                                                                                            |  |               | 8,841,226  |                  
|                                                                                                                                                                     |  |               |            |                  
|Long-term liabilities                                                                                                                                                |  |               |            |                  
|Notes payable, non-current portion                                                                                                                                   |  |               | –          |                  
|Total long Term liabilities                                                                                                                                          |  |               | –          |                  
|                                                                                                                                                                     |  |               |            |                  
|Total liabilities                                                                                                                                                    |  |               | 8,841,226  |                  
|Stockholders' deficit                                                                                                                                                |  |               |            |                  
|Common stock; $0.001 par value; 150,000,000 shares authorized,38,585,891 and 35,250,391 issued and outstanding at June 30, 2012 and  December 31, 2011, respectively |  |               | 38,586     |                  
|Additional paid-in capital                                                                                                                                           |  |               | 5,504,045  |                  
|Treasury stock at cost, 303,450 shares                                                                                                                               |  |               | (150,000   | )                
|Accumulated deficit                                                                                                                                                  |  |               | (6,271,944 | )                
|Total 3Pea International, Inc.'s stockholders' deficit                                                                                                               |  |               | (879,313   | )                
|Noncontrolling interest                                                                                                                                              |  |               | 57,375     |                  
|Total stockholders' deficit                                                                                                                                          |  |               | (821,938   | )                
|                                                                                                                                                                     |  |               |            |                  
|Total liabilities and stockholders' deficit                                                                                                                          |  | $             | 8,019,288  |                  



See accompanying notes to financial statements.





3









3PEA INTERNATIONAL, INC.

CONSOLIDATED STATEMENT OF OPERATIONS

FOR THE THREE MONTHS ENDED JUNE 30, 2012
AND 2011

(UNAUDITED)





|                                                                     |  | For the three months ended June 30,
|-------------------------------------------------------------------- |  | -----------------------------------
|                                                                     |  | 2012                               
|                                                                     |  |                                    
|Revenues                                                             |  | $                                  
|                                                                     |  |                                    
|Cost of revenues                                                     |  |                                    
|                                                                     |  |                                    
|Gross profit                                                         |  |                                    
|                                                                     |  |                                    
|Operating expenses                                                   |  |                                    
|Depreciation and amortization                                        |  |                                    
|Selling, general and administrative                                  |  |                                    
|                                                                     |  |                                    
|Total operating expenses                                             |  |                                    
|                                                                     |  |                                    
|Income from operations                                               |  |                                    
|                                                                     |  |                                    
|Other income (expense)                                               |  |                                    
|Interest expense                                                     |  |                                    
|Gain on debt extinguishment                                          |  |                                    
|Total other income (expense)                                         |  |                                    
|                                                                     |  |                                    
|Income before provision for income taxes and noncontrolling interest |  |                                    
|                                                                     |  |                                    
|Provision for income taxes                                           |  |                                    
|                                                                     |  |                                    
|Net income before noncontrolling interest                            |  |                                    
|                                                                     |  |                                    
|Net income (loss) attributable to the noncontrolling interest        |  |                                    
|                                                                     |  |                                    
|Net income attributable to 3Pea International, Inc.                  |  | $                                  
|                                                                     |  |                                    
|Net income per common share - basic                                  |  | $                                  
|Net income per common share - fully diluted                          |  | $                                  
|                                                                     |  |                                    
|Weighted average common shares outstanding - basic                   |  |                                    
|Weighted average common shares outstanding - fully diluted           |  |                                    







See accompanying notes to financial statements.



4











3PEA INTERNATIONAL, INC.

CONSOLIDATED STATEMENT OF OPERATIONS

FOR THE SIX MONTHS ENDED JUNE 30, 2012 AND
2011

(UNAUDITED)



|                                                                     |  | For the six months ended June 30,
|-------------------------------------------------------------------- |  | ---------------------------------
|                                                                     |  | 2012                             
|                                                                     |  |                                  
|Revenues                                                             |  | $                                
|                                                                     |  |                                  
|Cost of revenues                                                     |  |                                  
|                                                                     |  |                                  
|Gross profit                                                         |  |                                  
|                                                                     |  |                                  
|Operating expenses                                                   |  |                                  
|Depreciation and amortization                                        |  |                                  
|Selling, general and administrative                                  |  |                                  
|                                                                     |  |                                  
|Total operating expenses                                             |  |                                  
|                                                                     |  |                                  
|Income from operations                                               |  |                                  
|                                                                     |  |                                  
|Other income (expense)                                               |  |                                  
|Interest expense                                                     |  |                                  
|Gain on debt extinguishment                                          |  |                                  
|Total other income (expense)                                         |  |                                  
|                                                                     |  |                                  
|Income before provision for income taxes and noncontrolling interest |  |                                  
|                                                                     |  |                                  
|Provision for income taxes                                           |  |                                  
|                                                                     |  |                                  
|Net income before noncontrolling interest                            |  |                                  
|                                                                     |  |                                  
|Net income (loss) attributable to the noncontrolling interest        |  |                                  
|                                                                     |  |                                  
|Net income attributable to 3Pea International, Inc.                  |  | $                                
|                                                                     |  |                                  
|Net income per common share - basic                                  |  | $                                
|Net income per common share - fully diluted                          |  | $                                
|                                                                     |  |                                  
|Weighted average common shares outstanding - basic                   |  |                                  
|Weighted average common shares outstanding - fully diluted           |  |                                  



See accompanying notes
to financial statements.



5











3PEA INTERNATIONAL, INC.

CONSOLIDATED STATEMENT OF STOCKHOLDERS'
DEFICIT

FOR THE SIX MONTHS ENDED MARCH 31, 2012

(UNAUDITED)







|                                                                                            |  | Stockholders' Deficit Attributable to 3Pea International, Inc. |            |         |  |           
|------------------------------------------------------------------------------------------- |  | -------------------------------------------------------------- | ---------- | ------- |  | ----------
|                                                                                            |  |                                                                |            |         |  | Additional
|                                                                                            |  | Common Stock                                                   |            | Paid-in |  | Stock     
|                                                                                            |  | Shares                                                         |            | Amount  |  | Capital   
|Balance, Dec 31,
    2011                                                                   |  |                                                                | 35,250,391 |         |  |           
|                                                                                            |  |                                                                |            |         |  |           
|Issuance
    of stock on May 18, 2012  for debt conversion at .09 share                     |  |                                                                | 1,500,975  |         |  |           
|                                                                                            |  |                                                                |            |         |  |           
|Issuance
    of stock on May 18, 2012  for debt conversion at .09 share                     |  |                                                                | 1,834,525  |         |  |           
|                                                                                            |  |                                                                |            |         |  |           
|Issuance
    of  stock warrants for 1,834,525 shares of common stock for settlement of debt |  |                                                                | –          |         |  |           
|                                                                                            |  |                                                                |            |         |  |           
|Issuance
    of  stock warrants for 1,500,975 shares of common stock for settlement of debt |  |                                                                | –          |         |  |           
|                                                                                            |  |                                                                |            |         |  |           
|Net income
    (loss)                                                                       |  |                                                                | –          |         |  |           
|                                                                                            |  |                                                                |            |         |  |           
|Balance,
    June 30, 2012                                                                  |  | $                                                              | 38,585,891 |         |  | $         





See accompanying notes to financial statements.





6







3PEA INTERNATIONAL, INC.

CONSOLIDATED STATEMENT OF CASH FLOWS

FOR THE SIX MONTHS ENDED JUNE 30, 2012
AND 2011

(UNAUDITED)



|                                                                                                |  | For the six months ended June 30,
|----------------------------------------------------------------------------------------------- |  | ---------------------------------
|                                                                                                |  | 2012                             
|Cash flows from operating activities:                                                           |  |                                  
|Net income                                                                                      |  | $                                
|Adjustments to reconcile net income to net cash provided by operating activities:               |  |                                  
|Change in noncontrolling interest                                                               |  |                                  
|Depreciation and amortization                                                                   |  |                                  
|Gain on extinguishment of debt- stock based                                                     |  |                                  
|Changes in operating assets and liabilities:                                                    |  |                                  
|Change in restricted cash                                                                       |  |                                  
|Change in other receivables                                                                     |  |                                  
|Change in prepaid expenses                                                                      |  |                                  
|Change in accounts receivable                                                                   |  |                                  
|Change in accounts payable and accrued liabilities                                              |  |                                  
|Change in customer card funding                                                                 |  |                                  
|Net cash provided by operating activities                                                       |  |                                  
|                                                                                                |  |                                  
|Cash flows from investing activities:                                                           |  |                                  
|Purchase of fixed assets                                                                        |  |                                  
|Purchase of intangible assets                                                                   |  |                                  
|Net cash used by investing activities                                                           |  |                                  
|                                                                                                |  |                                  
|Cash flows from financing activities:                                                           |  |                                  
|Proceeds from borrowings on notes payable                                                       |  |                                  
|Payments on notes payable                                                                       |  |                                  
|Net cash provided by financing activities                                                       |  |                                  
|                                                                                                |  |                                  
|Net change in cash                                                                              |  |                                  
|Cash, beginning of period                                                                       |  |                                  
|                                                                                                |  |                                  
|Cash, end of period                                                                             |  | $                                
|                                                                                                |  |                                  
|Supplemental disclosure of cash flow information:                                               |  |                                  
|Non Cash financing transactions:                                                                |  |                                  
|Issuance of  3,335,500 shares
    of common stock and warrants in satisfaction of notes payable |  | $                                





See accompanying notes to financial statements.





7













3PEA INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

THREE AND SIX MONTHS ENDED JUNE 30, 2012

(UNAUDITED)





|1. | BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT POLICIES
|-- | ---------------------------------------------------------



The foregoing unaudited interim financial statements have been
prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions
for Form 10-Q and Regulation S-X as promulgated by the Securities and Exchange Commission (“SEC”). Accordingly, these
financial statements do not include all of the disclosures required by generally accepted accounting principles in the United States
of America for complete financial statements. These unaudited interim financial statements should be read in conjunction with the
audited financial statements and the notes thereto included on Form 10-K for the year ended December 31, 2011. In the opinion of
management, the unaudited interim financial statements furnished herein include all adjustments, all of which are of a normal recurring
nature, necessary for a fair statement of the results for the interim period presented.



The preparation of financial statements in accordance with generally
accepted accounting principles in the United States of America requires the use of estimates and assumptions that affect the reported
amounts of assets and liabilities, disclosure of contingent assets and liabilities known to exist as of the date the financial
statements are published, and the reported amounts of revenues and expenses during the reporting period. Uncertainties with respect
to such estimates and assumption are inherent in the preparation of the Company’s financial statements; accordingly, it is
possible that the actual results could differ from these estimates and assumptions that could have a material effect on the reported
amounts of the Company’s financial position and results of operations.



Operating results for the six months period ended June 30, 2012
are not necessarily indicative of the results that may be expected for the year ending December 31, 2012.



About 3PEA International, Inc.



3PEA International, Inc. is a payment solutions company which
currently focuses on providing prepaid debit program management and processing services. 3PEA provides a card processing platform
consisting of proprietary systems and innovative software applications. 3PEA develops prepaid card programs for healthcare reimbursement
payments, pharmaceutical assistance, corporate and incentive rewards, and are expanding into payroll cards, general purpose re-loadable
cards, travel cards, and expense reimbursement cards. 3PEA cards are offered to end users through our relationships with bank issuers.



Principles of consolidation – The consolidated
financial statements include the accounts of the Company and its subsidiaries. All significant intercompany balances and transactions
have been eliminated.



Use of estimates - The preparation of consolidated financial
statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ
from those estimates.





8











|1. | DESCRIPTION OF BUSINESS, HISTORY AND SUMMARY OF SIGNIFICANT POLICIES (continued)
|-- | --------------------------------------------------------------------------------



Restricted cash – restricted cash is a cash account
controlled by the Company which funds are received related to the card programs from our customers. The Company has recorded a
corresponding customer card funding liability.



Revenue and expense recognition – We recognize
revenue when (1) there is persuasive evidence of an arrangement existing, (2) delivery has occurred, (3) our price to the buyer
is fixed or determinable and (4) collectability of the receivables is reasonably assured. We recognize the costs of these revenues
at the time revenue is recognized. Any fees paid up front are deferred until such time such services have been considered rendered.
As of June 30, 2012 and December 31, 2011, there are no deferred revenues recorded.



We generate the following types of revenues:



| | • | Administration and usage fees, charged to our prepaid card clients when our programs are created, distributed or reloaded. Such revenues are recognized when such services are performed.                             
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | • | Transaction fees, paid by the applicable networks and passed through by our card issuing banks when our SVCs are used in a purchase or ATM transaction. Such revenues are recognized when such services are performed.



| | • | Maintenance, administration, transaction fees, charged to an SVC and not under any multiple element arrangements. Such revenues are recognized when such services are performed.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | • | Program maintenance management fees charged to our clients. Such revenues are not under any multiple element arrangements and are recognized when such services are performed.  



| | • | Software development and consulting services to our clients. Such revenues are recognized in accordance with ASC 985-605.
| | - | -------------------------------------------------------------------------------------------------------------------------



The Company records all revenues on gross basis in accordance
with ASC 605-45 since it is the primary obligor and establishes the price in the revenue arrangement. The Company is currently
under no obligation for refunding any fees or has any obligations for disputed claim settlements.



Earnings (loss) per share- Basic earnings (loss) per
share exclude any dilutive effects of options, warrants and convertible securities. Basic earnings (loss) per share is computed
using the weighted-average number of outstanding common stocks during the applicable period. Diluted earnings per share is computed
using the weighted-average number of common and common stock equivalent shares outstanding during the period. Common stock equivalent
shares are excluded from the computation if their effect is antidilutive.



|2. | FIXED ASSETS
|-- | ------------



Fixed assets consist of the following:



|                               |  | As of  June 30, 2012 |          | As of  December 31, 2011
|------------------------------ |  | -------------------- | -------- | ------------------------
|Equipment                      |  | $                    | 500,205  |                         
|Software                       |  |                      | 257,092  |                         
|Furniture and fixtures         |  |                      | 60,921   |                         
|Leasehold equipment            |  |                      | 17,721   |                         
|                               |  |                      | 835,939  |                         
|Less: accumulated depreciation |  |                      | (749,202 | )                       
|Fixed assets, net              |  | $                    | 86,737   |                         





9









|3. | INTANGIBLE ASSETS
|-- | -----------------



Intangible assets consist of the following:

|                               |  | As of
June 30, 2012 |         | As of
December 31, 2011
|------------------------------ |  | ------------------- | ------- | -----------------------
|Patents and trademarks         |  | $                   | 33,465  |                        
|Platform development           |  |                     | 240,137 |                        
|                               |  |                     | 273,602 |                        
|Less: accumulated amortization |  |                     | (23,610 | )                      
|Intangible assets, net         |  | $                   | 249,992 |                        



Intangible assets are amortized over their useful lives ranging
from periods of 5 to 15 years.



|4. | COMMON STOCK
|-- | ------------



At June 30, 2012, the Company's authorized capital stock was
150,000,000 shares of common stock, par value $0.001 per share, and 10,000,000 shares of preferred stock, par value $0.001 per
share. On that date, the Company had outstanding 38,585,891 shares of common stock, and no shares of preferred stock.



2012 Transactions: During the six months ended June 30,
2012, the Company issued 3,335,500 shares of common stock for extinguishment of debts valued at $0.09 per share (see Note 5 for
further discussions). The shares were valued at the market price of our common stock on the date of issuance.



Warrants



The Company issued the following warrants at corresponding exercise
price as of June 30, 2012.



|Date of Issuance |  | Number of Warrants |  | Exercise Price |  | Contractual Life |  | Number of  Shares Exercisable
|---------------- |  | ------------------ |  | -------------- |  | ---------------- |  | -----------------------------
|5/31/2012        |  | 1,834,525          |  | 0.50           |  | 3 years          |  | 1,834,525                    
|5/31/2012        |  | 1,500,975          |  | 0.50           |  | 3 years          |  | 1,500,975                    
|                 |  | 3,335,500          |  |                |  |                  |  | 3,335,500                    





|5. | GAIN ON DEBT EXTIGUISHMENT
|-- | --------------------------



On May 30, 2012, the Company negotiated the conversion of two
debt holders’ promissory notes totaling $1,667,750 in exchange for 3,335,500 shares of the Company’s common stock and
warrants for 3,335,500 shares of common stock with an exercise price of $0.50 expiring May 31, 2015. As a result of the conversion
of the two debt holders’ notes, the Company recognized a gain on debt extinguishment of $1,136,055 during the three and six
months ended June 30, 2012 based on the fair value of both the common stock and warrants issued. The warrants were valued at approximately
$231,500 using the Black-Scholes options pricing model under the following assumptions: stock price at issuance of $0.09 per share;
3 year life; discount rate of 4.29%; and volatility rate of 228%.





10









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



Disclosure Regarding Forward Looking
Statements



This Quarterly Report on Form 10-Q includes
forward looking statements (“Forward Looking Statements”). All statements other than statements of historical fact
included in this report are Forward Looking Statements. In the normal course of its business, the Company, in an effort to help
keep its shareholders and the public informed about the Company’s operations, may from time-to-time issue certain statements,
either in writing or orally, that contains or may contain Forward-Looking Statements. Although the Company believes that the expectations
reflected in such Forward Looking Statements are reasonable, it can give no assurance that such expectations will prove to have
been correct. Generally, these statements relate to business plans or strategies, projected or anticipated benefits or other consequences
of such plans or strategies, past and possible future, of acquisitions and projected or anticipated benefits from acquisitions
made by or to be made by the Company, or projections involving anticipated revenues, earnings, levels of capital expenditures or
other aspects of operating results. All phases of the Company operations are subject to a number of uncertainties, risks and other
influences, many of which are outside the control of the Company and any one of which, or a combination of which, could materially
affect the results of the Company’s proposed operations and whether Forward Looking Statements made by the Company ultimately
prove to be accurate. Such important factors (“Important Factors”) and other factors could cause actual results to
differ materially from the Company’s expectations are disclosed in this report. All prior and subsequent written and oral
Forward Looking Statements attributable to the Company or persons acting on its behalf are expressly qualified in their entirety
by the Important Factors described below that could cause actual results to differ materially from the Company’s expectations
as set forth in any Forward Looking Statement made by or on behalf of the Company.



Overview



We are a payment solutions company which
currently focuses on providing prepaid debit program management and processing services. We provide a card processing platform
consisting of proprietary systems and innovative software applications based on the unique needs of our programs. We have extended
our processing business capabilities through recent platform expansion. We design and process prepaid programs that run on a customized
processing platform through which our customers can define the services they wish to offer cardholders. Through this platform,
we provide a variety of services including transaction processing, card creation and fulfillment, cardholder enrollment, value
loading, cardholder account management, reporting, integrated voice response, and customer service.



We have developed prepaid card programs
for healthcare reimbursement payments, pharmaceutical assistance, corporate and incentive rewards, and are expanding into payroll
cards, general purpose re-loadable cards, travel cards, and expense reimbursement cards. Our cards are offered to end users through
our relationships with bank issuers.



Our products and services are aimed at
capitalizing on the growing demand for stored value and reloadable ATM/prepaid card financial products in a variety of market niches.
Our proprietary platform is scalable and customizable, delivering cost benefits and revenue building opportunities to partners.
We manage all aspects of the debit card lifecycle, from managing the card design and approval processes with banking partners and
card associations, to production, packaging, distribution, and personalization. We also oversee inventory and security controls,
renewals, lost and stolen card management and replacement.



Currently, the primary market for our cards
is the healthcare reimbursement market, pharmaceutical marketing or drug sampling market, and corporate incentive card market,
although we are expanding into other markets for stored value cards, including, pharmacy benefits cards, payment distribution and
reimbursement cards and payroll cards. In the fourth quarter of 2011, we completed integration and launch of an incentive reward
program targeting plasma donation centers. We anticipate steady growth of these programs over the next twenty-four months, having
launched sixteen donation centers to date with approximately twenty-five donation centers targeted for 2012.





11









During the fourth quarter of 2011, we certified
our newest card processing platform. Our platform expansion related primarily to the design and development of our processing systems
and related software applications and card management platform. We expect to continue our practice of investing an appropriate
level of resources to maintain, enhance and extend the functionality of our proprietary systems and existing software applications,
to develop new and innovative software applications and systems in response to the needs of our customers, and to enhance the capabilities
surrounding our infrastructure. In addition, we intend to offer products and services that are compatible with new and emerging
delivery channels.



As part of our platform expansion development
process, we evaluate current and emerging technology for applicability to our existing and future software platform. To this end,
we engage with various hardware and software vendors in evaluation of various infrastructure components. Where appropriate, we
use third-party technology components in the development of our software applications and service offerings. Third-party software
may be used for highly specialized business functions, which we may not be able to develop internally within time and budget constraints.
Our principal target markets for processing services include prepaid card issuers, retail and private-label issuers, small third-party
processors, and small and mid-size financial institutions in the United States and in emerging international markets.



To date, we have focused on extensive development
and limited sales activities in each of our target markets, as well as putting in place the infrastructure and processes to be
able to scale the business successfully. The company plans to devote more extensive resources to sales and marketing activities
in the future. We sell our products directly to customers in the U.S. but may work with a small number of resellers and third parties
in international markets to identify, sell and support targeted opportunities.



In order to expand into new markets, we
will need to invest additional funds in technology improvements, sales and marketing expenses, and regulatory compliance costs.
We are considering raising capital in a private placement to enable us to diversify into new market verticals. If we do not raise
new capital, we believe that we will still be able to expand into new markets using internally generated funds, but our expansion
will be delayed. While we have made substantial progress converting some of our debts into equity, we still have a substantial
amount of notes payable which we plan to convert into equity at some point. If we are unable to convert these notes into equity,
we may be forced to use any capital we raise to reduce our indebtedness instead of costs associated with expanding our business,
which will slow our rate of expansion.



Results of Operations



Three Months ended June 30, 2012 and
2011



Revenues for the three months ended June
30, 2012 were $2,549,003, an increase of $1,883,970 compared to the same period in the prior year, when revenues were $665,033.
The increase in revenue is due to increased processing and the launch of eight new plasma donation centers utilizing a new incentive
rewards programs during the second quarter which we believe will contribute to an increase in overall revenues for 2012.  Our
pharmaceutical marketing cards continue to make up a majority of our revenues and will continue to do so for the next 24 months.
Over the longer term, we expect our revenues to trend upward as the economy improves and as we roll out additional debit card products
utilizing our processing platform.



Cost of revenues for the three months ended
June 30, 2012 were $2,033,264, an increase of $1,601,090 compared to the same period in the prior year, when cost of revenues were
$432,174. Cost of revenues constituted approximately 80% and 65% of total revenues in 2012 and 2011, respectively.  Cost of
revenues is comprised of transaction processing fees, data connectivity and data center expenses, network fees, card production
costs, customer service and program management expenses, application integration setup and sales expense.





12









Our revenues and cost of revenues from
our pharmaceutical marketing cards, which is our primary line of business, fluctuate widely due to a variety of factors beyond
our control.  The pharmaceutical companies often do not distribute the debit cards via their pharmaceutical sales representatives
to various end points for distribution until days, weeks or months after program implementation, often with little advance
warning to us. We also experience dramatic usage swings based on collateral marketing efforts by the pharmaceutical companies,
such as print, web, radio and television advertising campaigns that run in association with one of our card programs. Constant
variations in program start and stop dates, variations in program timelines which range anywhere between six and thirty six months,
and variations in program characteristics such as the monetary value of the load, all contribute to provide
dramatic swings in the revenue generated from the programs.  As a result, our revenues and cost of revenues do not correlate
neatly to the number of cards in circulation or even the number of programs that are active at any given time.



Gross profit for the three months ended
June 30, 2012 was $515,739, an increase of $282,880 compared to the same period in the prior year, when gross profit was $232,859.
Our overall gross profit percentage approximated 20% and 35% during the fiscal years 2012 and 2011 which is consistent with our
overall expectations.



Selling, general and administrative expenses
for the three months ended June 30, 2012 were $143,995, a decrease of $495 compared to the same period in the prior year, when
selling, general and administrative expenses were $144,490.  The nominal increase is consistent with our overall expectations.



In the three months ended June 30, 2012,
we recorded operating income of $360,468, as compared to operating income of $75,513 in the same period in the prior year, an improvement
of $284,955.



Other income (expense) for the three months
ended June 30, 2012 was $1,120,349, an increase in net other income (expense) of $1,136,206 compared to the same period in the
prior year when other income (expense) was ($15,857).  The overall increase in net other income (expense) in 2012 is primarily
due to a gain on debt extinguishment totaling $1,136,055 arising from the conversion of two outstanding promissory notes totaling
$1,667,750 in exchange for a total of 3,335,500 shares of common stock and warrants for 3,335,500 shares of common stock with an
exercise price of $0.50.



Our net income for the three months ended
June 30, 2012 was $1,480,817, an increase of $1,421,161 compared to the same period in the prior year, when we recorded net income
of $59,656. The increase in our net income is attributable to the aforementioned factors.



Six Months ended June 30, 2012 and 2011



Revenues for the six months ended June
30, 2012 were $4,033,595, an increase of $2,430,994 compared to the same period in the prior year, when revenues were $1,602,601.
The increase in revenue is due to increased processing and the launch of sixteen new plasma donation centers utilizing a new incentive
rewards programs during the first six months of 2012 which we believe will contribute to an increase in overall revenues for 2012.
 Our pharmaceutical marketing cards continue to make up a majority of our revenues and will continue to do so for the next
24 months. Over the longer term, we expect our revenues to trend upward as the economy improves and as we roll out additional debit
card products utilizing our processing platform.



Cost of revenues for the six months ended
June 30, 2012 were $3,255,069, an increase of $2,071,909 compared to the same period in the prior year, when cost of revenues were
$1,183,160. Cost of revenues constituted approximately 81% and 74% of total revenues in 2012 and 2011, respectively.  Cost
of revenues is comprised of transaction processing fees, data connectivity and data center expenses, network fees, card production
costs, customer service and program management expenses, application integration setup and sales expense.





13









Our revenues and cost of revenues from
our pharmaceutical marketing cards, which is our primary line of business, fluctuate widely due to a variety of factors beyond
our control.  The pharmaceutical companies often do not distribute the debit cards via their pharmaceutical sales representatives
to various end points for distribution until days, weeks or months after program implementation, often with little advance
warning to us. We also experience dramatic usage swings based on collateral marketing efforts by the pharmaceutical companies,
such as print, web, radio and television advertising campaigns that run in association with our card programs. Constant variations
in program start and stop dates, variations in program timelines which range anywhere between six and thirty six months, and variations
in program characteristics such as the monetary value of the load, all contribute to provide dramatic swings
in the revenue generated from the programs.  As a result, our revenues and cost of revenues do not correlate neatly to
the number of cards in circulation or even the number of programs that are active at any given time.



Gross profit for the six months ended June
30, 2012 was $778,526, an increase of $359,085 compared to the same period in the prior year, when gross profit was $419,441. Our
overall gross profit percentage approximated 19% and 26% during the fiscal years 2012 and 2011 which is consistent with our overall
expectations.



Selling, general and administrative expenses
for the six months ended June 30, 2012 were $297,096, a decrease of $1,166 compared to the same period in the prior year, when
selling, general and administrative expenses were $298,262.  The nominal increase is consistent with our overall expectations.



In the six months ended June 30, 2012,
we recorded operating income of $452,556, as compared to operating income of $97,656 in the same period in the prior year, an improvement
of $354,900.



Other income (expense) for the six months
ended June 30, 2012 was $1,104,596, an increase in net other income (expense) of $1,136,136 compared to the same period in the
prior year when other income (expense) was ($31,540).  The overall increase in net other income (expense) in 2012 is primarily
due to a gain on debt extinguishment totaling $1,136,055 arising from the conversion of two outstanding promissory notes totaling
$1,667,750 in exchange for a total of 3,335,500 shares of common stock and warrants for 3,335,500 shares of common stock with an
exercise price of $0.50.



Our net income for the six months ended
June 30, 2012 was $1,557,152, an increase of $1,491,036 compared to the same period in the prior year, when we recorded net income
of $66,116. The increase in our net income is attributable to the aforementioned factors.



Liquidity and Sources of Capital



The following table sets forth the major
sources and uses of cash for the six months ended June 30, 2012 and 2011:



|                                                                  |  | Six months ended June 30,
|----------------------------------------------------------------- |  | -------------------------
|                                                                  |  | 2012                     
|Net cash provided by (used) in operating activities               |  | $                        
|Net cash provided by (used) in investing activities               |  |                          
|Net cash provided by (used) in financing activities               |  |                          
|Net (decrease) increase in unrestricted cash and cash equivalents |  |                          







14









Comparison of Six months ended June
30, 2012 and 2011



During the six months ended June 30, 2012
and 2011, we financed our operations primarily through internally generated funds.

Operating activities provided $170,653
of cash in 2012, as compared to $177,789 of cash in the same period in the prior year. Major non-cash items that affected our cash
flow from operations in 2012 were non-cash charges of $28,874 for depreciation and amortization and gain on debt extinguishment
of $1,136,055. Our operating assets and liabilities used $279,318 of cash, most of which resulted from payments on our accounts
payable of $856,857, and offset by collections from our accounts receivable of $577,694. Major non-cash items that affected our
cash flow from operations in 2011 were non-cash gain on debt extinguishment of $23,523 for depreciation and amortization.  Our
operating assets and liabilities provided $80,589 of cash, which resulted from collections of our accounts receivable of $1,599,383
offset by payments on our accounts payable of $1,135,294.



Investing activities used $105,108 of cash
in 2012, as compared to $119,805 of cash used in 2011, all of which primarily related to the enhancement of the processing platform
used in our business.



Financing activities used $11,750 of cash
in 2012 as compared to $3,500 of cash in 2011. In 2012, our use of cash from financing activities consisted of the repayment of
certain loans.



Sources of Financing



In both 2012 and 2011, our operations were
focused on developing our pharmaceutical debit card, which were financed largely from notes issued in 2008.  In 2009, revenues
from our pharmaceutical debit card reached the point that we were able to operate at a breakeven level from operations.



We believe that our available cash on hand
at June 30, 2012 of $117,621 and revenues anticipated for the remainder of 2012 will be sufficient to sustain our operations for
the next twelve months, provided that we are not required to pay any material amount of our accrued interest or our current notes
payable. We were successful at convincing some of our larger debt holders to convert their loans into a combination of common stock
and warrants in the quarter ended June 30, 2012, and we plan to request that some of our remaining creditors convert their debt
into equity to improve our financial position. We are also seeking to raise additional capital during the next twelve months through
an equity offering to high net worth and institutional investors. However, at this time we do not have an agreement with a broker-dealer
to raise money for us and we do not have commitments from any investors. There is no assurance we will be able to obtain additional
capital, or obtain the capital on acceptable terms and conditions.  We plan to use the proceeds to finance our entry into
other markets for our debit cards, and to repay indebtedness. Our failure to obtain new capital will delay our entry into new markets,
but will not jeopardize our ability to remain in business.



Off-Balance Sheet Arrangements



We do not have any off-balance sheet arrangements
that are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues
or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors.



Critical Accounting Estimates



Our significant accounting policies are
described in Note 1 of Notes to Financial Statements. At this time, we are not required to make any material estimates and assumptions
that affect the reported amounts and related disclosures of assets, liabilities, revenue, and expenses.



Any estimates we make will be based on
our experience and our interpretation of economic, political, regulatory, and other factors that affect our business prospects.
Actual results may differ significantly from our estimates.





15









Item 3. Quantitative and Qualitative
Disclosures about Market Risk.



Because the Company is a smaller reporting
company, it is not required to provide the information called for by this Item.



Item 4.  Controls and
Procedures.



Evaluation of Disclosure Controls and
Procedures



Our chief executive officer and chief financial
officer are responsible for establishing and maintaining our disclosure controls and procedures. Disclosure controls and procedures
means controls and other procedures that are designed to ensure that information we are required to disclose in the reports that
we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods
specified in the Securities and Exchange Commission’s rules and forms, and to ensure that information required to be disclosed
by us in those reports is accumulated and communicated to the our management, including our principal executive and principal financial
officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Our
chief executive officer and chief financial officer evaluated the effectiveness of our disclosure controls and procedures (as defined
in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) as of June 30, 2012 . Based on that evaluation, our
chief executive officer and chief financial officer have concluded that, as of the evaluation date, such controls and procedures
were effective.



Changes in internal controls



There were no changes in our internal controls
over financial reporting that occurred during the quarter ended June 30, 2012 that have materially affected, or are reasonably
likely to materially affect, our internal control over financial reporting.





PART II.  OTHER INFORMATION.





Item 1.  Legal Proceedings.



None.





Item 1A.  Risk Factors.



Not applicable.





Item 2.  Unregistered
Sales of Equity Securities and Use of Proceeds.



During
the three months ended June 30, 2012, securities were issued as follows:



On
May 30, 2012, the Company issued 3,335,500 shares of common stock and 3,335,500 Class A Warrants in full settlement and satisfaction
of $1,667,750 of indebtedness held by two creditors. The shares and warrants were issued pursuant to the exemption from registration
provided by Section 4(2) of the Securities Act of 1933, and Rule 506 promulgated thereunder.







Item 3.  Defaults upon
Senior Securities.



None.







16







Item 4. MINE SAFETY DISCLOSURES



None





Item 5.  Other Information.



None.





Item
6.  Exhibits.



|31.1     | Certification Pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934                             
|-------- | ----------------------------------------------------------------------------------------------------------------------
|         |                                                                                                                       
|31.2     | Certification Pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934                             
|         |                                                                                                                       
|32.1     | Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|         |                                                                                                                       
|32.2     | Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|         |                                                                                                                       
|101.INS* | XBRL Instance Document                                                                                                
|         |                                                                                                                       
|101.SCH* | XBRL Schema Document                                                                                                  
|         |                                                                                                                       
|101.CAL* | XBRL Calculation Linkbase Document                                                                                    
|         |                                                                                                                       
|101.DEF* | XBRL Definition Linkbase Document                                                                                     
|         |                                                                                                                       
|101.LAB* | XBRL Label Linkbase Document                                                                                          
|         |                                                                                                                       
|101.PRE* | XBRL Presentation Linkbase Document                                                                                   









* Pursuant to Rule 405(a)(2) of Regulation S-T, the
Company will furnish the XBRL Interactive Data Files with detailed footnote tagging as Exhibit 101 in an amendment to this
Form 10-Q within the permitted 30-day grace period granted for the first quarterly period in which detailed footnote tagging
is required.









SIGNATURES



In accordance with the requirements of
the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

|                      |                                                                                                 
|--------------------- | ------------------------------------------------------------------------------------------------
|                      | 3PEA INTERNATIONAL, INC.                                                                        
|Date: August 13, 2012 | /s/ Mark Newcomer                                                                               
|                      | By: Mark Newcomer, Chief Executive Officer
        (principal executive officer)                
|                      |                                                                                                 
|Date: August 13, 2012 | /s/ Arthur De Joya                                                                              
|                      | By: Arthur De Joya, Chief Financial Officer
        (principal financial and accounting officer)









17