The following discussion should be read and evaluated in conjunction with the unaudited condensed consolidated financial statements and notes thereto contained in this Report and with the discussion under "Forward-Looking Statements" on page 2 at the beginning of this Report and the Risk Factors set forth in Part I, Item 1A of our Annual Report on Form 10-K, as amended, for the fiscal year ended December 31, 2011 and in Part II, Item 1A of this Report.

Overview; Recent Developments

Net Element is currently pursuing a strategy to develop and/or acquire technology and applications for use in the online media industry. In furtherance of this strategy, Net Element acquired Openfilm, LLC on December 14, 2010 and Motorsport, LLC and Music1, LLC on February 1, 2011. Music1, LLC has a 97%-owned subsidiary, A&R Music Live, LLC. Net Element developed and launched in the fourth quarter of 2011 a beta test version of the Yapik mobile application on Android and iOS platforms and Net Element launched a beta test version of the website legalguru.com in the second quarter of 2012. In addition, through its subsidiary TOT Money, Net Element is developing a mobile commerce payment platform for Russia and other emerging markets.

Net Element believes that its technology platforms and development expertise will enable them to enhance the digital distribution of content in a variety of industries. Accordingly, Net Element is exploring the possibility of acquiring other Internet portal properties and companies with similar goals of connecting people in various vertical markets, such as the medical, educational and sports markets. From time to time, Net Element may be engaged in various discussions to acquire businesses or formulate joint venture or other arrangements. Net Element's policy is not to disclose discussions or potential transactions until definitive agreements have been executed. Where appropriate, acquisitions will be financed with Net Element's equity securities, which may result in substantial dilution to existing stockholders.

Net Element recently formed its indirect wholly-owned subsidiary OOO TOT Money (a Russian limited liability company) in June 2012 to adapt the existing revenue sharing platform used in Openfilm.com to a mobile commerce payment platform. Net Element plans to increasingly generate most of its revenues from the mobile commerce payment platform being developed by TOT Money. TOT Money initially plans to launch operations in Russia, using its mobile commerce payment platform to facilitate payments using SMS (short message services, which is a text messaging service).

On June 12, 2012, Net Element entered into an Agreement and Plan of Merger with Cazador Acquisition Corporation Ltd., a Cayman Islands limited corporation ("Cazador"), pursuant to which, if all required conditions are satisfied, Net Element will merge with and into Cazador, with Cazador continuing as the surviving company in the merger. Cazador is a blank check company whose ordinary shares and warrants are listed on The NASDAQ Capital Market. Consummation of the merger is subject to a number of conditions, including, among others: the registration statement on Form S-4 filed by Cazador with the Commission registering the Cazador shares to be issued to Net Element stockholders pursuant to the merger must be declared effective by the Commission; Cazador must have at least $23.5 million of cash held in its trust account (after paying all holders of Cazador shares who exercise their redemption right, but excluding payments to be made for transaction fees and related expenses and pay-off of related party debt); Cazador must change its jurisdiction of incorporation from the Cayman Islands to Delaware; the transaction must be approved by holders of at least two-thirds of the Cazador shares outstanding and entitled to vote; and the transaction must be approved by holders of a majority of the Net Element shares outstanding and entitled to vote. If all required conditions are not satisfied and the merger is not consummated before October 14, 2012, then Cazador will be required to repurchase all outstanding Cazador shares not held by its sponsor and to liquidate its trust account and the merger will not be consummated. If all required conditions to consummate the merger are satisfied, then each issued and outstanding share of Net Element common stock (other than shares held by Net Element as treasury stock or by any of its direct or indirect wholly-owned subsidiaries, which will be cancelled at the effect time of the merger, and Net Element shares with respect to which appraisal rights, to the extent available under the Delaware General Corporation Law, are properly exercised and not withdrawn) will be cancelled and converted into the right to receive 1/40 (or 0.025) of a Cazador share, and at least $23.5 million of cash (before repaying approximately $12.2 million in indebtedness of Net Element which must be repaid soon following the merger) in Cazador's trust account would be available to the surviving entity in the merger for working capital and business development needs. There is no assurance that all (or any) required conditions will be satisfied or that the merger will be consummated.

Since Net Element's inception, it has not generated significant revenues, and it has incurred significant operating losses. Net Element will require additional capital to develop its business operations (for additional information, see "Liquidity and Capital Resources" below). Substantially all of Net Element's revenues to-date have been generated by the sale of premium services (subscription and pay per view fees), licensing fees and advertising. However, in the future, Net Element plans to increasingly generate most of its revenues from the mobile commerce payment processing platform being developed by its subsidiary TOT Money, and from advertising. Failure to successfully develop that payment processing platform and enter into contracts with mobile phone carriers and content providers to use that platform, or failure to expand Net Element's base of advertisers or generate and maintain high quality content on its websites could harm Net Element's revenue prospects. Net Element faces all of the risks inherent in a new business, including management's potential underestimation of initial and ongoing costs, and potential delays and other problems in connection with developing its technologies, Internet websites and operations.

Results of Operations for the Three-Month Periods Ended June 30, 2012 and 2011

We reported a net loss of $2,147,713, or $(0.00) per share, for the three months ended June 30, 2012, as compared with a net loss of $1,728,413, or $(0.00) per share, for the three months ended June 30, 2011. Basic and diluted weighted average shares outstanding were 764,624,650 and 736,324,911 for the quarters ended June 30, 2012 and 2011, respectively.

Net revenues consist of service fees, advertising fees, membership fees and license fees. Net revenues for the three months ended June 30, 2012 and 2011 were $37,818 and $26,058, respectively. The following table provides a breakdown of revenue by web property for the three months ended June 30, 2012 and 2011.

       Web Property                2Q2012 Revenue      2Q2011 Revenue       Change
       A&R Music Live  / Music1   $        16,364     $        23,977     $ (7,613 )
       Motorsport.com                      12,666                 197       12,469
       Openfilm.com                         8,248               1,740        6,508
       Netlab Systems                         540                 144          396
       Total Revenue              $        37,818     $        26,058     $ 11,760

A&R Music Live / Music1 revenues for the three months ended June 30, 2012 decreased $7,613, or 32%, compared to revenues for the three months ended June 30, 2011 as a result of updates made to the website during the three months ended June 30, 2012. Motorsport.com revenues increased from $197 for the three months ended June 30, 2011 to $12,666 for the three months ended June 30, 2012 due to increased advertising on the site. Additionally, Motorsport.com had cancelled the majority of its low value advertising contracts in an effort to obtain higher value advertising for the site. Openfilm.com revenues increased $6,508, or 374%, for the three months ended June 30, 2012 compared to the three months ended June 30, 2011 due to increased advertising and license fees generated for the 2012 period.

Operating expenses totaled $2,237,669 for the three months ended June 30, 2012, as compared to total operating expenses of $1,850,268 for the three months ended June 30, 2011. Most of total operating expenses in each of such periods consisted of general and administrative expenses. For the three months ended June 30, 2012, general and administrative expenses were $1,665,359, or 74% of total operating expenses during that period. For the three months ended June 30, 2011, general and administrative expenses were $1,426,962, or 77% of total operating expenses during that period. The components of our general and administrative expenses are discussed below.

Cost of revenues represents direct costs of generating revenues, including commissions, content acquired and created and certain payroll expense that is directly related to revenue creation. Cost of revenues for the three months ended June 30, 2012 were $100,154 as compared to $285,367 for the three months ended June 30, 2011, which represents a decrease of $185,213, or 65%, per the following detail by web property.

                                  2Q2012 Cost of       2Q2011 Cost of
     Web Property                       revenues             revenues         Change
     A&R Music Live  / Music1   $         19,032     $         48,632     $  (29,600 )
     Motorsport.com                       56,687               59,625         (2,938 )
     Openfilm.com                         19,794               68,276        (48,482 )
     Other                                 4,641              108,834       (104,193 )

The decrease in other cost of revenues was primarily due to a decrease of $41,528 in cost of revenues in corporate due to reduced consulting costs and video production expenses. The balance of the decrease was due to lower consulting and video production costs in Yapik and LegalGuru. Openfilm cost of revenues decreased $48,482 primarily due to reduced promotion costs. A&R Music Live / Music1 cost of revenues decreased $29,600 primarily due to a decrease in Music1 development costs.

Business development expenses consist of direct costs associated with developing our brand and developing revenue opportunities. Business development expenses increased by $205,776, or 283%, to $278,506 for the three months ended June 30, 2012 as compared with $72,730 for the three months ended June 30, 2011. For the quarter ended June 30, 2012, business development expenses were primarily attributable to corporate activities ($270,538), and LegalGuru ($7,156). Business development expenses for the three months ended June 30, 2011 were primarily attributable to corporate activities ($58,346) and Motorsport ($12,349). Business development expenses attributable to corporate activities related primarily to business development of new company-wide website and services opportunities. LegalGuru business development expenses related primarily to marketing efforts. Motorsport business development expenses related primarily to branding through the use of paid marketing professionals at race events and the purchase of promotional items. The primary reasons for the increase in business development expense for the three months ended June 30, 2012 was $133,232 of expense related to promotion at Ferrari North American Challenge and a $72,544 increase in travel expenses relating to business development, partially offset by decreases in Motorsport business development expenses of $12,300 as we did not have paid marketing professionals or promotional items at race events during the three months ended June 30, 2012.

General and administrative expenses were $1,665,359 for the three months ended June 30, 2012 as compared to $1,426,962 for the three months ended June 30, 2011. General and administrative expenses for the three months ended June 30, 2012 and 2011 consisted of operating expenses not otherwise delineated in our Unaudited Condensed Consolidated Statements of Operations, including certain salaries, benefits, professional fees, travel, rent, Internet expenses and other expenses required to run our business. General and administrative expenses for the three months ended June 30, 2012 and 2011 were attributable to the properties or subsidiaries of the Company as follows:

                                    Three months ended       Three months ended
Property or Entity                    June 30, 2012            June 30, 2011
Net Element Corporate              $            939,960     $            751,327
Yapik                                            41,774                   36,955
Openfilm / Launchpad                             41,522                  139,625
LegalGuru                                        75,125                   11,406
Motorsport                                       54,636                   52,621
A&R Music Live / Music1                         102,214                  120,233
OOO Net Element Russia                          117,500                        -
Netlab Systems / Splinex                        292,628                  314,795
Total general and administrative   $          1,665,359     $          1,426,962

General and administrative expenses for Net Element Corporate were $939,960 for the three months ended June 30, 2012 as compared to $751,327 for the three months ended June 30, 2011. For the three months ended June 30, 2012, general and administrative expenses for Corporate consisted primarily of $259,264 of payroll expenses, $222,675 of professional fees and $306,320 of non-cash compensation expense relating to the issuance of shares and options for services.

Of the $751,327 in general and administrative expenses for corporate for the three months ended June 30, 2011, $433,979 is attributable to payroll expense, $178,376 in professional fees, $112,978 in travel and $25,994 in miscellaneous other expenses.

General and administrative expenses attributable to Openfilm / Launchpad decreased by $98,103 primarily due to lower payroll ($42,353), lower consulting fees ($10,966) and lower travel expenses ($11,822) resulting from lower headcount and reduced salaries for remaining employees. LegalGuru and Yapik both started accumulating expenses in March of 2011 as start-up businesses and OOO Net Element Russia was formed during the second quarter of 2012, which explains the variance between general and administrative expenses for the three months ended June 30, 2012 versus the three months ended June 30, 2011 with respect to those subsidiaries.

Product development expense was $73,972 for the three months ended June 30, 2012 as compared to $41,585 for the three months ended June 30, 2011 when the Company had more limited product development efforts. Product development expense consists of research and development on new ideas for existing and to be formed websites and services as well as work that may result in the Company seeking patents for particular technology or business processes.

Depreciation and amortization expense consists of depreciation expense on fixed assets used by the Company and the amortization of capitalized website development, intellectual property and deferred compensation expenses. Depreciation and amortization expense was $119,678 for the three months ended June 30, 2012 as compared with $23,624 for the three months ended June 30, 2011. This increase was due to an increase in fixed and intangible assets as the Company built out its operations over the last twelve months.

Capitalized costs related to website development and intangible assets were $719,619, net at June 30, 2012 as compared with $608,823 at June 30, 2011. Capitalized website development and intangible assets of $719,619 at June 30, 2012 includes $473,689 of capitalized web development, $27,385 for the direct costs of acquiring patents and $216,300 related to website content, customer lists and domain names (Motorsport, LLC ($128,750) and Music1, LLC ($87,550)).

Interest expense was $71,727 for the three months ended June 30, 2012 as compared with $32,378 for the three months ended June 30, 2011. Interest expense for the three months ended June 30, 2012 includes interest on convertible loans from Enerfund to Net Element ($48,358 in interest expense at 5% per annum) with principal balances totaling $4,092,000 and a loan from Enerfund to Openfilm with a principal balance of $1,667,762 ($20,790 in interest expense at 5% per annum). The interest expense for the three months ended June 30, 2011 was primarily attributable to the loan from Enerfund to Openfilm, LLC ($27,867 in interest expense) with a principal balance of $1,667,762 and an interest rate of 5% per annum.

The net loss attributable to non-controlling interests relating to Yapik, LLC, LegalGuru, LLC, A&R Music Live, LLC, and Splinex, LLC was $123,865 for the three months ended June 30, 2012 as compared with $128,175 for the three months ended June 30, 2011. Non-controlling interest for the three months ended June 30, 2012 were primarily attributable to LegalGuru ($75,736) and Yapik ($36,521). The non-controlling interest reflects the results of operations of subsidiaries that are allocable to equity owners other than the Company.

Results of Operations for the Six-Month Periods Ended June 30, 2012 and 2011

We reported a net loss of $4,531,708, or $(0.01) per share, for the six months ended June 30, 2012, as compared with a net loss of $22,043,310, or $(0.03) per share, for the six months ended June 30, 2011. Basic and diluted weighted average shares outstanding were 758,708,606 and 702,367,953 for the six months ended June 30, 2012 and 2011, respectively.

Net revenues consist of service fees, advertising fees, membership fees and license fees. Net revenues for the six months ended June 30, 2012 and 2011 were $112,628 and $104,204, respectively. The following table provides a breakdown of revenue by web property for the six months ended June 30, 2012 and 2011.

                                                 YTD 6/30/12       YTD 6/30/11
Web Property                                         Revenue           Revenue           Change
A&R Music Live  / Music1 (acquired 2/1/2011)   $      50,395     $      41,610     $      8,785
Motorsport.com (acquired 2/1/2011)                    44,626             6,955           37,671
Openfilm.com / Launchpad                              16,486            52,429          (35,943 )
Netlab Systems                                         1,121             3,210           (2,089 )
Total Revenue                                  $     112,628     $     104,204     $      8,424

A&R Music Live / Music1 revenues increased $8,785 due to longer time period of ownership in 2012 (We bought A&R Music Live / Music1 in February, 2011). Motorsport.com revenues increased $37,671 due to longer time period of ownership in 2012 (We bought Motorsport.com in February, 2011) and due to re-establishment of revenue stream from advertising that was reduced dramatically subsequent to purchase in February, 2011. Openfilm / Launchpad revenues decreased $35,943 primarily due to license fee revenue decrease of $32,800 for the six months ending June 30, 2012 when compared to the six months ended June 30, 2011. License revenues vary from period to period based on contracts entered into during a particular period to use Launchpad or other software and/or services.

Operating expenses totaled $4,284,663 for the six months ended June 30, 2012, as compared to total operating expenses of $22,214,522 for the six months ended June 30, 2011. Most of total operating expenses in each of such periods consisted of general and administrative expenses. For the six months ended June 30, 2012, general and administrative expenses were $3,285,867, or 77% of total operating expenses during that period. For the six months ended June 30, 2011, general and administrative expenses were $21,625,854, or 97% of total operating expenses during that period. The components of our general and administrative expenses are discussed below.

Cost of revenues represents direct costs of generating revenues, including commissions, hosting, content acquired and created and certain payroll and consulting expenses that are directly related to revenue creation. Cost of revenues for the six months ended June 30, 2012 were $199,781 as compared to $372,190 for the six months ended June 30, 2011, which represents a decrease of $172,409, or 46%.

                                     YTD 6/30/12            YTD 6/30/11
   Web Property                 Cost of revenues       Cost of revenues         Change
   A&R Live / Music1          $           35,603     $           59,477     $  (23,874 )
   Motorsport.com                        116,792                 96,696         20,096
   Openfilm.com / Launchpad               42,965                107,183        (64,218 )
   Other                                   4,421                108,834       (104,413 )
   Total Cost of revenues     $          199,781     $          372,190     $ (172,409 )

A&R Live / Music1 cost of revenues for the six months ended June 30, 2012 was $35,603, or $23,874 lower than cost of revenues for the six months ended June 30, 2011, primarily due to web development work in Music1 being higher by $32,453 during the 2011 time period offset by $3,480 in increased hosting expenses, $1,276 in increased merchant fees and $3,521 in increased payroll and contractor expenses. Motorsport.com cost of revenues were higher in 2012 than 2011 by $20,096 primarily due to higher hosting costs of $17,906, higher content acquisition costs of $10,361, higher contractor expenses of $9,772 and higher commissions paid of $5,440, offset by lower travel expenses to produce content of $23,297 and lower internet connectivity costs of $3,582. Openfilm / Launchpad cost of revenues decreased $64,218 in the six months ended June 30, 2012 as compared to the six months ended June 30, 2011 primarily due to reductions of $49,350 in direct marketing and a reduction of $9,409 in commissions. Other cost of revenues decreased $104,413 for the six months ended June 30, 2012 when compared to the six months ended June 30, 2011 primarily due to a reduction in web development costs incurred to produce revenues.

Business development expenses consist of direct costs associated with developing our brand and developing revenue opportunities. Business development expenses increased by $359,012, or 342%, to $464,026 for the six months ended June 30, 2012 as compared with $105,014 for the six months ended June 30, 2011. For the six months ended June 30, 2012, business development expenses were primarily attributable to corporate activities ($446,287), and LegalGuru ($16,135). Business development expenses for the six months ended June 30, 2011 were primarily attributable to corporate activities ($65,136) and Motorsport ($36,507). Business development expenses attributable to corporate activities related primarily to business development of new website and services opportunities. LegalGuru business development expenses related primarily to marketing efforts. Motorsport business development expenses related primarily to branding through the use of paid marketing professionals at race events and the purchase of promotional items. The primary reasons for the increase in business development expense for the six months ended June 30, 2012 was $266,186 of expense related to promotion at Ferrari North American Challenge and $122,795 increase in travel relating to business development, partially offset by decreases in Motorsport of $36,157 as we did not have paid marketing professionals or promotional items at race events during 2012.

General and administrative expenses were $3,285,867 for the six months ended June 30, 2012 as compared to $21,625,854 for the six months ended June 30, 2011. General and administrative expenses for the six months ended June 30, 2012 and 2011 consisted of operating expenses not otherwise delineated in our Unaudited Condensed Consolidated Statements of Operations, including certain salaries, benefits, professional fees, travel, rent, Internet expenses and other expenses required to run our business. General and administrative expenses for the six months ended June 30, 2012 and 2011 were attributable to the properties or subsidiaries of the Company as follows:

                                     Six months ended       Six months ended
Property or Entity                      June 30, 2012          June 30, 2011
Net Element Corporate              $        1,913,198     $       20,534,918
Yapik                                          80,984                 44,580
Openfilm / Launchpad                           77,226                258,878
LegalGuru                                     130,886                 21,291
Motorsport                                    175,010                 94,152
A&R Music Live / Music1                       209,776                172,235
OOO Net Element Russia                        117,500                      -
Netlab Systems / Splinex                      581,287                499,800
Total general and administrative   $        3,285,867     $       21,625,854

General and administrative expenses for Net Element Corporate were $1,913,198 for the six months ended June 30, 2012 as compared to $20,534,918 for the six months ended June 30, 2011. For the six months ended June 30, 2012, general and administrative expenses for Corporate consisted primarily of $827,817 in non-cash compensation expense relating to the issuance of stock, options and warrants, $480,198 of payroll expenses, $414,546 of professional fees, $46,821 of recruiting expense and $17,416 of travel expense.

Of the $20,534,918 in general and administrative expenses for corporate for the six months ended June 30, 2011, $18,999,435 is attributable to non-cash compensation expense relating primarily to the issuance of stock and options pursuant to a subscription agreement with Enerfund during the period. Of the $1,535,483 remaining in corporate general and administrative expenses for the six months ended June 30, 2011, $889,163 consisted of payroll expense, $129,928 was for recruiting expenses, $247,840 in professional fees, $50,000 for accrual of disputed tax penalties (see Note 14 of the accompanying Notes to Unaudited Condensed Consolidated Financial Statements), $154,857 in travel and $63,695 of other general and administrative expenses.

Motorsport and A&R Music Live / Music1 were both purchased on February 1, 2011 so the six months ended June 30, 2011 only includes five months of operating expenses for each of those subsidiaries. Additionally, subsequent to acquisition, the Company increased its development efforts for both of those entities, which contributed to higher general and administrative expenses in the six months ended June 30, 2012 as compared to the six months ended June 30, 2011. LegalGuru and Yapik both started accumulating expenses in March of 2011 as start-up businesses and OOO Net Element Russia was formed during the second quarter of 2012, which explains the variance between general and administrative expenses for the six months ended June 30, 2012 versus the six months ended June 30, 2011. Openfilm / Launchpad general and administrative expense decreased $181,652 for the six months ended June 30, 2012 compared to the six months ended June 30, 2011 primarily due to reductions in payroll expenses ($90,018), travel ($28,097), consulting fees ($18,634) and professional services ($8,795). Expenses were lower in 2012 due to lower headcount and a reduced budget for Openfilm during 2012 as compared to 2011.

Product development expense was $146,648 for the six months ended June 30, 2012 as compared to $46,585 for the six months ended June 30, 2011 when the Company . . .