The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the unaudited condensed consolidated financial statements and the related notes thereto included elsewhere in this Quarterly Report on Form 10-Q and the audited consolidated financial statements and notes thereto and management's discussion and analysis of financial condition and results of operations for the fiscal year ended December 31, 2011, or fiscal year 2011, included in our Annual Report on Form 10-K for fiscal year 2011, or 2011 Annual Report on Form 10-K. References to "Epocrates," "we," "our" and "us" are to Epocrates, Inc. unless otherwise specified or the context otherwise requires.

This Quarterly Report on Form 10-Q contains "forward-looking statements" that involve risks and uncertainties, as well as assumptions that, if they never materialize or prove incorrect, could cause our results to differ materially from those expressed or implied by such forward-looking statements. The statements contained in this Quarterly Report on Form 10-Q that are not purely historical are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Terminology such as "believe," "may," "might," "objective," "estimate," "continue," "anticipate," "intend," "should," "plan," "expect," "predict," "potential" or the negative of these terms or other similar expressions is intended to identify forward-looking statements.

We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our financial condition, results of operations, business strategy and financial needs. Such forward-looking statements are subject to risks, uncertainties and other important factors that could cause actual results and the timing of certain events to differ materially from future results expressed or implied by such forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those identified in "Part II - Item 1A. Risk Factors" below, and those discussed in the sections titled "Special Note Regarding Forward-Looking Statements" and "Risk Factors" included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2011, as filed with the Securities and Exchange Commission, or SEC, on March 19, 2012. Furthermore, such forward-looking statements speak only as of the date of this report. Except as required by law, we undertake no obligation to update any forward-looking statements to reflect events or circumstances after the date of such statements.

Business Overview

Epocrates is a leading physician platform for essential clinical content, practice tools and health industry engagement at the point of care. The Epocrates network consists of more than one million healthcare professionals, including 50% of U.S. physicians, who routinely use its solutions and services. Epocrates' portfolio includes top-ranked medical applications, such as the industry's #1 medical application among U.S. physicians, which provides convenient, point-of-care access to information such as dosing, drug interactions, pricing and insurance coverage for thousands of brand, generic and over-the-counter drugs. The features available through our unique physician platform are often referenced multiple times per day and help healthcare professionals make more informed prescribing decisions, improve workflow and enhance patient safety. We offer our products on major U.S. mobile platforms including Apple, Android and BlackBerry.

We generate revenue by providing clients in the healthcare industry (e.g., pharmaceutical companies, managed care companies and market research firms) with interactive services to engage with our network of users and through the sale of subscriptions to our premium drug and clinical reference tools to healthcare professionals. Our client base is located almost entirely within the U.S. For the three months and six months ended June 30, 2012, one client accounted for more than 10% of total revenues. For the three and six months ended June 30, 2011, no single client accounted for more than 10% of total revenues. There were two clients that accounted for more than 10% of accounts receivable, net, one of which accounted for 15% of accounts receivable, net as of June 30, 2012. One client accounted for 15% of accounts receivable, net as of December 31, 2011.

Recent Developments

As previously reported, the Audit Committee of the Board of Directors of Epocrates, as authorized by the Board of Directors, approved the discontinuation of Epocrates' Electronic Health Record, or EHR, business in early 2012. In connection with this

decision, Epocrates recorded an impairment charge of approximately $8.5 million in its fourth fiscal quarter of 2011, which represents the write-down of the carrying value of the goodwill, intangible and other long-lived assets related to the EHR product to their estimated fair value of zero. This charge was recorded in Impairment of Long-lived Assets and Goodwill in our consolidated statements of operations for the year ended December 31, 2011.

Upon the Audit Committee's approval, we met the requirements for reporting the EHR segment as discontinued operations for the three months ended March 31, 2012, and the results of this segment are now recorded in gain (loss) from discontinued operations, net of tax on our condensed consolidated statements of comprehensive (loss) income. Prior period results have been revised to conform to the current period presentation.

In June 2012, we sold certain assets related to the EHR iPad application to a third party pursuant to a purchase agreement that was not material to our consolidated financial statements. The consideration received from the sale of the EHR iPad application together with all other miscellaneous wind-down costs resulted in a net gain of approximately $0.9 million for the three months ended June 30, 2012 and a net loss of approximately $2.1 million for the six months ended June 30, 2012.

The Company's condensed consolidated statements of comprehensive (loss) income for the six months ended June 30, 2012 have been revised from its earnings release on Form 8-K as filed on August 7, 2012 to correct the inclusion of approximately $0.2 million of research and development expenses for EHR employees in continuing operations for the three months ended March 31, 2012. The Company has reclassified such expenses to gain (loss) from discontinued operations for the six months ended June 30, 2012.

Highlights

• For the three months ended June 30, 2012, we recorded total revenues of $26.8 million, a decrease of $1.0 million, or 4%, from the three months ended June 30, 2011. For the six months ended June 30, 2012, we recorded total revenues of $54.4 million, a decrease of $2.7 million, or 5%, from the six months ended June 30, 2011. For both periods, the decrease was primarily due to an unusually high number of unused license code expirations for which we recognized revenue in the six months ended June 30, 2012.

• Net loss was $0.4 million for the three months ended June 30, 2012 versus net income of $3.4 million for the three months ended June 30, 2011. Net loss was $1.8 million for the six months ended June 30, 2012 versus net income of $2.3 million for the six months ended June 30, 2011. The net losses for both the three and six months ended June 30, 2012 were impacted by the gain on settlement and change in fair value of contingent consideration in the six months ended June 30, 2011 combined with decreased revenue and increased cost of revenue in the six months ended June 30, 2012.

• Net loss per share was $0.02 for the three months ended June 30, 2012 compared to net income per diluted share of $0.13 for the three months ended June 30, 2011. Net loss per share was $0.08 for the six months ended June 30, 2012 compared to net income per diluted share of $0.09 for the six months ended June 30, 2011.

• Loss from continuing operations was $1.3 million for the three months ended June 30, 2012 versus income from continuing operations of $4.2 million for the three months ended June 30, 2011, with such decrease primarily attributable to a $6.4 million gain on settlement of contingent consideration recognized in the three months ended June 30, 2011. Income from continuing operations was $0.3 million for the six months ended June 30, 2012 versus income from continuing operations of $4.4 million for the six months ended June 30, 2011.

• Loss from continuing operations per share was $0.05 for the three months ended June 30, 2012 compared to income from continuing operations of $0.17 per diluted share for the three months ended June 30, 2011. Income from continuing operations per diluted share was less than $0.01 per share for the six months ended June 30, 2012 compared to income from continuing operations of $0.19 per diluted share for the six months ended June 30, 2011.

• Earnings before interest, taxes, non-cash and other items ("adjusted EBITDA"), as defined in the GAAP to non-GAAP reconciliation provided in "Non-GAAP Financial Measures," was $2.2 million for the three months ended June 30, 2012 compared to adjusted EBITDA of $5.3 million for the three months ended June 30, 2011. For the six months ended June 30, 2012, adjusted EBITDA was $7.1 million compared to $11.7 million for the six months ended June 30, 2011. The decrease in adjusted EBITDA for the three and six months ended June 30, 2012 was primarily attributable to decreased revenue coupled with an increase in cost of revenue compared to the three and six months ended June 30, 2011.

• Total cash, cash equivalents and short-term investments declined by 4% to $81.9 million at June 30, 2012 compared to $85.2 million at December 31, 2011.

Critical Accounting Policies and Estimates

The preparation of financial statements in accordance with accounting principles generally accepted in the U.S., or GAAP, requires us 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 financial statements and the reported amounts of revenue and expenses during the reporting period. We base our estimates and assumptions on current facts, historical experience and various other factors that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities and the accrual of costs and expenses that are not readily apparent from other sources. The actual results experienced by us may differ materially and adversely from our estimates. Our critical accounting policies are those that affect our historical financial statements materially and involve difficult, subjective or complex judgments by management.

There have been no significant changes in our critical accounting policies during the quarter ended June 30, 2012 compared to those previously disclosed in "Critical Accounting Policies and Estimates" in "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in our 2011 Annual Report on Form 10-K.

Results of Operations

The following table summarizes our results of operations for the three and six
months ended June 30, 2012 compared to the three and six months ended June 30,
2011 (in thousands):
                                          Three Months Ended             Six Months Ended
                                               June 30,                      June 30,
                                         2012            2011           2012           2011
Total revenues, net                  $    26,824     $   27,860     $   54,355     $   57,037
Total cost of revenues                    10,949          9,768         21,236         19,158
Gross profit                              15,875         18,092         33,119         37,879
Operating expenses:
Sales and marketing                        6,711          6,482         12,793         13,602
Research and development                   5,364          5,055         10,128         10,075
General and administrative                 5,234          5,908         10,220         12,165
Facilities exit costs                          -             58              -            618
Gain on settlement and change in
fair value of contingent
consideration                                  -         (6,439 )            -         (5,933 )
Total operating expenses                  17,309         11,064         33,141         30,527
(Loss) income from operations             (1,434 )        7,028            (22 )        7,352
Interest income                                5             23             11             51
Other (expense) income, net                   (2 )          177             (1 )          179
(Loss) income before income taxes         (1,431 )        7,228            (12 )        7,582
Benefit from (provision for) income
taxes                                        147         (2,998 )          288         (3,150 )
(Loss) income from continuing
operations                                (1,284 )        4,230            276          4,432
Gain (loss) from discontinued
operations, net of tax                       885           (837 )       (2,113 )       (2,165 )
Net (loss) income                    $      (399 )   $    3,393     $   (1,837 )   $    2,267

In 2011, we had two reportable segments: Subscriptions and Interactive Services and EHR. On February 24, 2012, the Audit Committee of our Board of Directors, as authorized by the Board of Directors, approved the discontinuation of Epocrates' EHR product. In the first quarter of 2012, we qualified for discontinued operations presentation under GAAP, and at such time, the EHR operating segment results were reported in loss from discontinued operations on our condensed consolidated statements of comprehensive (loss) income. Prior period amounts have been revised in order to conform to the current period presentation.

Revenues

We generate revenue by providing healthcare companies with interactive services to engage with our network of users and through the sale of subscriptions to our premium drug and clinical reference tools to healthcare professionals. Revenues from Subscriptions and Interactive Services were as follows (in thousands):

                          Three Months Ended         Six Months Ended
                               June 30,                  June 30,
                           2012         2011         2012        2011
Subscriptions          $     4,751    $  6,094    $   9,427    $ 12,303
Interactive Services        22,073      21,766       44,928      44,734
                       $    26,824    $ 27,860    $  54,355    $ 57,037

Subscriptions. Subscriptions revenue decreased $1.3 million for the three months ended June 30, 2012 and $2.9 million for the six months ended June 30, 2012. The decrease in subscriptions revenue for both the three and six months ended June 30, 2012 is primarily attributable to the unusually high number of unused license code expirations for which we recognized revenue in the first half of 2011. The difference in unused license code expirations contributed to $1.0 million of the decrease in subscriptions revenue for the three months ended June 30, 2012 and $2.1 million of the decrease for the six months ended June 30, 2012. The decline in subscriptions revenue was additionally impacted by a decrease of approximately $0.2 million in the three months ended June 30, 2012 and approximately $0.4 million in the six months ended June 30, 2012 in iTunes App Store sales, as we decreased our offering of Modality applications from the prior year. We expect the percentage of users who pay for a subscription to remain unchanged or even decrease over time. As a result, we expect subscription revenue from our premium products to decrease in total and as a percentage of revenue in the future.

Interactive Services. Interactive services revenue increased $0.3 million for the three months ended June 30, 2012 and $0.2 million for the six months ended June 30, 2012. The $0.3 million increase in interactive services revenue in the three months ended June 30, 2012 compared to the three months ended June 30, 2011 was due to a $0.7 million increase in market research services, which was partially offset by a $0.3 million decrease in pharmaceutical revenues. The $0.2 million increase in interactive services revenue for the six months ended June 30, 2012 is the result of a $1.1 million increase in market research services, which was partially offset by a $0.5 million decrease in pharmaceutical revenues and a $0.4 million decrease in formulary hosting revenues. The $0.5 million decrease in pharmaceutical revenues is largely attributable to a $0.6 million decline in EssentialPoints revenue as a result of a reduced number of running activities in the year-to-date.

Cost of revenues

Cost of revenues consists of the costs related to providing services to clients which include salaries and related personnel expenses, stock-based compensation, service support costs, payments to participants for market research surveys we conduct for our clients, third-party royalties and allocated overhead. Third-party royalties consist of fees paid to branded content owners for the use of their intellectual property in our premium drug and reference products. Allocated overhead represents expenses such as rent, occupancy charges and information technology costs that we allocate to all departments based on headcount. We also allocate depreciation and amortization expense to cost of revenues.

The following is a breakdown of cost of revenues related to subscriptions and interactive services for the three and six months ended June 30, 2012 and 2011 (in thousands):

                           Three Months Ended           Six Months Ended
                                June 30,                    June 30,
                             2012           2011        2012        2011
Subscriptions          $     1,749        $ 1,800    $   3,698    $  3,843
Interactive Services         9,200          7,968       17,538      15,315
                       $    10,949        $ 9,768    $  21,236    $ 19,158

Subscriptions. Cost of subscriptions revenue decreased by $0.1 million for both the three and six months ended June 30, 2012 versus the same periods in 2011. As a percentage of subscriptions revenue, cost of subscriptions revenue was 37% for the three months ended June 30, 2012 versus 30% for the three months ended June 30, 2011. Cost of subscriptions revenue was 39% for the six months ended June 30, 2012 versus 31% for the six months ended June 30, 2011. These increases in cost of subscriptions revenue as a percentage of subscriptions revenue is due to the decline in subscriptions revenue from the same period in the prior year as a result of the recognition of revenue on an unusually high number of expired license codes during the first half of 2011.

Interactive Services. Cost of interactive services revenue increased approximately $1.2 million for the three months ended June 30, 2012 compared to the same period in 2011, primarily due to increases of $0.5 million in honoraria expenses as a result of higher market research activity in the second quarter of 2012, $0.3 million in increased co-location employee-related expenses as a result of hiring new employees and $0.3 million in fulfillment and partner fees associated with our mSampling and DocAlert

product offerings.

Cost of interactive services revenue increased approximately $2.2 million for the six months ended June 30, 2012 compared to the same period in 2011, primarily due to increases of $0.7 million in honoraria expenses as a result of higher market research activity in the first half of 2012, $0.7 million in fulfillment and partner fees associated with our mSampling and DocAlert product offerings and $0.7 million in increased co-location employee-related expenses as a result of hiring new employees.

Cost of interactive services revenue as a percentage of interactive services revenue was 42% for the three months ended June 30, 2012, 37% for the three months ended June 30, 2011, 39% for the six months ended June 30, 2012 and 34% for the six months ended June 30, 2011.

Sales and marketing expense

Sales and marketing expense primarily consists of salaries and related personnel expenses, sales commissions, stock-based compensation, trade show expenses, promotional expenses, public relations expenses and allocated overhead.

Sales and marketing expense increased approximately $0.2 million, or 4%, for the three months ended June 30, 2012 versus the same period in 2011. This increase was due to a $0.4 million increase in salaries expense as a result of several positions being filled in the three months ended June 30, 2012; this increase was partially offset by a $0.2 million decrease in sales commissions as a result of a revised commission plan for 2012. Sales and marketing expense decreased approximately $0.8 million, or 6%, for the six months ended June 30, 2012 versus the same period in 2011. This decrease was primarily due to a $0.9 million reduction in sales commissions as a result of a revised commission plan for 2012.

Sales and marketing expense as a percentage of total revenues increased from 23% for the three months ended June 30, 2011 to 25% for the three months ended June 30, 2012. Sales and marketing expense as a percentage of total revenues was 24% both the six months ended June 30, 2012 and 2011.

Research and development expense

Research and development expense primarily consists of salaries and related personnel expenses, stock-based compensation, allocated overhead, consultant fees and expenses related to the design, development, testing and enhancements of our services.

Research and development expense increased approximately $0.3 million, or 6%, for the three months ended June 30, 2012 compared to the three months ended June 30, 2011. This increase was primarily due to a $0.4 million increase in consulting fees. As a percentage of total revenues, research and development expense was 20% for the three months ended June 30, 2012 and 18% for the three months ended June 30, 2011.

Research and development expense increased approximately $0.1 million, or 1%, for the six months ended June 30, 2012 compared to the six months ended June 30, 2011. As a percentage of total revenues, research and development expense was 19% for the six months ended June 30, 2012 and was 18% for the six months ended June 30, 2011.

General and administrative expense

General and administrative expense primarily consists of salaries and related personnel expenses, stock-based compensation, consulting, audit fees, legal fees, allocated overhead and other general corporate expenses.

General and administrative expense decreased $0.7 million, or 11%, for the three months ended June 30, 2012 compared to the three months ended June 30, 2011. This decrease was primarily due to a $0.9 million decrease in legal fees, as the three months ended June 30, 2011 included legal fees associated with the SEC subpoena, which was partially offset by a $0.3 million increase in professional fees necessary to comply with the financial statement and internal controls audit requirements for public companies. General and administrative expense as a percentage of total revenues was 20% for the three months ended June 30, 2012 and was 21% for the three months ended June 30, 2011.

General and administrative expense decreased $1.9 million, or 16%, for the six months ended June 30, 2012 compared to the six months ended June 30, 2011. This decrease was primarily due to decreases of $0.9 million in legal fees, $0.7 million in stock-based compensation expense and $0.3 million in recruiting expenses. We incurred significant legal and other professional fees during the six months ended June 30, 2011 to support our compliance with the subpoena received in connection with an SEC investigation. The $0.7 million decrease in stock-based compensation was primarily due to additional stock-based compensation expense of $0.5 million in the six months ended June 30, 2011 that was recorded in connection with the modification of the terms

of the stock options held by certain directors who resigned from the Board of Directors during the first quarter of 2011. General and administrative expense as a percentage of total revenues was 19% for the six months ended June 30, 2012 and was 21% for the six months ended June 30, 2011.

Facilities exit costs

We recorded a charge of approximately $0.6 million in the six months ended June 30, 2011 relating to facilities exit costs. We vacated our East Windsor, New Jersey office in the first quarter of 2011 and relocated our New Jersey operations to Ewing, New Jersey. We had signed a non-cancellable lease with the landlord which does not expire until the end of fiscal 2012 and therefore we will be liable to make monthly lease rentals under the contract. The liability recorded at fair value is based on the present value of the remaining lease rentals and is reduced for the estimated sub-lease rentals that could be reasonably obtained for the property.

Gain on settlement and change in fair value of contingent consideration

For the three months ended June 30, 2011, gain on settlement and change in fair value of contingent consideration reflects a gain of approximately $6.4 million as a result of an agreement we entered into with the sellers of MedCafe, Inc. to settle the earn-out consideration liability for a lump sum payment of $6.4 million.

For the six months ended June 30, 2011, gain on settlement and change in fair value of contingent consideration reflects a $6.4 million gain on settlement as a result of an agreement entered into with the sellers of MedCafe, Inc. during June 2011 offset by an increase in contingent consideration expense of $0.5 million related to revaluing the contingent consideration liability to its fair value as of March 31, 2011.

Benefit from (provision for) income taxes

For the three months ended June 30, 2012, we recorded an income tax benefit of approximately $0.3 million, of which $0.2 million was allocated to continuing operations, with the balance of $0.1 million allocated to discontinued operations. For the three months ended June 30, 2011, we recorded an income tax provision of $2.5 million, which was comprised of a tax provision of approximately $3.0 million allocated to continuing operations and a tax benefit of $0.5 million allocated to discontinued operations. The income tax benefit during the three months ended June 30, 2012 represented the federal and state statutory rates adjusted for non-deductible stock compensation expense. The income tax provision during the three months ended June 30, 2011 represented the federal and state statutory tax rates adjusted for non-deductible stock compensation expense partially offset by research and development credits.

For the six months ended June 30, 2012, we recorded an income tax benefit of . . .