Audit Committee Charter

Amended by the Board of Directors: September 8, 2005



There shall be a committee of the Board of Directors (the "Board") of Inspire Pharmaceuticals, Inc. (the "Company", "Inspire") to be known as the Audit Committee (the "Committee"), whose purpose, composition, duties, responsibilities, resources and procedures are as follows:

Purpose of the Committee
The purpose of the Committee is to oversee the accounting and financial reporting processes of the Company and audits of the financial statements of the Company. The Committee shall provide assistance to the Board in overseeing the Company's accounting and financial reporting processes, its internal accounting, financial and disclosure controls, the quality and integrity of its financial statements and the annual audit by the Company's independent registered public accounting firm (the "Independent Auditor"). In so doing, the Committee shall endeavor to maintain free and open communication between the Committee, the Independent Auditor, and management of the Company ("Management"). In discharging its oversight role, the Committee is empowered to investigate any matter brought to its attention with full access to all books, records, facilities and personnel of the Company and to retain outside legal counsel, accountants or other consultants for this purpose or to advise the Committee on any matter within the scope of its responsibilities, as it deems necessary or appropriate, without the need to seek approval of the Board or Management.

Composition of the Committee
The Board shall appoint the members of the Committee, upon the recommendation of the Corporate Governance Committee. The Committee will be composed of not less than three (3) Board members. Each member of the Committee shall be an independent director, as determined by the Board, consistent with current law and the rules and regulations of the Nasdaq Stock Market, Inc. ("Nasdaq"). Each Committee member shall serve at the pleasure of the Board and for such term or terms as the Board shall determine. The Board shall appoint the Chairperson of the Committee at its first meeting after each annual meeting of the stockholders, or as the Committee shall determine necessary or appropriate. All members of the Committee shall be financially literate as required by applicable law or regulation. At least one (1) member of the Committee shall have past employment experience in finance or accounting, requisite professional certification in accounting, or any other comparable experience or background which results in that individual's financial sophistication in accordance with current law and Nasdaq rules and regulations.

Duties and Responsibilities
The primary responsibility of the Committee is to oversee the Company's accounting and financial reporting processes on behalf of, and to report the results of its activities to, the Board. Management is responsible for preparing the Company's financial statements and the Independent Auditor is responsible for auditing those financial statements. The policies and procedures of the Committee in carrying out its responsibilities should remain flexible in order to best react to changing conditions and circumstances. The specific duties and responsibilities of the Committee shall include the following:

Oversight of the Company's Relationship with the Independent Auditor

1.

The Committee has sole and direct responsibility for the appointment, compensation, retention (and where appropriate, replacement) and oversight of the Independent Auditor. The Independent Auditor shall report directly to the Committee.

2.

The Committee shall have a clear understanding with Management and the Independent Auditor that the Independent Auditor is ultimately accountable to the Board and the Committee, as representatives of the Company's stockholders.

3.

The Committee shall review annually the selection of the Independent Auditor and ensure compliance with applicable independence and rotation requirements.

4.

The Committee shall review and discuss with the Independent Auditor its independence from the Company and actively engage the Independent Auditor in a dialogue with respect to any disclosed relationship or services that may impact its objectivity and independence. The Committee shall require the Independent Auditor to provide a formal written statement delineating all relationships between the Independent Auditor and the Company consistent with the Independence Standards Board Standard 1.

5.

The Committee shall review and pre-approve or, as appropriate, establish policies and procedures for the review and approval of, all audit services and all permissible non-audit services to be provided by the Independent Auditor, and the Committee shall have sole authority to determine whether, when and how the Independent Auditor is engaged by the Company to provide non-audit services.

6.

The Committee shall discuss with the Independent Auditor the overall scope of and plans for the annual audit, including the adequacy of staffing and compensation. Further, the Committee shall meet with the Independent Auditor to discuss the results of the annual audit and accompanying management letters, and any other matters required to be communicated to the Committee by the Independent Auditor under generally accepted auditing standards, applicable law, and Nasdaq rules and regulations.

7.

The Committee shall follow hiring policies for the Company with regard to employees and former employees of the Independent Auditor consistent with current law and Nasdaq rules and regulations.

 

 

Financial Statement and Disclosure Matters

8.

The Committee shall review with Management and the Independent Auditor the audited financial statements and related footnotes, Management's Discussion and Analysis and all other financial information proposed to be included in the Company's applicable Annual Report on Form 10-K, including the Independent Auditor's judgment about the quality of accounting principles, the application of significant accounting policies, the reasonableness of significant judgments and the clarity of the disclosures therein. The Committee shall also recommend to the Board whether the audited financial statements should be included in the Company's Annual Report on Form 10-K for the fiscal year subject to the audit. Further, the Committee shall review and discuss with Management the Company's annual operating results press releases prior to publication.

9.

The Committee shall discuss with Management and the Independent Auditor the adequacy and effectiveness of the Company's accounting, financial and internal controls, including any suggested improvements or any material weaknesses reported by the Independent Auditor, management reports concerning the Company's internal controls, reports of any internal audit provider regarding compliance, design and testing of the Company's internal controls and reports by the Independent Auditor attesting to the Company's internal controls.

10.

The Committee shall review the interim financial statements with Management and the Independent Auditor prior to the filing of the Company's applicable Quarterly Report on Form 10-Q. The Committee shall discuss with the Independent Auditor the results of the Independent Auditor's quarterly review and any other matters required to be communicated to the Committee by the Independent Auditor under generally accepted auditing standards. Further, the Committee shall review and discuss with Management the Company's quarterly operating results press releases prior to publication. The Committee will discuss quarterly with Management and the Independent Auditor the disclosure controls and Management's certification of those controls.

11.

The Committee shall review and approve any "non-GAAP" financial disclosures (including but not limited to pro forma financial disclosures) prior to their release by the Company.

12.

The Committee shall review and discuss with Management any off-balance sheet financing arrangements to which the Company is a party.

 

 

Oversight of the Company's Internal Audit Function

13.

The Committee shall review and discuss with Management the scope and responsibilities of the Company's internal audit function.

14.

The Committee shall review the significant reports to Management prepared by the internal audit provider and Management's responses, if any.

 

 

Other Powers and Responsibilities

15.

The Committee shall prepare a report to be included in the Company's annual proxy statement in accordance with the requirements of the Securities and Exchange Commission ("SEC").

16.

The Committee shall discuss with Management and, as appropriate, the Independent Auditor, any Current Reports on Form 8-K directly relating to financial and accounting matters, or as requested by the Board.

17.

The Committee, or another independent body of the Board, shall review and approve all related party transactions as required by current law and Nasdaq rules and regulations.

18.

The Committee shall discuss with the Company's General Counsel or outside counsel legal matters that may have a material impact on the financial statements of the Company or the Company's compliance policies.

19.

The Committee shall establish and oversee procedures consistent with legal requirements for the receipt, retention and treatment of complaints received by the Company regarding accounting, internal controls, auditing or legal compliance matters, including procedures for the confidential, anonymous submission by employees of the Company of concerns regarding questionable accounting or auditing matters and the Company's policy, to the extent required, with regard to professional responsibility rules for attorneys practicing before the SEC.

20.

The Committee shall review and discuss any reports concerning a violation of securities laws or breach of fiduciary duty or similar violation by the Company, or any employee or agent of the Company, submitted to the Committee by any attorney employed by or performing legal services for the Company pursuant to the SEC and/or securities exchange attorney professional responsibility rules.

21.

The Committee shall receive regular reports from the Company's Corporate Compliance Officer regarding the activities of the Compliance Department. The Corporate Compliance Officer shall report to the Committee any significant matters including any allegations regarding accounting, internal auditing controls or auditing matters; any serious and substantial compliance issues; and material reports or inquiries received from regulators or governmental agencies.

22.

The Committee shall review at least annually with Management and the Independent Auditor the Company's "Code of Ethics and Conduct Relating to Financial Affairs" relating to senior executive, financial and accounting officers, as well as other personnel, and monitor compliance therewith.

23.

The Committee shall review and discuss accounting pronouncements, initiatives and proposed rule changes relevant to the Company.

24.

The Committee shall review on an annual basis any policies adopted by the Committee, including its policy, if any, regarding the pre-approval of audit and non-audit services.

25.

The Committee shall review and reassess this Audit Committee Charter on an annual basis, shall recommend any proposed changes to the Board, and shall ensure that a copy of this Audit Committee Charter is publicly disclosed as required by law and Nasdaq rules and regulations.

26.

The Committee shall review on an annual basis the performance of the Committee, and report to the Board the results of such review. The review shall be conducted in such manner as the Committee deems appropriate.

27.

The Committee shall review such other matters (primarily financial matters) as is deemed appropriate by the Board and the Committee. By way of example, such other areas might include risk management and investment performance.

Resources
The Company shall provide for appropriate funding, as determined by the Committee, in its capacity as a committee of the Board, for payment of compensation to the Independent Auditor and any other public accounting firm engaged for the purpose of preparing or issuing an audit report or performing other audit, review or attest services for the Company; compensation of any advisers employed by the Committee; and ordinary administrative expenses of the Committee that are necessary or appropriate in carrying out its duties.

Procedural Matters
Meetings
The Committee shall meet at least quarterly, or more frequently as circumstances dictate. The Chairperson shall establish the agenda of each Committee meeting with the assistance of appropriate members of Management. The agenda, whenever reasonably practicable, shall be circulated to each Committee member prior to the meeting date. Each Committee member is free to suggest the inclusion of items on the agenda. Each Committee member is free to raise at any Committee meeting subjects that are not on the agenda for that meeting. The Chairperson of the Committee (or in his or her absence, a member designated by the Chairperson) shall preside at each meeting of the Committee. A majority of the members of the Committee shall constitute a quorum for the transaction of business at any meeting of the Committee. Appropriate officers of the Company may attend any meeting of the Committee, except for portions of such meetings where the officers' presence would be inappropriate, as determined by the Committee. The Committee may request any officer or employee of the Company or the Company's outside counsel, internal audit provider or Independent Auditor to attend a meeting of the Committee or to meet with any members of, or consultants to, the Committee. The Committee may hold separate executive sessions with Management, the Independent Auditor and/or the Company's internal audit provider, as appropriate. The Committee may meet by telephone or videoconference and may take action by unanimous written consent.

Minutes and Reports
The Committee shall maintain minutes of each meeting. The Committee shall report the matters discussed at each Committee meeting to the Board from time to time, or whenever so requested by the Board.