A.     Purpose

The Audit Committee (the “Committee”) shall provide assistance to the members of the Board of Directors (the “Board of Directors” or the “Board”) of Insurance Auto Auctions, Inc. (the “Company”) in fulfilling its oversight functions. In doing so, it shall be the responsibility of the Committee to maintain free and open means of communication between the members of the Board, the Company’s independent public accountants who audit the Company’s financial statements (the “Auditors”), and the Company’s financial management and the internal auditing staff. The Board shall have the ultimate authority and responsibility, based upon recommendations from the Committee, to select, and where appropriate, replace the Auditors, who are ultimately accountable to the Board of Directors and the Committee. While it is not the Committee’s responsibility to certify the Company’s financial statements or to guarantee the auditor’s report, the Committee will facilitate discussions among the Board, the Auditors and the Company’s management.

B.     Scope

While the Committee has the functions set forth in this Charter, the Company’s management is responsible for preparing the Company’s financial statements, and the Auditors are responsible for auditing those financial statements. Management is also responsible for implementing procedures to help ensure that the Company or any Company employee complies with all applicable laws and regulations or with the Company’s applicable ethics standards. The Committee plays a critical role in serving as a check and balance for the Company’s financial reporting system. In carrying out its functions, the Committee’s goal is to help ensure that management properly develops and adheres to a sound system of internal controls and that the Auditors, through their own review, objectively assess the Company’s financial reporting practices.

C.    Composition

The Committee shall be comprised of three members who shall satisfy the requirements, including independence and experience, of the Sarbanes-Oxley Act of 2002, the National Association of Securities Dealers for companies listed on the NASDAQ National Market (“NASDAQ”), and any other applicable requirements. Committee members and the Committee Chairman shall be designated by the full Board of Directors upon the recommendation of the Chairman of the Board, in consultation with the Nominating, Governance and Compensation Committee.

D.    Functions

In carrying out its functions, the Committee’s policies and procedures shall remain flexible, so that it may be in a position to react or respond to changing circumstances or conditions. The Committee shall review and reassess no less than annually the adequacy of the Committee’s Charter. While there is no “blueprint” to be followed by the Committee in carrying out its functions, the following shall be considered within the Committee’s authority.

The Committee’s functions may be divided into the following general categories: (1) overseeing financial reporting, (2) evaluating independent and internal audit processes (3) reviewing internal controls established by management, and (4) other functions. The Committee shall:

  1. Financial Reporting
    1. Meet with the Auditors and the Company’s management to discuss, review and comment upon the interim financial statements to be included in each of the Company’s Quarterly Reports on Form 10-Q prior to the public announcement of financial results and the filing of such reports with the Securities and Exchange Commission (the “SEC”). All members of the Committee are encouraged to attend these meetings; however, a quorum for these meetings or for this portion of regular meetings of the Committee may be the Chairman of the Committee as authorized by applicable rules.
    2. Review with the Auditors, the Company’s management and the internal auditors the Company’s annual financial statements to be included in the Company’s Annual Report on Form 10-K prior to the public announcement of financial results and the filing of the Form 10-K with the SEC.
    3. Review the disclosure under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in each Annual Report on Form 10-K and Quarterly Report on Form 10-Q, prior to the filing thereof with the SEC.
    4. Based upon discussions with, and reliance upon, the Auditors and the Company’s management, cause to be prepared a report for inclusion in the Company’s proxy statement, which report will satisfy the requirements of the Securities Exchange Act of 1934 (the “Exchange Act”). In addition, the Committee will provide any other audit committee-related disclosure, in the Company’s filings with the SEC or otherwise, required by applicable securities laws, rules and regulations or by the rules of the NASDAQ.
    5. Discuss with the Auditors their judgments about the quality, not just the acceptability, of the Company’s accounting principles and financial disclosure practices used or proposed and the appropriateness of significant management judgments.
    6. Discuss with management and the Auditors the effect of regulatory and accounting initiatives, as well as off-balance sheet structures, on the Company’s financial statements.
    7. Review a report from the Auditors periodically, but no less than annually, as to (i) all critical accounting policies to be used, (ii) all alternative disclosures and treatments of financial information within generally accepted accounting principles that have been discussed with the Company’s management, the ramifications of the use of such alternative disclosures and treatments and the disclosures and treatments preferred by the Auditors; and (iii) other material written communications between the Auditors and the Company’s management, including management letters and schedules of unadjusted differences.
    8. Recommend to the Board, based upon the review and discussion described above, whether the annual financial statements should be included in the Company’s Annual Report on Form 10-K.
  1. Audit Processes
    1. Assume direct responsibility for the appointment, retention, replacement or termination, compensation, evaluation and oversight of the work of the Auditors (including resolution of disagreements between the Auditors and the Company’s management regarding issues relating to accounting standards, financial reporting, the preparation of the Company’s financial statements and periodic reports, and such other related issues that the Committee deems to be within its purview).
    2. Pre-approve, and adopt such procedures for the pre-approval of, all audit services and permitted non-audit services to be provided to the Company by the Auditors, as required by Section 10A(i) of the Exchange Act and the SEC rules adopted thereunder. The Committee may delegate, subject to any rules or limitations it deems appropriate, to one or more designated members of the Committee the authority to grant such pre-approvals; provided, however, that the decisions of any member to whom authority is so delegated to pre-approve an activity shall be presented to the full Committee for ratification at its next meeting.
    3. On an annual basis, review and discuss with the Auditors all significant relationships the Auditors have with the Company in order to determine the Auditors’ independence. As part of such a review process, the Committee shall receive the written disclosures and an annual statement from the Auditors relating to their independence, as required by Independent Standards Board Standard No. l, and make inquiries to the Auditors as to any matters disclosed therein.
    4. On an annual basis, obtain and review a report from the Auditors concerning their internal quality control review of the firm, any inquiry or investigation by governmental or professional authorities within the preceding five (5) years respecting one or more independent audits carried out by the firm and any steps taken to address such issues.
    5. Review the experience and qualifications of the senior members of the Auditors’ team.
    6. Review the annual audit plan of the Auditors and evaluate their performance and adherence to the prior year’s audit plan.
    7. Require the rotation of the lead audit partner on a regular basis in accordance with the requirements of the Exchange Act.
    8. Review and approve or veto the Company’s hiring of employees or former employees of the Auditors who participated in any capacity in the audits of the Company.
    9. Following completion of the annual audit, review separately with the Company’s management and the Auditors any significant difficulties encountered during the course of the audit, including any restrictions on the scope of work or access to required information.
  1. Internal Controls
    1. Establish procedures for (i) the receipt, retention and treatment of complaints received by the Company regarding accounting, internal accounting or financial controls or auditing matters, and (ii) the confidential, anonymous submission by employees of the Company of concerns regarding questionable accounting, financial or auditing matters.
    2. Review periodically the Company’s Code of Conduct and the Company’s program to monitor compliance with that Code of Conduct.
    3. Review with the Auditors, the Company’s management and the internal auditors the Company’s internal accounting and financial control policies and procedures, including management’s controls and security procedures with respect to the Company’s information systems.
    4. Review with the Auditors and the Company’s management the extent to which changes or improvements in financial or accounting practices, as approved by the Committee, have been implemented. This review will be conducted at an appropriate time subsequent to implementation of changes or improvements, as decided by the Committee.
    5. Review periodically with counsel to the Company legal and regulatory matters that could have a significant effect on the Company’s financial statements.
  1. Other Functions
    1. Review and approve related party transactions and conflicts of interest questions between Board members or senior management, on the one hand, and the Company, on the other hand.
    2. Discuss the Company’s policies with respect to risk assessment and risk management.
    3. Oversee and review the Company’s asset management policies, including an annual review of the Company’s investment policies and performance for cash and short-term investments.
    4. Review the Company’s compliance with employee benefit plan requirements.
    5. Investigate any other matter brought to its attention within the scope of its duties that it deems appropriate for investigation.
    6. Have the authority to engage and determine funding for outside legal, accounting or other advisors as it deems necessary to carry out its functions.
    7. Perform an annual evaluation of the Committee.
    8. Perform such other functions as assigned by law, the Company’s certificate of incorporation and Bylaws, and the Board of Directors, and as are provided by the SEC and the NASDAQ.
    9. Regularly report its activities, findings and conclusions to the full Board of Directors, including providing copies to the full Board of all approved Committee meeting minutes.

E.     Meetings

The Committee shall hold four (4) regular meetings and any special meetings as may be necessary or called by the Chairman of the Committee or at the request of the Auditors or the internal auditing staff or management. Members of senior management, the Auditors or others may attend meetings of the Committee at the invitation of the Committee and shall provide pertinent information as necessary. The Committee shall meet with the Auditors, the internal auditing staff and management in separate executive sessions to discuss any matters that the Committee or these groups believe should be discussed privately with the Committee. The Committee may meet via telephone conference calls.

F.     Communications with the Board of Directors

The Committee shall, after each meeting, report its activities, findings and conclusions to the full Board of Directors.

March 2004