<PAGE>


                          SECURITIES AND EXCHANGE COMMISSION
                               WASHINGTON, D.C.  20549
                                           
                                      FORM 10-Q
                                          
(Mark One)

[X]  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
     ACT OF 1934
    
For the quarterly period ended September 30, 1996     

                                          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 Number:     0-19594
                                                       -------
                                            
                            INSURANCE AUTO AUCTIONS, INC.
                            -----------------------------
                (Exact name of registrant as specified in its charter)
                                           
 California                                                           95-3790111
(State or other jurisdiction of             (I.R.S. Employer Identification No.)
incorporation or organization)

1270 West Northwest Highway, Palatine, Illinois                            60067
--------------------------------------------------------------------------------
(Address of principal executive offices)                              (Zip Code)

                                  (847) 705-9550
--------------------------------------------------------------------------------
                 (Registrant'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.

                                                            /X/ Yes  / / No

                         APPLICABLE ONLY TO CORPORATE ISSUERS
                                           
Number of shares outstanding of each of the issuer's classes of common stock, as
of September 30, 1996:

                      Class                 Outstanding September 30, 1996
                      -----                 ------------------------------
       Common Stock, $0.001 Par Value              11,282,088 shares

<PAGE>

                                        INDEX
                                           
                            INSURANCE AUTO AUCTIONS, INC.

<TABLE>
<CAPTION>
                                                                          PAGE NUMBER
                                                                          -----------
<S>                                                                       <C>
PART I.  FINANCIAL INFORMATION.........................................         3

Item 1.  Financial Statements (Unaudited)..............................         3

         Condensed Consolidated Balance Sheets
             as of  September 30, 1996 and December 31, 1995...........         3
         Condensed Consolidated Statements of Operations for the
             Three Month Periods ended September 30, 1996 and 
             September 30, 1995 and the Nine Month Periods ended 
             September 30, 1996 and September 30, 1995.................         4
         Condensed Consolidated Statements of Cash Flows for the
             Nine Month Periods ended September 30, 1996 and 
             September 30, 1995........................................         5
         Notes to Condensed Consolidated Financial Statements..........         6

Item 2.  Management's Discussion and Analysis of Financial Condition
             and Results of Operations.................................         8

PART II.  OTHER INFORMATION............................................        15

Item 1.  Legal Proceedings and Other Matters...........................        15

Item 2.  Changes in Securities ........................................        15

Item 3.  Defaults upon Senior Securities...............................        15

Item 4.  Submission of Matters to a Vote of Security Holders...........        15

Item 5.  Other Information.............................................        15

Item 6.  Exhibits and Reports on Form 8-K..............................        15

Signatures.............................................................        16

</TABLE>

                                       2
<PAGE>

PART I.  FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS (UNAUDITED)

                            INSURANCE AUTO AUCTIONS, INC.
                                   AND SUBSIDIARIES
                        CONDENSED CONSOLIDATED BALANCE SHEETS
                                     (UNAUDITED)
                                           

                                   September 30,         December 31,
                                       1996                 1995     
                                   --------------        ------------
ASSETS

Current assets:
    Cash and cash equivalents       $  4,383,000        $    362,000
    Short-term investments             8,802,000           6,820,000
    Accounts receivable, net          32,485,000          30,198,000
    Inventories                        9,377,000           9,495,000
    Other current assets               2,773,000           3,591,000
                                    ------------        ------------
         Total current assets         57,820,000          50,466,000
                                    ------------        ------------
Property and equipment, at 
  cost, net                           22,684,000          21,144,000
Other assets, principally 
  goodwill, net                      137,542,000         139,023,000
                                    ------------        ------------
                                    $218,046,000        $210,633,000
                                    ------------        ------------
                                    ------------        ------------

LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities:
    Current installments of 
      long-term debt                $  2,064,000        $  4,015,000
    Accounts payable                  22,956,000          20,531,000
    Accrued liabilities               12,052,000          11,306,000
    Income taxes                       2,884,000           2,427,000
                                    ------------        ------------
       Total current liabilities      39,956,000          38,279,000
                                    ------------        ------------
Long-term debt, excluding 
  current installments                31,577,000          28,973,000
                                    ------------        ------------
    Total liabilities                 71,533,000          67,252,000
                                    ------------        ------------
Shareholders' equity:
Preferred stock, par value of 
  $.001 per share. Authorized 
  5,000,000 shares; none issued.              --                  --
Common stock, par value of $.001
  per share Authorized 20,000,000 
  shares; issued and outstanding
  11,282,088 and 11,270,141 
  shares as of September 30, 1996
  and December 31, 1995, respectively     11,000              11,000
Additional paid-in capital           131,676,000         131,575,000
Retained earnings                     14,826,000          11,795,000
                                    ------------        ------------
       Total shareholders' equity    146,513,000         143,381,000
                                    ------------        ------------
                                    $218,046,000        $210,633,000
                                    ------------        ------------
                                    ------------        ------------

                                       3

        SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
<PAGE>

                            INSURANCE AUTO AUCTIONS, INC.
                                   AND SUBSIDIARIES
                   CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                                     (UNAUDITED)
                                            
                            Three Month Periods            Nine Month Periods
                            Ended September 30,             Ended September 30, 
                       -------------------------    ----------------------------
                          1996           1995            1996          1995
                          ----           ----            ----          ----
Net sales:
    Vehicle sales      $48,707,000    $47,634,000    $156,922,000  $138,259,000
    Fee income          19,973,000     17,348,000      60,616,000    52,145,000
                       -----------    -----------     -----------   -----------
                        68,680,000     64,982,000     217,538,000   190,404,000
Cost and expenses:
    Cost of sales       54,941,000     52,125,000     172,568,000   147,533,000
    Direct operating 
      expenses          11,010,000     11,100,000      35,200,000    31,178,000
    Amortization of 
      acquisition costs    931,000        903,000       2,796,000     2,481,000
    Special charges          --         4,226,000         --          4,226,000
                       -----------    -----------     -----------   -----------
    Earnings from 
      operations         1,798,000     (3,372,000)      6,974,000       760,000

Other (income)expense:
    Interest expense       713,000        718,000       2,289,000     1,659,000
    Interest (income)     (232,000)      (183,000)       (632,000)     (753,000)
                       -----------    -----------     -----------   -----------
    Earnings (loss) 
      before income 
      taxes              1,317,000     (3,907,000)      5,317,000     4,080,000
    
Income taxes (benefit)     566,000     (1,660,000)      2,286,000     1,734,000
                       -----------    -----------     -----------  ------------
    Net earnings 
      (loss)           $   751,000    $(2,247,000)    $ 3,031,000  $  2,346,000
                       -----------    -----------     -----------  ------------
                       -----------    -----------     -----------  ------------
Net earnings (loss) 
  per common and 
   common equivalent
   shares outstanding  $       .07    $      (.20)     $       .27  $        .21
                       -----------    -----------      -----------  ------------
                       -----------    -----------      -----------  ------------
Weighted average 
  common and common
  equivalent shares 
  outstanding           11,320,000     11,284,000       11,338,000    11,307,000


                                           4

        SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
                                           
<PAGE>

                            INSURANCE AUTO AUCTIONS, INC.
                                   AND SUBSIDIARIES
                   CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                      (UNAUDITED)

                                                      Nine Month  Periods
                                                      Ended September 30, 
                                                    -------------------------
                                                        1996        1995
                                                        ----        ----
Cash flows from operating activities:
Net earnings                                        $ 3,031,000   $ 2,346,000
                                                    -----------   -----------
Adjustments to reconcile net earnings to net cash
  provided by operating activities:
    Depreciation and amortization                     6,195,000     4,733,000
    Non-cash special charges                             --         2,512,000
    Change in assets and liabilities (net of 
     effects of acquired companies):
    (Increase) decrease in:
      Accounts receivable, net                       (2,287,000)     (387,000)
      Inventories                                       118,000    (2,291,000)
      Other current assets                              818,000      (510,000)
      Other assets                                      (84,000)     (110,000)
    Increase (decrease) in:
      Accounts payable                                2,351,000    (1,599,000)
      Accrued liabilities                             1,241,000     1,967,000
    Income taxes payable                                457,000    (1,859,000)
                                                    -----------   -----------
    Total adjustments                                 8,809,000     2,456,000
                                                    -----------   -----------

    Net cash provided by operating activities        11,840,000     4,802,000
                                                    -----------   -----------

Cash flows from investing activities:
  Sale (purchase) of short-term investments          (1,982,000)    1,973,000
  Capital expenditures                               (4,939,000)   (8,249,000)
  Payments made in connection with 
    acquired companies, net of cash acquired         (1,797,000)  (18,474,000)
                                                    -----------   -----------
    Net cash used in investing activities            (8,718,000)  (24,750,000)
                                                    -----------   -----------
Cash flows from financing activities:
  Payment of notes payable                           (3,770,000)     (856,000)
  Net proceeds from issuance of Senior Notes
    and notes payable                                 4,568,000    19,605,000
  Proceeds from issurance of common stock               101,000       367,000
                                                    -----------   -----------
    Net cash provided by financing activities           899,000    19,116,000
                                                    -----------   -----------

    Net increase (decrease) in cash                   4,021,000      (832,000)

Cash and cash equivalents at beginning of period        362,000     2,529,000
                                                    -----------   -----------
Cash and cash equivalents at end of period          $ 4,383,000   $ 1,697,000
                                                    -----------   -----------
                                                    -----------   -----------
Supplemental disclosures of cash flow information:
  Cash paid during the year for:
    Interest                                        $ 2,597,000   $ 1,177,000
    Income taxes                                      1,858,000     4,039,000
                                                    -----------   -----------
                                                    -----------   -----------
                                       5

        SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.

<PAGE>

                                 INSURANCE AUTO AUCTIONS, INC.
                                     AND SUBSIDIARIES
                       NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                        (UNAUDITED)

1.  GENERAL

    The unaudited condensed consolidated financial statements of Insurance 
    Auto Auctions, Inc. and its subsidiaries (collectively, the "Company") have
    been prepared on the same basis as the audited consolidated financial 
    statements and, in the opinion of management, reflect all adjustments 
    (consisting of normal recurring adjustments) necessary for a fair 
    presentation for each of the periods presented.  The results of operations
    for interim periods are not necessarily indicative of results for full 
    fiscal years.

    As contemplated by the Securities and Exchange Commission ("SEC") under 
    Rule 10-01 of Regulation S-X, the accompanying consolidated financial 
    statements and related notes have been condensed and do not contain certain
    information that will be included in the Company's annual consolidated 
    financial statements and notes thereto.  For further information, refer to 
    the consolidated financial statements and footnotes thereto included in the
    Company's annual report on Form 10-K for the year ended December 31, 1995.

2.  INCOME TAXES

    Income taxes were computed using the effective tax rate estimated to be 
    applicable for the full fiscal year, which is subject to ongoing review and
    evaluation by management.

3.  NET EARNINGS (LOSS) PER SHARE

    Net earnings (loss) per share is based on the weighted average number of
    shares of common and common share equivalents outstanding.

4.  RECLASSIFICATIONS

    Certain reclassifications have been made to the 1995 accounts to conform
    with the 1996 presentation.

5.  RECENT DEVELOPMENTS

    Statement of Financial Accounting Standards No. 123, "Accounting for 
    Stock-Based Compensation" (Statement No. 123), issued in October 1995 and 
    effective for fiscal years beginning after December 15, 1995, permits, but 
    does not require, a fair-value based method of accounting for employee stock
    options or similar equity instruments.  Statement No. 123 allows an entity 
    to elect to continue to measure compensation cost under Accounting 
    Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees"
    (APBO No. 25), but requires pro forma disclosures of net earnings and 
    earnings per share as if the fair-value based method of accounting had been
    applied.  The Company adopted Statement No. 123 on January 1, 1996 and has
     elected to continue to measure compensation cost under APBO No. 25.

    In August 1995, the Registrant was named as a defendant in two lawsuits 
    filed by Registrant shareholders.  The first suit was filed in the U.S. 
    District Court for the Central District of California. This suit alleges 
    violations of the federal securities laws and purports to seek damages on 
    behalf of a class of shareholders who purchased the Registrant's common 
    stock during the period of July 27, 1994 through August 4, 1995.  In August
    1996, the federal court denied certification of the plaintiff class on the 
    ground that the named plaintiff was not an adequate class representative.  
    As a result, a new plaintiff shareholder is currently seeking to be 
    certified  to  represent the class alleged.  The Registrant believes that
    this lawsuit is without merit and intends to continue to defend against it
     vigorously.

                                       6
<PAGE>


    The second suit was filed in the Los Angeles County Superior Court.  This
    suit alleged violations of California securities laws and purported to seek
    damages on behalf of a class of shareholders who purchased the Registrant's
    common stock during the period of February 21, 1995 through August 4, 1995.
    In August 1996, the state court refused to certify this class on the ground
    that the named plaintiff was not an adequate class representative.  As a
    result, the action has been dismissed and judgment has been entered in favor
    of the Registrant and its officers and directors without payment of any
    consideration.

                                       7
<PAGE>


ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.

    THE DISCUSSION IN THIS SECTION CONTAINS FORWARD-LOOKING STATEMENTS THAT
INVOLVE RISKS AND UNCERTAINTIES.  THE COMPANY'S ACTUAL RESULTS COULD DIFFER
MATERIALLY FROM THOSE DISCUSSED HEREIN.  FACTORS THAT COULD CAUSE OR CONTRIBUTE
TO SUCH DIFFERENCES INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED IN THE
COMPANY'S ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1995 AND
THIS FORM 10-Q.

OVERVIEW

         The Company offers insurance companies and other vehicle suppliers
cost-effective salvage processing solutions through a variety of different
methods of sale, including fixed fee consignment, purchase agreement and
percentage of sale consignment.  Under the purchase agreement sales method, the
vehicle is owned by the Company and the sales price of the vehicle is recorded
in revenue.  Under the fixed fee and percentage of sale consignment sales
methods, the vehicle is not owned by the Company and only the fees associated
with the processing and sale of the vehicle are recorded in net sales.  By
assuming some of the risk inherent in owning the salvage vehicle instead of
selling on a consignment basis, the Company is potentially able to increase
profits by improving the value of the salvage vehicle prior to the sale.  
         
         Under the purchase agreement method, IAA generally pays the 
insurance company a pre-determined percentage of the Actual Cash Value 
("ACV") to purchase the vehicle, pursuant to the purchase agreement.  ACVs 
are the estimated pre-accident fair value of a vehicle, adjusted for 
additional equipment, mileage and other factors.  Until the significant rise 
in used car prices and ACVs during 1995, the conversion from consignment 
sales to purchase agreement sales generally benefited the Company.  During 
1995, however, used car prices and ACVs rose significantly.  Despite the 
increase in used car prices and ACVs, prices at salvage auctions did not 
increase correspondingly.  Because the Company's purchase price is fixed by 
contract, the increased ACVs can and has reduced profitability on the sale of 
vehicles under the purchase agreement method.  

         The Company has renegotiated some of its purchase agreement contracts
and is seeking to renegotiate certain others.  If the relationship between ACVs
and salvage prices remains at its present level, the Company may continue to
encounter reduced profitability from purchase agreement contracts until they
expire or are renegotiated.  The Company continues to offer purchase agreements
to those customers who select it, but generally at a lower percentage of ACV
than previously offered to customers, based on current vehicle values.  The
Company has added adjustment and risk-sharing clauses to its new standard
purchase agreement contracts designed to provide some protection to the Company
and its customers from certain unexpected, significant changes in the
ACV/salvage price relationship. 
         
         The Company has grown through acquisitions and since June 1995 has
acquired five salvage pools (the "Acquisitions") strategically located
throughout the United States, and has opened a new facility start-up in Kansas
City.  The largest of these acquisitions, ADB Auctions, Inc. and its related
company, ASC Auctions, Inc., occurred June 19, 1995.  Of the four remaining
smaller acquisitions, three were made in July, August and December 1995 and one
was made in February 1996.
         
         The Company's operating results are subject to fluctuations, including
quarterly fluctuations, that can result from a number of factors, some of which
are more significant for sales under the purchase agreement method.  See
"Factors That May Affect Future Results" in the Company's Annual Report on Form
10-K for the year ended December 31, 1995 and this Form 10-Q for a further
discussion of some of the factors that affect or could affect the Company's
business, operating results and financial condition.

                                       8
<PAGE>

RESULTS OF OPERATIONS

THREE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO THE THREE MONTHS ENDED
SEPTEMBER 30, 1995

         Net sales of the Company increased to $68,680,000 for the three 
months ended September 30, 1996, from $64,982,000 for the same three month 
period in 1995, a 6% increase.  Sales were higher due to acquired operations, 
same store growth,  and fee increases.  Unit volume increased 8%, as compared 
to the same period in 1995, with most of the unit growth resulting from 
acquired operations, while existing facilities volume increased 2%.  Net 
sales growth from existing facilities increased 6%, as a result of same store 
growth and increased fees. The purchase agreement sales method of processing 
accounted for 36,000 vehicles, or 33% of total volume, up 2% from the same 
three-month period in 1995.
         
         Cost of sales increased to $54,941,000 for the three months ended 
September 30, 1996, from $52,125,000 for the same period in 1995, a 5% 
increase. Cost of sales, as a percentage of sales, compared to the same 
quarter last year, were flat.
         
         Direct operating expenses decreased to $11,010,000 for the three 
months ended September 30, 1996, from $11,100,000, excluding special charges 
of $4,226,000, for the same period in 1995, a 1% decrease.  The decrease in 
direct operating expenses was associated with the Company's continued cost 
reduction efforts.  Direct operating expenses as a percentage of net sales 
were down 1% compared to the same period in 1995.  Amortization of 
acquisition costs associated with the Acquisitions increased to $931,000 for 
the three month period ended September 30, 1996 from $903,000 for the 
comparable period in 1995, as a result of amortization of goodwill for the 
Acquisitions.
         
         Interest expense decreased to $713,000 for the three months ended 
September 30, 1996, from $718,000 for the same period in 1995.  The reduction 
in interest expense is attributable to prior payments of  notes payable to 
sellers of certain acquisitions.  This reduction was offset by the prior 
utilization of a portion of the $15,000,000 Revolving Line of Credit Facility 
the "Facility."
         
         Interest income increased to $232,000 for the three month period 
ended September 30, 1996, from $183,000 for the comparable period in 1995.  
The change in interest income was attributable to an increase in 
interest-bearing investments.
          
         Income taxes increased to $566,000 for the three months ended 
September 30, 1996, from the $1,660,000 benefit for the comparable period in 
1995.  This increase was primarily the result of the special charges that 
were incurred in 1995.
         
         The Company's net earnings were $751,000 for the three months ended 
September 30, 1996, a 133% increase from the comparable period in 1995 which 
was a loss of $2,247,000, resulting principally from the aforementioned 
special charges.

                                       9
<PAGE>

NINE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO THE NINE MONTHS ENDED 
SEPTEMBER 30, 1995

    Net sales of the Company increased to $217,538,000 for the nine months 
ended September 30, 1996, from $199,404,000 for the comparable nine-month 
period in 1995, a 14% increase.  Sales were higher due to acquisitions, same 
store growth, and fee increases.  Unit volume increased 19% in the nine-month 
period ended September 30, 1996, as compared to the similar period in 1995, 
with most of the unit growth resulting from the acquired operations, while 
existing facilities volume increased 3%.  The purchase agreement sales method 
of processing accounted for 115,000 vehicles, or 35% of total volume, up 15% 
from the same nine-month period  in 1995. 

    Cost of sales increased to $172,568,000 in the nine-month period ended 
September 30, 1996, from $147,533,000 in the comparable nine month period in 
1995, a 17% increase.  The increase in cost of sales was substantially a 
result of same store growth, conversions of consignment to purchase agreement 
and volume from acquisitions.  Cost of sales growth was higher than net sales 
growth, and as a percentage of net sales increased from 77% to 79%, mostly as 
a result of higher prices per car paid due to higher ACVs and lower selling 
prices as a percent of ACV for some salvage vehicles on the purchase 
agreement method of sales.

         Direct operating expenses  increased to $35,200,000 for the nine 
months ended September 30, 1996, from $31,178,000, excluding special charges 
of $4,226,000, for the same period in 1995, a 13% increase.  The increase in 
direct operating expenses was associated with the acquired operations, as 
well as the Company's continued investments in personnel, management 
information systems, facilities expansion and improvements.  Direct operating 
expenses as a percentage of net sales were flat compared to the same period 
in 1995. Amortization of acquisition costs associated with the Acquisitions 
increased to $2,796,000 for the nine month period ended September 30, 1996, 
from $2,481,000 for the comparable period in 1995, as a result of 
amortization of goodwill for the Acquisitions.
         
    Interest expense increased to $2,289,000 for the nine months ended 
September 30, 1996, from  $1,659,000 for the same period in 1995.  The change 
in interest expense was mostly attributable to increases in notes payable to 
sellers of certain acquisitions and the utilization of a portion of the 

         Interest income decreased to $632,000 for the nine-month period 
ended September 30, 1996, from $753,000 for the comparable period in 1995.  
The change in interest income was attributable to a decrease in 
interest-bearing investments liquidated to help consummate the acquisitions.
          
         Income taxes increased to $2,286,000 for the nine months  ended 
September 30, 1996, from $1,734,000 for the comparable period in 1995.  This 
increase was primarily the result of increased earnings primarily due to fee 
increases and the special charges incurred in 1995.
         
         The Company's net earnings were $3,031,000 for the nine months ended 
September 30, 1996, a 29% increase from the comparable period in 1995 of 
$2,346,000.

FINANCIAL CONDITION AND LIQUIDITY
         
         At September 30, 1996, the Company had current assets of 
$57,820,000, including $13,185,000 of cash and cash equivalents and short 
term investments, current liabilities of $39,956,000 and working capital of 
$17,864,000.  The $5,677,000 increase in working capital from December 31, 
1995, was principally related to proceeds from long term borrowings under the 
Facility and net earnings.  On August 1, 1995, the Company entered into the 
Facility with the bank, permitting borrowings of up to $15,000,000.  The 
Facility, subject to certain terms and conditions, expires in August 1998 and 
bears interest at a variable rate.  Approximately $4,500,000 in borrowings 
were outstanding on the Facility at September 30, 1996.
         
         At September 30, 1996, the Company's indebtedness consisted mostly 
of 8.6% Senior Notes approximating $20,000,000, a post-retirement benefits 
liability relating to the Underwriters Salvage Company acquisition of 
approximately $4,283,000, amounts due to the sellers of ADB aggregating 
$3,667,000 with imputed

                                       10
<PAGE>

interest at 7.5%, amounts due to the seller of a smaller acquisition  
aggregating  $500,000 which bears interest at 8.0% and $4,500,000 outstanding 
on the Facility which bears interest at a variable rate which is 
approximately 7% at September 30, 1996.

         
         Capital expenditures were approximately $4,939,000 for the nine months
ended September 30, 1996.  These capital expenditures included upgrading and
expanding Company's facilities and management information systems.  The Company
currently leases most of its facilities and other properties.
         
         The Company believes that cash generated from operations and its
borrowing capacity will be sufficient to fund capital expenditures and provide
adequate working capital for operations for the next twelve months.  Part of the
Company's plan is continued growth possibly through new facility start-ups and
acquisitions.  At some time in the future, the Company may require additional
financing.  There can be no assurance that additional financing, if required,
will be available on favorable terms.  
         
         The Company's operating results have not historically been materially
affected by inflation.
         
RECENT DEVELOPMENTS

    Statement of Financial Accounting Standards No. 123, "Accounting for 
Stock-Based Compensation" (Statement No. 123), issued in October 1995 and 
effective for fiscal years beginning after December 15, 1995, permits, but 
does not require, a fair-value based method of accounting for employee stock 
options or similar equity instruments.  Statement No. 123 allows an entity to 
elect to continue to measure compensation cost under Accounting Principles 
Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APBO No. 
25), but requires pro forma disclosures of net earnings and earnings per 
share as if the fair-value based method of accounting had been applied.  The 
Company adopted Statement No. 123 on January 1, 1996 and has elected to 
continue to measure compensation cost under APBO No. 25.

    In August 1995, the Registrant was named as a defendant in two lawsuits
filed by Registrant shareholders.  The first suit was filed in the U.S. District
Court for the Central District of California. This suit alleges violations of
the federal securities laws and purports to seek damages on behalf of a class of
shareholders who purchased the Registrant's common stock during the period of
July 27, 1994 through August 4, 1995.  In August 1996, the federal court denied
certification of the plaintiff class on the ground that the named plaintiff was
not an adequate class representative.  As a result, a new plaintiff shareholder
is currently seeking to be certified to represent the class alleged.  The
Registrant believes that this lawsuit is without merit and intends to continue
to defend against it vigorously.  

    The second suit was filed in the Los Angeles County Superior Court.  This
suit alleged violations of California securities laws and purported to seek
damages on behalf of a class of shareholders who purchased the Registrant's
common stock during the period of February 21, 1995 through August 4, 1995.  In
August 1996, the state court refused to certify this class on the ground that
the named plaintiff was not an adequate class representative.  As a result, the
action has been dismissed and judgment has been entered in favor of the
Registrant and its officers and directors without payment of any consideration.

FACTORS THAT MAY AFFECT FUTURE RESULTS

         The Company operates in a changing environment that involves a number
of risks, some of which are beyond the Company's control.  The following
discussion highlights some of these risks.

         QUARTERLY FLUCTUATIONS.  The Company's operating results have in the
past and may in the future fluctuate significantly depending on a number of
factors, some of which are more significant for sales under the purchase
agreement method.  These factors include changes in the market value of salvage
vehicles, attendance at salvage auctions, delays or changes in state title
processing, fluctuations in Actual Cash Values ("ACVs") of salvage vehicles,
changes in regulations governing the processing of salvage vehicles, the
availability of vehicles and weather conditions.  As a result, the Company
believes that period-to-period comparisons of its results of operations

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<PAGE>

are not necessarily meaningful and should not be relied upon as any 
indication of future performance. Revenues in any quarter are substantially 
dependent on a number of factors including attendance at salvage auctions and 
the market value of salvage vehicles.  Revenues for any future quarter are 
not predictable with any significant degree of accuracy; the Company's 
expense levels, however, are relatively fixed.  If revenue levels are below 
expectations, operating results are likely to be adversely affected.  Due to 
all of the foregoing factors, it is likely that in some future quarter the 
Company's operating results will be below the expectations of public market 
analysts and investors. 

         DEPENDENCE ON KEY INSURANCE COMPANY SUPPLIERS.  Historically, a 
limited number of insurance companies has accounted for a substantial portion 
of the Company's revenues.  For example, in 1995, vehicles supplied by the 
Company's three largest suppliers accounted for approximately 49% of the 
Company's unit sales.  The largest suppliers, Allstate Insurance ("Allstate") 
and State Farm Insurance, accounted for approximately 21% and 19% 
respectively, of the Company's unit sales.  A number of other insurance 
company suppliers have also contributed to the profitability of the Company.  
A loss or reduction in the number of vehicles from any of these suppliers, or 
adverse change in the agreements that such suppliers have with the Company, 
could have a material adverse effect on the Company's business, operating 
results and financial condition.  
         
         PROVISION OF SERVICES AS A NATIONAL OR REGIONAL SUPPLIER.  The 
provision of services to insurance company suppliers on a national or 
regional basis requires that the Company expend resources and dedicate 
management to a small number of individual accounts, resulting in a 
significant amount of fixed costs.  The development of a referral based 
national network service, in particular, has required the devotion of 
financial resources without immediate reimbursement of such expenses by the 
insurance company suppliers.
         
         PURCHASE AGREEMENT METHOD OF SALE.  The Company has entered into a 
number of purchase agreements, including agreements with its most significant 
insurance suppliers, that obligate the Company to purchase most salvage 
vehicles offered to it at a formula percentage of ACV.  In recent times, 
increased ACVs on which the Company's costs are based have reduced the 
profitability that the Company realizes on purchase agreement contracts.  The 
Company is currently attempting to renegotiate its agreements with certain of 
these suppliers.  There can be no assurance, however, that the Company can 
renegotiate the terms of these agreements on terms favorable to the Company.  
The failure to renegotiate some or all of these agreements could have a 
material adverse effect on the Company's operating results and financial 
condition.  In addition, further increases in ACVs or declines in the market 
or auction prices for salvage vehicles could have a material adverse effect 
on the Company's business, operating results and financial condition.

         COMPETITION.  Historically, the automotive salvage industry has been 
highly fragmented.  As a result, the Company faces intense competition for 
the supply of salvage vehicles from vehicle suppliers, as well as competition 
from buyer of vehicles from other regional salvage pools.  These regional 
salvage pools generally process vehicles under the fixed fee consignment 
method and generally do not offer the full range of services provided by the 
Company.  The salvage industry has recently experienced consolidation, 
however, and the Company believes its principal publicly-held competitor is 
Copart, Inc.  Copart, Inc. has effected a number of acquisitions of regional 
salvage pools and competes with IAA in most of IAA's geographic markets.  Due 
to the limited number of vehicle suppliers, competition for salvage vehicles 
from Copart and regional suppliers is intense.  It is also possible that the 
Company may encounter further competition from existing competitors and new 
market entrants that are significantly larger and have greater financial and 
marketing resources.  Other potential competitors could include used car 
auction companies, certain salvage buyer groups and insurance companies some 
of which presently supply auto salvage to IAA.  While most insurance 
companies have abandoned or reduced efforts to sell salvage without the use 
of service providers such as the Company, they may in the future decide to 
dispose of their salvage directly to customers.  There can be no assurance 
that the Company will be able to compete successfully against current or 
future competitors or that competitive pressures faced by the Company will 
not have a material adverse effect on its business, operating results and 
financial condition.
         
         RECENT MANAGEMENT CHANGES.  There has recently been turnover in 
certain key positions in the Company.  Additions of new personnel and 
departures of existing personnel, particularly in key positions, can be

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<PAGE>

disruptive, which could have a material adverse effect upon the Company's 
business, operating results and financial condition.
         
         INTEGRATION AND EXPANSION OF FACILITIES.  The Company seeks to 
increase sales and profitability through acquisition of other salvage auction 
facilities, new site expansion and the increase of salvage vehicle volume at 
existing facilities.  There can be no assurance that the Company will 
continue to acquire new facilities on terms economical to the Company or that 
the Company will be able to add additional facilities on terms economical to 
the Company or that the Company will be able to increase revenues at newly 
acquired facilities above levels realized prior to acquisition. The Company's 
ability to achieve these objectives is dependent on the integration of new 
facilities, and their information systems, into its existing operations, the 
identification and lease of suitable premises and the availability of 
capital.  There can be no assurance that this integration will occur, that 
suitable premises will be identified or that additional capital will be 
available to fund expansion and integration of the Company's business.  Any 
delays or obstacles in this integration process could have a material adverse 
effect on the Company's business, operating results and financial condition.  
Furthermore, the Company has limited sources of additional capital available 
for acquisitions, expansions and start-ups.  The Company's ability to 
integrate and expand its facilities will depend on its ability to identify 
and obtain additional sources of capital to finance such integration and 
expansion.  Finally, the Company has experienced a period of significant 
expansion that has placed a strain upon its management systems and resources. 
 In the future, the Company will be required to continue to improve its 
financial and management controls, reporting systems and procedures on a 
timely basis and expand, train and manage its employee work force.  The 
failure to improve these systems on a timely basis and to successfully expand 
and train the Company's work force could have a material adverse effect on 
the Company's business, operating results and financial condition.

         VOLATILITY OF STOCK PRICE.  The market price of the Company's common 
stock has been and could continue to be subject to significant fluctuations 
in response to various factors and events, including variations in the 
Company's operating results, the timing and size of acquisitions and facility 
openings, the loss of vehicle suppliers or buyers, the announcement of new 
vehicle supply agreements by the Company or its competitors, changes in 
regulations governing the Company's operations or its vehicle suppliers, 
environmental problems or litigation. 
         
         GOVERNMENTAL REGULATION.  The Company's operations are subject to 
regulation, supervision and licensing under various federal, state and local 
statutes, ordinances and regulations.  The acquisition and sale of totaled 
and recovered theft vehicles is regulated by state motor vehicle departments 
in each of the locations in which the Company operates.  Changes in 
governmental regulations or interpretations of existing regulations can 
result in increased costs, reduced salvage vehicle prices and decreased 
profitability for the Company.  For example, the delays in the transfers of 
title caused by the implementation of the Torres Bill in California had a 
negative effect on the Company's third and fourth quarter   results.  In 
addition to the regulation of sales and acquisitions of vehicles, the Company 
is also subject to various local zoning requirements with regard to the 
location of its auction and storage facilities.  These zoning requirements 
vary from location to location.  Failure to comply with present or future 
regulations or changes in existing regulations could have material adverse 
effect of the Company's business, operating results and financial condition. 

    ENVIRONMENTAL REGULATION.  The Company's operations are subject to federal,
state and local laws and regulations regarding the protection of the
environment.  In the salvage vehicle auction industry, large numbers of wrecked
vehicles are stored at auction facilities for short periods of time.  Minor
spills of gasoline, motor oils and other fluids may occur from time to time at
the Company's facilities and may result in soil, surface water or groundwater
contamination.  Petroleum products and other hazardous materials are contained
in aboveground or underground storage tanks located at certain of the Company's
facilities.  Waste materials such as waste solvents or used oils are generated
at some of the Company's facilities and are disposed of as nonhazardous or
hazardous wastes. The Company believes that it is in compliance in all material
respects with applicable environmental regulations and does not anticipate any
material capital expenditures for environmental compliance or remediation . 
Environmental laws and regulations, however, could become more stringent over
time and there can be no assurance that the Company or its operations will not
be subject to significant compliance costs in the future.  To date, the Company
has not incurred expenditures for preventive or remedial action with respect to
contamination or the use of hazardous materials that have had a material adverse
effect on the Company's results of operations or

                                       13
<PAGE>

financial condition.  The contamination that could occur at the Company's 
facilities and the potential contamination by previous users of certain 
acquired facilities create the risk, however, that the Company could incur 
substantial expenditures for preventive or remedial action, as well as 
potential liability arising as a consequence of hazardous material 
contamination, which could have a material adverse effect on the Company.

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<PAGE>

PART II.  OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS AND OTHER MATTERS.

(a) In August 1995, the Registrant was named as a defendant in two
    lawsuits filed by Registrant shareholders.  The first suit was filed
    in the U.S. District Court for the Central District of California and
    named as defendants one of the Registrant's officers who is also a
    director, one additional director, three former officers and two
    former directors. This suit alleges violations of the federal
    securities laws and purports to seek damages on behalf of a class of
    shareholders who purchased the Registrant's common stock during the
    period of July 27, 1994 through August 4, 1995.  In August 1996, the
    federal court denied certification of the plaintiff class on the
    ground that the named plaintiff was not an adequate class
    representative.  As a result, a new plaintiff shareholder is currently
    seeking to be certified to represent the class alleged.  The
    Registrant believes that this lawsuit is without merit and intends to
    continue to defend against it vigorously.  See Note 8 to the
    Registrant's Consolidated Financial Statements to the Company's Annual
    Report on Form 10-K for the year ended December 31, 1995.

    The second suit was filed in the Los Angeles County Superior Court and
    named as defendants one of the Registrant's officers who is also a
    director, one additional director and one former officer and director. 
    This suit alleged violations of California securities laws and
    purported to seek damages on behalf of a class of shareholders who
    purchased the Registrant's common stock during the period of February
    21, 1995 through August 4, 1995.  In August 1996, the state court
    refused to certify this class on the ground that the named plaintiff
    was not an adequate class representative.  As a result, the action has
    been dismissed and judgment has been entered in favor of the
    Registrant and its officers and directors without payment of any
    consideration.

Item 2.  Changes in Securities.  None

Item 3.  Defaults upon Senior Securities.  None

Item 4.  Submission of Matters to a Vote of Security Holders.  None

ITEM 5.  OTHER INFORMATION. NONE

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K.

             (a)  EXHIBITS.  NONE
             (b)  REPORTS ON FORM 8-K.  NONE


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<PAGE>

                                      SIGNATURES

          Pursuant to the requirements of Section 13 or 15(d) of the 
Securities Exchange Act of 1934, the registrant has duly caused this report 
to be signed on its behalf by the undersigned, thereunto duly authorized.
                                           
                                 INSURANCE AUTO AUCTIONS, INC.




Date: November 7, 1996            By:  /s/ Linda C. Larrabee                   
                                     -----------------------------------------
                                     Name:     Linda C. Larrabee 
                                     Title:    Senior Vice President, Chief 
                                             Financial Officer and Secretary 

                                        (Duly Authorized Officer and Principal
                                           Financial and Accounting Officer)





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