<PAGE>   1
                       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 July 1, 2001

                                       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)

Illinois                                                              95-3790111
--------------------------------------------------------------------------------
(State or other jurisdiction                (I.R.S. Employer Identification No.)
of incorporation or organization)

850 East Algonquin Road, Suite 100, Schaumburg, Illinois              60173-3855
--------------------------------------------------------------------------------
(Address of principal executive offices)                              (Zip Code)

                                 (847) 839-3939
--------------------------------------------------------------------------------
              (Registrant's telephone number, including area code)


         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 July 31, 2001:

              Class                              Outstanding July 31, 2001
              -----                              -------------------------

   Common Stock, $0.001 Par Value                    11,973,165 shares


<PAGE>   2


                                      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 July 1, 2001 and December 31, 2000......................................      3
         Condensed Consolidated Statements of Operations for the
              Three Month and Six Month Periods ended July 1, 2001 and June 30, 2000........      4
         Condensed Consolidated Statements of Cash Flows for the
              Six Month Periods ended July 1, 2001 and June 30, 2000........................      5
         Notes to Condensed Consolidated Financial Statements...............................      6

Item 2.  Management's Discussion and Analysis of Financial Condition
              and Results of Operations.....................................................      7

Item 3.  Quantitative and Qualitative Disclosures about Market Risk.........................     13

PART II.  OTHER INFORMATION.................................................................     14

Item 1.  Legal Proceedings..................................................................     14

Item 2.  Changes in Securities..............................................................     14

Item 3.  Defaults upon Senior Securities....................................................     14

Item 4.  Submission of Matters to a Vote of Security Holders................................     14

Item 5.  Other Information..................................................................     14

Item 6.  Exhibits and Reports on Form 8-K...................................................     14

SIGNATURES        ..........................................................................     15
</TABLE>



                                       2
<PAGE>   3
                          INSURANCE AUTO AUCTIONS, INC.
                                AND SUBSIDIARIES
                      Condensed Consolidated Balance Sheets
                (in thousands except share and per share amounts)


<TABLE>
<CAPTION>
                                                            July 1,      December 31,
                                                              2001           2000
                                                          ------------   ------------
<S>                                                       <C>            <C>
ASSETS                                                    (Unaudited)

Current assets:
     Cash and cash equivalents                              $ 35,875         $ 30,938
     Short-term investments                                    3,911            4,859
     Accounts receivable, net                                 45,398           48,091
     Inventories                                              15,113           10,588
     Other current assets                                      4,499            3,112
                                                            --------         --------
            Total current assets                             104,796           97,588
                                                            --------         --------

Property and equipment, net                                   35,603           30,492
Investments in marketable securities                            --              2,240
Deferred income taxes                                          5,264            5,123
Other assets, principally goodwill, net                      128,229          130,264
                                                            --------         --------
                                                            $273,892         $265,707
                                                            ========         ========

LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities:
     Current installments of long-term debt                 $ 20,038         $     37
     Accounts payable                                         39,182           38,176
     Accrued liabilities                                       5,791            6,171
     Accrued restructuring charges                             2,821             --
                                                            --------         --------
         Total current liabilities                            67,832           44,384
                                                            --------         --------

Long-term debt, excluding current installments                   121           20,141
Other liabilities                                              3,612            3,001
Deferred income taxes                                         11,129           10,440
                                                            --------         --------

         Total liabilities                                    82,694           77,966
                                                            --------         --------

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
     11,921,365 and 11,715,936 shares as of July 1,
     2001 and December 31, 2000, respectively                     12               12
Additional paid-in capital                                   139,893          136,962
Retained earnings                                             51,293           50,767
                                                            --------         --------

         Total shareholders' equity                          191,198          187,741
                                                            --------         --------
                                                            $273,892         $265,707
                                                            ========         ========
</TABLE>



See accompanying notes to condensed consolidated financial statements.



                                       3
<PAGE>   4
                          INSURANCE AUTO AUCTIONS, INC.
                                AND SUBSIDIARIES
                 Condensed Consolidated Statements of Operations
                     (in thousands except per share amounts)



<TABLE>
<CAPTION>
                                                                  THREE MONTH PERIODS ENDED   SIX MONTH PERIODS ENDED
                                                                  -------------------------   -----------------------
                                                                      JULY 1,     JUNE 30,       JULY 1,    JUNE 30,
                                                                       2001         2000         2001         2000
                                                                  -------------------------   -----------------------
<S>                                                               <C>            <C>          <C>          <C>
                                                                          (UNAUDITED)               (UNAUDITED)
Net revenues:
     Vehicle sales                                                  $  36,942    $  50,845    $  77,159    $ 105,809
     Fee income                                                        38,572       33,431       76,199       65,427
                                                                    ---------    ---------    ---------    ---------
                                                                       75,514       84,276      153,358      171,236
Costs and expenses:
     Cost of sales                                                     51,122       60,089      106,147      123,944
     Direct operating expenses                                         19,550       14,409       38,017       29,427
     Amortization of acquisition costs                                  1,005          985        2,011        1,933
     Special charges                                                     --           --          6,047         --
                                                                    ---------    ---------    ---------    ---------
         Earnings from operations                                       3,837        8,793        1,136       15,932

Other (income)expense:
     Interest expense                                                     456          457          912          921
     Interest income                                                     (315)        (470)        (683)        (881)
                                                                    ---------    ---------    ---------    ---------

         Earnings before income taxes                                   3,696        8,806          907       15,892

Income taxes                                                            1,525        3,611          381        6,516
                                                                    ---------    ---------    ---------    ---------

     Net earnings                                                   $   2,171    $   5,195    $     526    $   9,376
                                                                    =========    =========    =========    =========

Net earnings per share:
     Basic                                                          $     .18    $     .45    $     .04    $     .81
                                                                    =========    =========    =========    =========
     Diluted                                                        $     .18    $     .44    $     .04    $     .79
                                                                    =========    =========    =========    =========

Weighted average shares outstanding:
     Basic                                                             11,792       11,634       11,761       11,610
     Effect of dilutive securities -
       stock options                                                      148          252          208          218
                                                                    ---------    ---------    ---------    ---------
     Diluted                                                           11,940       11,886       11,969       11,828
                                                                    =========    =========    =========    =========
</TABLE>


See accompanying notes to condensed consolidated financial statements.



                                       4
<PAGE>   5


                         INSURANCE AUTO AUCTIONS, INC.
                                AND SUBSIDIARIES
                 Condensed Consolidated Statements of Cash Flows
                            (in thousands of dollars)


<TABLE>
<CAPTION>
                                                                                   SIX MONTH PERIODS ENDED
                                                                                 ---------------------------
                                                                                   JULY 1,         JUNE 30,
                                                                                    2001             2000
                                                                                 ---------------------------
                                                                                        (UNAUDITED)
<S>                                                                               <C>           <C>
Cash flows from operating activities:
Net earnings                                                                         $    526    $  9,376
Adjustments to reconcile net earnings to net cash
   provided by operating activities:
     Depreciation and amortization                                                      4,975       4,790
     Gain on disposal of fixed assets                                                    (388)        (22)
     Special charges                                                                    6,047        --
     Changes in assets and liabilities (excluding effects of acquired businesses):
     (Increase) decrease in:
       Investments, net                                                                 3,188      (2,596)
       Accounts receivable, net                                                         2,756        (826)
       Inventories                                                                     (4,525)        306
       Other current assets                                                            (1,387)       (628)
       Other assets                                                                        52          30
     Increase (decrease) in:
       Accounts payable                                                                   952       4,274
       Accrued liabilities                                                             (3,006)        419
       Deferred income taxes, net                                                         549       1,124
                                                                                     --------    --------
         Total adjustments                                                              9,213       6,871
                                                                                     --------    --------

     Net cash provided by operating activities                                          9,739      16,247
                                                                                     --------    --------

Cash flows from investing activities:
   Capital expenditures                                                                (9,025)     (6,432)
   Proceeds from disposal of fixed assets                                               1,416          88
   Acquisitions of businesses, net of cash acquired                                      (105)     (6,925)
                                                                                     --------    --------

      Net cash used in investing activities                                            (7,714)    (13,269)
                                                                                     --------    --------

Cash flows from financing activities:
   Proceeds from issuance of common stock                                               2,931       1,398
   Principal payments of long-term debt                                                   (19)       (114)
                                                                                     --------    --------

Net cash provided by financing activities                                               2,912       1,284
                                                                                     --------    --------

Net increase in cash                                                                    4,937       4,262

Cash and cash equivalents at beginning of period                                       30,938      27,186
                                                                                     --------    --------

Cash and cash equivalents at end of period                                           $ 35,875    $ 31,448
                                                                                     ========    ========

Supplemental disclosures of cash flow information: Cash paid during the periods
   for:
     Interest                                                                        $    860    $    860
                                                                                     ========    ========
     Income taxes                                                                    $      7    $  5,154
                                                                                     ========    ========
</TABLE>



See accompanying notes to condensed consolidated financial statements.



                                       5
<PAGE>   6
                         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 annual audited consolidated
       financial statements and, in the opinion of the Company, reflect all
       adjustments (consisting of normal recurring adjustments, except as
       otherwise described in Note 2) 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 is included in the Company's annual consolidated
       financial statements and notes thereto. For further information, refer to
       the consolidated financial statements and notes thereto included in the
       Company's annual report on Form 10-K for the year ended December 31,
       2000.

       Effective January 1, 2001, the Company adopted a fiscal year ending on
       the last Sunday in December of each year. Fiscal year 2001 will consist
       of 52 weeks and will end on December 30, 2001.

2.     SPECIAL CHARGES

       In March 2001, the Company announced an organizational realignment.
       During the first quarter of 2001, the Company recorded pretax
       restructuring charges of $6.0 million. As part of this plan, the Company
       offered involuntary severance packages to approximately 30 staff
       employees primarily located at its headquarters and recognized $2.4
       million in employee termination benefits associated with this workforce
       reduction. The Company also recorded approximately $1.7 million related
       to the abandonment of certain facilities including cancellation of a
       planned expansion at its headquarters building. The remaining balance
       includes amounts related to repositioning the Company's towing operations
       and other restructuring charges. The Company expects to substantially
       complete these restructuring activities by the end of 2001.

       The restructuring charges were determined based upon formal plans
       approved by the Company's management. The amounts the Company ultimately
       incurs may change as the reorganization is executed. The activity
       affecting the accrual for restructuring charges, which is included in
       Accrued Liabilities and Other Non-current Liabilities, for the six months
       ended July 1, 2001 is as follows:


(000's)                            Workforce   Facility    Towing
                                   Reduction   Closings   and Other    Total
                                   ---------   --------   ---------  ---------
Balance at December 31, 2000 ....   $  --      $          $  --      $  --
Charges to operations ...........     2,376      1,739      1,932      6,047
Utilization of accrual ..........    (1,368)      (378)      (784)    (2,530)
                                    -------    -------    -------    -------
Balance at July 1, 2001 .........   $ 1,008    $ 1,361    $ 1,148    $ 3,517
                                    =======    =======    =======    =======



                                       6
<PAGE>   7
3.     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 the Company.

4.     ACQUISITION

       In February 2001, the Company acquired Pittsburgh Auto Salvage Service
       for $105,000 in cash. This acquisition was accounted for as a purchase,
       and the results of operations are included in the Company's consolidated
       financial statements from the date of acquisition.

5.     NEW ACCOUNTING PRONOUNCEMENTS

       In June 2001, the FASB issued SFAS No. 141, "Business Combinations," and
       SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141
       addresses financial accounting and reporting for business combinations.
       SFAS No. 142 addresses financial accounting and reporting for acquired
       goodwill and other intangible assets. The Company is required to comply
       with SFAS No. 141 for all new acquisitions that occur beginning in the
       third quarter of fiscal year 2001. The Company is required to comply with
       SFAS No. 142 in the third quarter of fiscal year 2001 for new
       acquisitions and in the first quarter of fiscal year 2002 for previously
       acquired intangibles.



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

The discussion in this section contains forward-looking information that is
subject to certain risks, trends and uncertainties that could cause actual
results to differ materially from those projected, expressed, or implied by such
forward-looking information. In some cases, you can identify forward-looking
statements by our use of words such as "may, will, should, anticipates,
believes, expects, plans, future, intends, could, estimate, predict, targeting,
potential or contingent," the negative of these terms or other similar
expressions. The Company's actual results could differ materially from those
discussed or implied herein. Factors that could cause or contribute to such
differences include, but are not limited to, those discussed in "Factors That
May Affect Future Results" below and in the Company's annual report on Form 10-K
for the fiscal year ended December 31, 2000. Among these risks are: conducting
business pursuant to the purchase agreement method of sale; changes in the
market value of salvage; fluctuations in the actual cash value of salvage
vehicles; the ability to successfully renegotiate existing purchase agreement
contracts; the quality and quantity of inventory available from suppliers;
competition; the ability to pass through increased towing costs; dependence on
key insurance company suppliers; delays or changes in state title processing;
general weather conditions; legislative or regulatory acts; that vehicle
processing time will improve; the availability of suitable acquisition
candidates; the ability to bring new facilities to expected earnings targets;
that the Company's towing business will reach forecasted levels of profitability
and the level of energy and labor costs.

OVERVIEW

         The Company offers insurance companies and other vehicle suppliers
cost-effective salvage processing solutions through a variety of different
methods of sale, including percentage of sale consignment, fixed fee
consignment, and purchase agreement. Under the percentage of sale consignment
and fixed fee 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 revenues. The percentage of sale consignment method offers potentially
increased profits over fixed fee consignment by providing incentives to both the
Company and the salvage provider to invest in vehicle enhancements thereby
maximizing vehicle selling prices. Under the purchase agreement sales method,
the vehicle is owned by the Company and the sales price of the vehicle is
recorded in revenue. 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.



                                       7
<PAGE>   8

         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. ACVs are the estimated pre-accident fair value of a vehicle,
adjusted for additional equipment, mileage and other factors. Because the
Company's purchase price is fixed by contract, changes in ACVs or in the market
or auction prices for salvage vehicles have an impact on the profitability of
the sale of vehicles under the purchase agreement method. However, if increases
in used car prices and ACVs are not associated with a corresponding increase in
prices at salvage auctions, there can be a negative impact on the profitability
of purchase agreement sales. To mitigate these risks, the Company has adjustment
and risk-sharing clauses in its 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.

         Since its initial public offering, the Company has grown primarily
through a series of acquisitions to now include 58 locations as of July 1, 2001.

         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" below for a further discussion of some of the
factors that affect or could affect the Company's business, operating results
and financial condition.

RESULTS OF OPERATIONS

         Three Months Ended July 1, 2001 Compared to the Three Months Ended June
30, 2000

         Net revenues of the Company decreased to $75.5 million for the three
months ended July 1, 2001, from $84.3 million for the same three month period in
2000, a 10% decrease. The decline in net revenues is consistent with a planned
strategic shift away from vehicles sold under the purchase agreement method.
Under the purchase agreement method, the entire purchase price of the vehicle is
recorded as revenue compared to only recording the fees collected on the sale of
a car under the lower risk consignment fee based arrangements. This change in
contract mix also contributed to the significant increase in fee income for the
quarter. Fee income in the second quarter increased 15% to $38.6 million versus
$33.4 million in the second quarter of last year. This increase is the result of
both increased volume and pricing changes. Gross profit increased slightly to
$24.4 million for the three months ended July 1, 2001, from $24.2 million for
the comparable period in 2000.

         Direct operating expenses increased to $19.6 million for the three
months ended July 1, 2001, from $14.4 million for the comparable period in 2000.
Acquisitions and Company-developed new greenfield sites that were completed in
2000 and 2001 contributed to the significant increase in expenses. In addition,
higher information technology expenses were recognized in 2001 as internal
staffing costs were redirected from capitalized development cost efforts to
maintenance.

         Interest expense decreased slightly to $456,000 for the three months
ended July 1, 2001, from $457,000 for the comparable period in 2000. Interest
income decreased to $315,000 for the 2001 second quarter versus $470,000 for the
fiscal year 2000 second quarter.

         The Company's effective income tax rate for the quarter was 41.3% in
2001 versus 41% in 2000.

         Six Months Ended July 1, 2001 Compared to the Six Months Ended June 30,
2000

         Net revenues of the Company decreased to $153.4 million for the six
months ended July 1, 2001, from $171.2 million for the same six month period in
2000, a 10% decrease. Fee income in the second quarter increased 16% versus last
year. This increase is the result of both increased volume and pricing changes.

         Gross profit decreased slightly to $47.2 million for the six months
ended July 1, 2001, from $47.3 million for the same period in 2000. The decline
in profitability reflects continued poor performance of



                                       8
<PAGE>   9

certain purchase agreement contracts during their phase-out period as well as
inventory write-downs on certain purchase agreement cars still in inventory.

         Direct operating expenses increased to $38.0 million for the six months
ended July 1, 2001, from $29.4 million for the comparable period in 2000. The
increase is primarily related to acquisitions and greenfields that were
completed in 2000 and 2001.

         Interest expense decreased slightly to $912,000 for the six months
ended July 1, 2001, from $921,000 for the same period in 2000. Interest income
decreased to $683,000 for the six month period ended July 1, 2001, from $881,000
for the comparable period in 2000.

         Income taxes decreased to $381,000 for the six months ended July 1,
2001, from $6.5 million for the comparable period in 2000. The Company's
effective tax rate for the six months ended July 1, 2001 was 42% versus 41% for
the comparable period in 2000. The effective tax rate reflects management's
estimate of the applicable rate for the full year and is subject to ongoing
review and evaluation by the Company.

         The Company's net earnings for the six months ended July 1, 2001,
including special charges, is $526,000 with diluted earnings per share of $.04
compared to last year's six month period net earnings of $9.4 million and
diluted earnings per share of $.79. Excluding the after-tax effect of special
charges, the Company's net earnings for the first half of 2001 would have been
$4.0 million with diluted earnings per share of $.34.

FINANCIAL CONDITION AND LIQUIDITY

         At July 1, 2001, the Company had current assets of $104.8 million,
including $35.9 million of cash and cash equivalents and $3.9 million of
short-term investments. Current liabilities were $67.8 million. The Company had
working capital of $37.0 million at July 1, 2001, a $16.2 million decrease from
December 31, 2000. Current installments of long-term debt include $20.0 million
of 8.6% Senior Notes that mature on February 15, 2002. These notes were
reclassified to current liabilities in 2001 thus accounting for the decline in
working capital since the end of the year. The Company plans to replace these
notes with new external financing.

         Other long-term liabilities include a post-retirement benefits
liability that relates to the acquisition in 1994 of Underwriters Salvage
Company. The amount recorded at July 1, 2001 for the post-retirement benefits
liability is approximately $2.9 million. The remaining balance within other
long-term liabilities represents expenditures related to the restructuring
charge that will be made more than one year beyond July 1, 2001.

         Capital expenditures were approximately $9.0 million for the six months
ended July 1, 2001. These capital expenditures primarily included upgrading and
expanding the Company's facilities including the purchase of land at its new
facility in Albuquerque, New Mexico and the opening of its new Los Angeles,
California facility. The Los Angeles facility consolidates and replaces two
previous sites within the Los Angeles area. The Company currently leases most of
its facilities and other properties.

         In February 2001, the Company acquired Pittsburgh Auto Salvage Service
for $105,000 in cash. This acquisition was accounted for as a purchase, and the
results of operations are included in the Company's consolidated financial
statements from the date of acquisition.

         In September 2000, the Company's Board of Directors authorized the
purchase of up to 1,500,000 shares of its common stock. Purchases may be made
from time to time in the open market, subject to the requirements of applicable
laws, and, if made will be financed with existing cash and cash equivalents,
marketable securities, and cash from operations. As of July 1, 2001, the Company
had not purchased any shares pursuant to this authorization and has no immediate
plans to do so.



                                       9
<PAGE>   10

         The Company believes that cash generated from operations 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, acquisitions, and the
development of new claims processing services. 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.

         In June 2001, the FASB issued SFAS No. 141, "Business Combinations,"
and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 addresses
financial accounting and reporting for business combinations. SFAS No. 142
addresses financial accounting and reporting for acquired goodwill and other
intangible assets. The Company is required to comply with SFAS No. 141 for all
new acquisitions that occur beginning in the third quarter of fiscal year 2001.
The Company is required to comply with SFAS No. 142 in the third quarter of
fiscal year 2001 for new acquisitions and in the first quarter of fiscal year
2002 for previously acquired intangibles.

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: fluctuations in ACVs of salvage
vehicles, changes in the market value of salvage vehicles, delays or changes in
state title processing, general weather conditions, changes in regulations
governing the processing of salvage vehicles, the availability and quality of
salvage vehicles and attendance at salvage auctions. The Company is also
dependent upon receiving a sufficient number of total loss vehicles as well as
recovered theft vehicles to sustain its profit margins. Factors which can effect
the number of vehicles received include: reduction of policy writing by
insurance providers which would affect the number of claims over a period of
time, and changes in direct repair procedures that would reduce the number of
newer less damaged total loss vehicles that tend to have the higher salvage
values. Additionally in the last few years there has been a declining trend in
theft occurrences. As a result, the Company believes that period-to-period
comparisons of its results of operations are not necessarily meaningful and
should not be relied upon as any indication of future performance. In addition,
revenues for any future quarter are not predictable with any significant degree
of accuracy, while the Company's expense levels 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
quarters the Company's operating results will be below the expectations of
public market analysts and investors.

         Quality and Quantity of Inventory Available from Suppliers. The Company
is dependent upon receiving a sufficient number of total loss vehicles as well
as recovered theft vehicles to sustain its profit margins. Factors which can
effect the number of salvage vehicles received include the reduction of policy
writing by insurance providers which would affect the number of claims over a
period of time, and changes in direct repair procedures that would reduce the
number of newer less-damaged total loss vehicles that tend to have higher
salvage values. The decreases in the quality and quantity of inventory, and in
particular the availability of newer and less-damaged vehicles, are further
aggravated under the purchase agreement method of salvage and can have a
material adverse effect on the operating results and financial condition of the
Company.

         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
processors 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,




                                       10
<PAGE>   11

however, and the Company believes its principal publicly-held competitor is
Copart, Inc. ("Copart"). Copart has completed 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 is intense
for salvage vehicles from Copart and regional suppliers. 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, providers of claims software to insurance 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 end users.
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 operating results and
financial condition.

         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 2000, vehicles supplied by the Company's
three largest suppliers accounted for approximately 40% of the Company's unit
sales. The largest suppliers, State Farm Insurance, Farmers Insurance, and
Allstate, each accounted for approximately 14%, 14%, and 12%, respectively, of
the Company's unit sales. A loss or reduction in the number of vehicles from any
of these suppliers, or adverse changes in the agreements that such suppliers
have with the Company, could have a material adverse effect on the Company's
operating results and financial condition.

         Purchase Agreement Method of Sale. Under the purchase agreement method
of sale, the Company is required to purchase, and the insurance company and
other non-insurance company suppliers are required to sell to the Company,
virtually all total loss and recovered theft vehicles generated by the supplier
in a designated geographic area. The agreements are customized to each
supplier's needs, but typically require the Company to pay a specified
percentage of a vehicle's ACV, depending on the vehicle's age and certain other
conditions including whether the vehicle is a total loss or recovered theft
vehicle. IAA assumes the risk of market price variation for vehicles sold under
a purchase agreement and therefore works to enhance the value of purchased
vehicles in the selling process. Because the Company's purchase price is fixed
by contract, changes in ACVs or in the market or auction prices for salvage
vehicles have an impact on the profitability of the sale of vehicles under the
purchase agreement method. If increases in used car prices and ACVs are not
associated with a corresponding increase in prices at salvage auctions, there
can be a negative impact on the profitability of purchase agreement sales.
Revenue recorded from the sale of a purchase agreement vehicle is the actual
selling price of the vehicle.

         From 1993 to 1996, increased ACVs reduced the profitability that the
Company realized on purchase agreement contracts. Beginning late in the second
quarter of 2000 and continuing into early 2001, purchase agreement profitability
was impaired by a combination of rising ACVs and flat to lower sale prices at
auction in certain parts of the country. 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 operating results and financial condition. The
Company has included adjustment and risk-sharing clauses in certain of its
purchase agreement contracts to provide some protection to the Company and its
customers from unexpected, significant changes in ACVs that are not accompanied
by a comparable increase in sales prices. In addition, the Company has
renegotiated certain purchase agreements, converting them to either the Percent
of Sale or Fixed Fee Consignment method of sale.

         In 2000 and 1999 respectively, approximately 26% and 28% of the units
processed by IAA were processed through the purchase agreement method of sale.
The Company expects that approximately 20% of total units sold in 2001 will be
sold under the purchase agreement method of sale.

         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 law or governmental
regulations or interpretations of existing law or regulations can result in
increased costs, reduced salvage vehicle prices and decreased



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profitability for the Company. 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 a
material adverse effect of the Company's 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.

         Expansion and Integration 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, among other things, 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
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. 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 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.

         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 expenditure 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 operating results or 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




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hazardous material contamination, which could have a material adverse effect on
the Company's operating results and financial condition.

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

         The Company had approximately $3.9 million of investments as of July 1,
2001. These investments largely consisted of state government obligations and
had either variable rates of interest or stated interest rates ranging from
3.55% to 6.55%. The Company's investments are exposed to certain market risks
inherent with such assets. This risk is mitigated by the Company's policy of
investing in securities with high credit ratings and investing through major
financial institutions with high credit ratings.

         The Company has senior notes payable of $20 million at an interest rate
of 8.6% that mature on February 15, 2002. The terms of the note agreement are
such that pre-payment of such debt may not be advantageous to the Company in the
event that funds may be available to the Company at a lower rate of interest.



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PART II.  OTHER INFORMATION.


ITEM 1.  LEGAL PROCEEDINGS.  Inapplicable

ITEM 2.  CHANGES IN SECURITIES.  Inapplicable

ITEM 3.  DEFAULTS UPON SENIOR SECURITIES.  Inapplicable

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE ON SECURITY HOLDERS.

                At the Annual Meeting of Shareholders of the Company held June
         13, 2001 the shareholders (i) elected eight directors to serve on the
         Company's Board of Directors, (ii) approved the adoption of an
         amendment to the Company's Employee Stock Purchase Plan increasing the
         number of shares of common stock reserved for issuance thereunder by
         75,000 shares, and (iii) ratified the Company's appointment of KPMG LLP
         to serve as the Company's independent auditors for the fiscal year
         ending December 31, 2001. Shareholders holding 10,477,156 shares of
         Common Stock, representing 89.0% of the total number of shares
         outstanding and entitled to vote at the meeting, were present in person
         or by proxy at the meeting.

                The vote for nominated directors was as follows:

                  Director                     Votes for         Votes Withheld
                  --------                     ---------         --------------

                  Joseph F. Mazzella           10,430,552           46,604
                  Thomas C. O'Brien            10,430,552           46,604
                  Maurice A. Cocca             10,451,852           25,304
                  Susan B. Gould               10,451,852           25,304
                  Peter H. Kamin               10,430,552           46,604
                  Melvin R. Martin             10,415,467           61,689
                  Jeffrey W. Ubben             10,430,552           46,604
                  John K. Wilcox               10,451,852           25,304

                The vote to approve the adoption of an amendment to the
         Company's Employee Stock Purchase Plan was as follows: For: 10,123,689;
         Against: 346,161; Abstain: 7,306.

                The vote for ratifying the appointment of KPMG LLP was as
         follows: For: 10,466,913; Against: 25,804; and Abstain: 4,439.


ITEM 5.  OTHER INFORMATION.  Inapplicable

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

         (a) EXHIBITS.

                10   Amended and Restated Employee Stock Purchase Plan


         (b) REPORTS ON FORM 8-K.  No reports on Form 8-K were filed during
             the fiscal quarter ending July 1, 2001.





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                                   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: August  14, 2001               By:      /s/ Scott P. Pettit
                                        ---------------------------------
                                     Name:  Scott P. Pettit
                                     Title: Senior Vice President and
                                            Chief Financial Officer

                                            (Duly Authorized Officer and
                                            Principal Financial Officer)





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                                  EXHIBIT INDEX



EXHIBIT NO.
-----------


10              Amended and Restated Employee Stock Purchase Plan





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