<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 March 31, 1998

                                       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 of            (I.R.S. Employer Identification No.)
incorporation or organization)             

850 East Algonquin Road, Suite 100,                                 
Schaumburg, Illinois                                                      60173
--------------------------------------------------------------------------------
(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 March 31, 1998:

         Class                             Outstanding March 31, 1998
         -----                             --------------------------
 Common Stock, $0.001 Par Value                11,307,454 shares




<PAGE>   2





                                     INDEX

                         INSURANCE AUTO AUCTIONS, INC.

                                                                    PAGE NUMBER
                                                                    -----------


 PART I.  FINANCIAL INFORMATION ..........................................    3

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

          Condensed Consolidated Balance Sheets
            as of March 31, 1998 and December 31, 1997 ...................    3
          Condensed Consolidated Statements of Earnings for the
            Three Month Periods ended March 31, 1998 and March 31, 1997 ..    4
          Condensed Consolidated Statements of Cash Flows for the
            Three Month Periods ended March 31, 1998 and March 31, 1997 ..    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 ...............................................  13

 Item 1.  Legal Proceedings ...............................................  13

 Item 2.  Changes in Securities ...........................................  13

 Item 3.  Defaults upon Senior Securities .................................  13

 Item 4.  Submission of Matters to a Vote of Security Holders .............  13

 Item 5.  Other Information ...............................................  13

 Item 6.  Exhibits and Reports on Form 8-K ................................  13

 SIGNATURES ...............................................................  14



                                      2


<PAGE>   3



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


<TABLE>
<CAPTION>
                                                                          March 31,   December 31,
                                                                             1998          1997
                                                                        -------------  ------------
<S>                                                                     <C>            <C>
ASSETS

Current assets:
 Cash and cash equivalents                                              $   8,124,000  $  9,634,000
 Accounts receivable, net                                                  31,065,000    28,992,000
 Inventories                                                               10,810,000    11,762,000
 Other current assets                                                       1,748,000     1,868,000
                                                                        -------------  ------------
       Total current assets                                                51,747,000    52,256,000

Property and equipment, at cost, net                                       21,178,000    20,778,000
Deferred income taxes                                                       2,603,000     2,603,000
Intangible assets, principally goodwill, net                              131,830,000   131,435,000
                                                                         ------------  ------------

                                                                         $207,358,000  $207,072,000
                                                                         ============  ============

LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities:
 Current installments of long-term debt                                  $  2,034,000  $  2,034,000
 Accounts payable                                                          15,786,000    16,319,000
 Accrued liabilities                                                        7,288,000     7,698,000
 Income taxes                                                                 862,000       497,000
                                                                         ------------  ------------
       Total current liabilities                                           25,970,000    26,548,000

Long-term debt, excluding current installments                             20,214,000    20,246,000
Accumulated postretirement benefits obligation                              3,743,000     3,831,000
Deferred income taxes                                                       5,236,000     5,235,000
                                                                         ------------  ------------

      Total liabilities                                                    55,163,000    55,860,000
                                                                         ------------  ------------

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
   11,307,454, and 11,299,561, shares as of March 31, 1998
   and December 31, 1997, respectively                                         11,000        11,000
 Additional paid-in capital                                               131,923,000   131,809,000
 Retained earnings                                                         20,261,000    19,392,000
                                                                         ------------  ------------

      Total shareholders' equity                                          152,195,000   151,212,000
                                                                         ------------  ------------

                                                                         $207,358,000  $207,072,000
                                                                         ============  ============
</TABLE>


See accompanying notes to condensed consolidated financial statements.

                                      3




<PAGE>   4



                         INSURANCE AUTO AUCTIONS, INC.
                                 AND SUBSIDIARY
                 CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
                                  (UNAUDITED)


<TABLE>
<CAPTION>

                                                                           Three Month Periods
                                                                              Ended March 31,
                                                                          ------------------------
                                                                             1998         1997
                                                                           -----------  -----------
<S>                                                                         <C>          <C>
Net sales:                                                                 
 Vehicle sales                                                              $47,169,000  $45,156,000
 Fee income                                                                  21,389,000   22,729,000
                                                                            -----------  -----------
                                                                             68,558,000   67,885,000
Cost and expenses:                                        
 Cost of sales                                                               52,092,000   54,053,000
 Direct operating expenses                                                   11,997,000   11,456,000
 Amortization of acquisition costs                                              942,000      950,000
 Special charges                                                              1,564,000            -
                                                                            -----------  -----------
                                        
    Earnings from operations                                                  1,963,000    1,426,000
                                        
Other (income) expense:                                        
 Interest expense                                                               528,000      654,000
 Interest income                                                               (174,000)    (158,000)
                                                                            -----------  -----------
                                        
    Earnings before income taxes                                              1,609,000      930,000
                                        
Income taxes                                                                    740,000      400,000
                                                                            -----------  -----------
                                        
    Net earnings                                                               $869,000     $530,000
                                                                            ===========  ===========
                                        
Net earnings per common and common                                        
 equivalent shares outstanding                                                     $.08         $.05
                                                                            ===========  ===========
                                        
Weighted average common and common                                        
 equivalent shares outstanding                                               11,380,000   11,312,000
                                                                            ===========  ===========
</TABLE>                                        



See accompanying notes to condensed consolidated financial statements.

                                      4



<PAGE>   5




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


<TABLE>
<CAPTION>
                                                                                           Three Month Periods
                                                                                             Ended March 31,
                                                                                      --------------------------------
                                                                                         1998                  1997
                                                                                      ----------             ----------
<S>                                                                                 <C>                  <C>
Cash flows from operating activities:                     
Net earnings                                                                        $   869,000           $     530,000
Adjustments to reconcile net earnings to net cash
  provided by operating activities:
    Depreciation and amortization                                                     2,152,000               2,089,000
    Loss on disposal of fixed assets                                                      4,000                       -
    Change in assets and liabilities (net of effects of acquired companies):
    (Increase) decrease in:
       Accounts receivable, net                                                      (1,635,000)                451,000
       Inventories                                                                      952,000                (797,000)
       Other current assets                                                             120,000               1,243,000
       Other assets                                                                     (75,000)                (41,000)
    Increase (decrease) in:
       Accounts payable                                                                (533,000)              2,890,000
       Accrued liabilities                                                             (562,000)             (1,828,000)
       Income taxes payable                                                             366,000                (158,000)
                                                                                ---------------       -----------------
           Total adjustments                                                            789,000               3,849,000
                                                                                ---------------       -----------------
    Net cash provided by operating activities                                         1,658,000               4,379,000
                                                                                ---------------       -----------------
Cash flows from investing activities:
  Payments made in connection with acquired companies,
    net of cash acquired                                                            (1,748,000)                (97,000)
  Capital expenditures                                                              (1,414,000)               (750,000)
                                                                                --------------       -----------------
   Net cash used in investing activities                                            (3,162,000)               (847,000)
                                                                                --------------       -----------------
Cash flows from financing activities:
  Proceeds from issuance of common stock                                               114,000                  67,000
  Principal payments of long-term debt                                                (120,000)             (4,588,000)
                                                                               ---------------       -----------------
Net decrease in cash used in financing activities                                       (6,000)             (4,521,000)
                                                                               ---------------       -----------------
Net decrease in cash                                                                (1,510,000)               (989,000)

Cash and cash equivalents at beginning of period                                     9,634,000               5,888,000
                                                                               ---------------       -----------------
Cash and cash equivalents at end of period                                          $8,124,000              $4,899,000
                                                                               ===============       =================
Supplemental disclosures of cash flow information:
  Cash paid during the year for:
    Interest                                                                         $889,000               $1,261,000
                                                                              ===============        =================
    Income taxes                                                                      375,000                  558,000
                                                                              ===============        =================
</TABLE>


See accompanying notes to condensed consolidated financial statements.

                                      5



<PAGE>   6



                        INSURANCE AUTO AUCTIONS, INC.
                                AND SUBSIDIARY

             NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                 (UNAUDITED)

1. GENERAL

     The unaudited condensed consolidated financial statements of Insurance
     Auto Auctions, Inc. and its subsidiary (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 notes
     thereto included in the Company's annual report on Form 10-K for the year
     ended December 31, 1997.


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 the Company.


3.   NET EARNINGS PER SHARE

     Net earnings per share represents diluted earnings per share and is based
     on the weighted average number of shares of common and potentially
     issuable common stock equivalents outstanding.


4.   COMPREHENSIVE INCOME

     In June 1997, the Financial Accounting Standards Board issued Statement of
     Financial Accounting Standards No. 130, "Reporting Comprehensive Income"
     ("SFAS 130").  SFAS 130 establishes standards for reporting and display of
     comprehensive income and its components in a full set of general-purpose
     financial statements.  SFAS 130 is effective for financial statements for
     fiscal years beginning after December 15, 1997 and was adopted by the
     Company in the three months ended March 31, 1998.  Adoption of SFAS 130
     did not have a material impact on the Company's consolidated financial
     position, results of operations, or liquidity.

5.   SPECIAL CHARGES

     During the first quarter of 1998, a settlement agreement was entered into
     by the Company resolving all outstanding differences between Insurance
     Auto Auctions, Inc. and Bradley Scott, who has resigned as a director and
     Chairman of the Board. In the settlement agreement, various agreements
     were terminated (including agreements providing for compensation and
     certain benefits through June 30, 1999, and all outstanding stock
     options).  Per the settlement agreement, the Company made a lump-sum
     payment of $700,000 to Scott. This included a bonus payment for 1997 of
     $126,000


                                      6


<PAGE>   7



     pursuant to a 1996 agreement between the Company and Scott. The
     difference of $574,000 was recorded as a special charge in first quarter
     1998.  In addition, McKinsey & Co. had been retained to assist the Company
     in identifying and developing additional customer-valued services,
     focusing on opportunities to add value to the insurance industry's
     automobile claims process and reduce costs for these organizations.  The
     scope of the work completed also included the evaluation and development
     of new business offerings that leverage the company's current
     competencies, geographic presence and assets.  The cost of the project of
     $990,000 was recorded as a special charge in first quarter 1998.

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.  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
"Factors That May Affect Future Results" below.  Among these risks are quality
and quantity of inventory available from suppliers, competition, dependence on
key insurance company suppliers, governmental regulation, weather conditions
and market value of salvage.


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 a purchase agreement.  ACV's 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 ACV's 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.  With purchase agreement sales,
significant increases in used car prices and ACV's generally benefit the
Company.  However, if increases in used car prices and ACV's 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.

     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.  The Company has renegotiated or terminated all
significant purchase agreement contracts not conforming to the Company's
standards for this type of agreement, converting customers to either a fixed
fee consignment or percent of sale consignment contract whenever possible.
However, the Company continues to offer purchase agreements to those customers
who select it.

     Since its initial public offering, the Company has grown primarily through
a series of acquisitions to now include 48 locations as of March 31, 1998.  In
February of 1998, the Company acquired Auto Disposal Company.  ADC operated two
pools in Alabama.

                                      7


<PAGE>   8



     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 March 31, 1998 Compared to the Three Months Ended March 31,
1997


     Net sales of the Company increased to $68,558,000 for the three months
ended March 31, 1998, from $67,885,000 for the same three month period in 1997.
Unit volume decreased 3%, compared to the same period in 1997.  The decrease is
the result of fewer units being available for sale as compared to the prior
period.  This was due to the Company's decision to terminate specific,
unprofitable purchase agreements and the comparatively mild winter in many
parts of the Country, resulting in fewer "total loss" accidents.  The purchase
agreement sales method of processing accounted for 34,500 vehicles, or 30% of
total volume, down 8% from the same period in 1997. This decrease is consistent
with the shift from purchase agreements to consignment and percent of sale
contracts.


     Gross profit increased 19% to $16,466,000 for the three months ended March
31, 1998, from $13,832,000 for the same period in 1997. Gross profit per unit
of $143 for the three months ended March 31, 1998 was 22% higher than for the
comparable period of 1997. The increase in gross profit is the result of the
Company's decision to renegotiate or terminate specific, unprofitable purchase
agreements and an evaluation of the Company's services and corresponding fee
structures to insure the Company's service offerings are properly valued in the
market place.

     Direct operating expenses increased to $11,997,000 for the three months
ended March 31, 1998, from $11,374,000 for the same period in 1997.  Direct
operating expenses per unit increased to $104 for the three months ended March
31, 1998, as compared to $96 for the same period in 1997. The increase is the
result of lower unit volume and the funding of several value-added services
that were in development in the first quarter of 1998.

     During the first quarter of 1998, a settlement agreement was entered into
by the Company resolving all outstanding differences between Insurance Auto
Auctions, Inc. and Bradley Scott, who has resigned as a director and Chairman
of the Board. In the settlement agreement, various agreements were terminated
(including agreements providing for compensation and certain benefits through
June 30, 1999, and all outstanding stock options).  Per the settlement
agreement, the Company made a lump-sum payment of $700,000 to Scott. This
included a bonus payment for 1997 of $126,000 pursuant to a 1996 agreement
between the Company and Scott. The difference of $574,000 was recorded as a
special charge in first quarter 1998.

     McKinsey & Co. had been retained to assist the Company in identifying and
developing additional customer-valued services, focusing on opportunities to
add value to the insurance industry's automobile claims process and reduce
costs for these organizations.  The scope of the work completed also included
the evaluation and development of new business offerings that leverage the
company's current competencies, geographic presence and assets.  The cost of
the project of $990,000 was recorded as a special charge in first quarter 1998.

     Amortization of acquisition costs associated with acquisitions decreased
to $942,000 for the three months ended March 31, 1998 from $950,000 for the
comparable period in 1997.

     Interest expense decreased to $528,000 for the three months ended March
31, 1998, from $736,000 for the same period in 1997. The change in interest
expense was attributable to a decrease in

                                      8



<PAGE>   9



long-term debt as a result of the Company's repayment of borrowings
under the Company's Revolving Line of Credit Facility (the "Facility") and
repayment of several notes payable to sellers related to certain acquisitions.
Interest income increased to $174,000 for the three month period ended March 
31, 1998, from $158,000 for the comparable period in 1997.

     Income taxes increased to $740,000 for the three months ended March 31,
1998, from $400,000 for the comparable period in 1997. This increase is the
result of the increase in earnings and an increase in the Company's effective
tax rate. The Company's effective tax rate for the three months ended March 31,
1998 was 46%. The effective tax rate is subject to ongoing review and
evaluation by the Company.

     The Company's net earnings were $869,000 for the three months ended March
31, 1998, a 64% increase from $530,000 for the comparable period in 1997.


FINANCIAL CONDITION AND LIQUIDITY

     At March 31, 1998, the Company had current assets of  $51,747,000,
including $8,124,000 of cash and cash equivalents and current liabilities of
$25,970,000. The Company had working capital of $25,777,000 at March 31, 1998,
a $69,000 increase from December 31, 1997.

     At March 31, 1998, 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
$3,743,000, amounts due to the sellers related to an acquisition aggregating
$2,248,000 with imputed interest at 7.5% and amounts due to the sellers of
smaller acquisitions aggregating  $263,000 which bear interest at 8.0%. There
were no borrowings outstanding on the Facility at March 31, 1998.

     Capital expenditures were approximately $1,414,000 for the three months
ended March 31, 1998. These capital expenditures primarily included upgrading
and expanding the Company's management information system and the Company's
facilities.  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,
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.


RECENT DEVELOPMENTS


     Statement of Financial Accounting Standards ("S.F.A.S.") No. 131,
"Disclosures about Segments of an Enterprise and Related Information", was
issued in June 1997 and is effective for fiscal years beginning after December
15, 1997.  S.F.A.S. NO. 131 establishes new standards for disclosing
information about operating segments.  Adoption of this statement did not have
a material impact on the Company's financial position, results of operations,
or liquidity.


                                      9



<PAGE>   10


     In February 1998, the FASB issued Statement of Financial Accounting
Standards No. 132, "Employers' Disclosures about Pensions and Others
Postretirement Benefits" "(SFAS 132)" which amends the disclosure requirements
of Statements No. 87, "Employers' Accounting for Pensions" "(SFAS 87)", No. 88,
"Employers' Accounting for Settlements and Curtailments of Defined Benefit
Pension Plans and for Termination Benefits", and No. 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions.  SFAS 132 is
effective for fiscal years beginning after December 15, 1997.  Adoption of this
statement did not have a material impact on the Company's financial position,
results of operations, or liquidity.

     The Company has conducted a review of its computer systems to identify the
systems that could be affected by the "Year 2000" issue.  Based on the results
of that review, modifications were made to the Company's systems.  The Company
believes its computer systems are Year 2000 compliant in all material respects,
based on the results of the review and the successful implementation of the
modifications.  Total estimated costs incurred in modifying the Company's
systems were not material and were expensed as incurred.


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 ("ACV's") of salvage vehicles, changes in
regulations governing the processing of salvage vehicles, general weather
conditions and the availability and quality of salvage vehicles.  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.  These factors are further aggravated in the event the
Company fails to renegotiate purchase agreement contracts that are volume and
mix dependent on availability of these types of sales.  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; 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 reduction of policy
writing by insurance providers which would affect the number of claims over a
period of time, the changes in direct repair procedures that would reduce the
number of newer less damaged total loss vehicles that tend to have higher
salvage values and general weather conditions.  For example, a comparatively
mild winter can result in fewer "total loss" accidents, causing fewer vehicles
to be available for sale by the Company.  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 negative impact on the operating results and financial
condition of the Company.


                                      10



<PAGE>   11


     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, 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, 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
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.

     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 1997, vehicles supplied by the Company's
three largest suppliers accounted for approximately 46% of the Company's unit
sales.  The largest suppliers, State Farm Insurance, Allstate Insurance
("Allstate"), and Farmers Insurance, each accounted for approximately 19%, 17%,
and 10%, respectively, of the Company's unit sales.  A number of other
insurance company suppliers, including 20th Century Insurance, 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.

     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.  Increases in ACV's 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.  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.

     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 Company believes legislation currently being
considered by Congress could have a negative impact on the number of buyers
attending an auction as well as increase some of the costs to those buyers.
This legislation could increase governmental regulation of certain operations
of 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 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
require that the Company expends resources


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<PAGE>   12

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.

     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, 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 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.  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.

     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 results of operations 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 hazardous material contamination, which could have a material
adverse effect on the Company.



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<PAGE>   13


ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

                        Not Applicable


PART II.  OTHER INFORMATION.

ITEM 1.  LEGAL PROCEEDINGS.

     Bradley Scott, Chairman of the Board of the Company, was a defendant in a
lawsuit arising out of his alleged promise to share the proceeds from the sale
of his stock in Los Angeles Auto Salvage, Inc., a corporate predecessor of the
Company, with a former business associate.  In February 1998, the lawsuit was
settled by Scott.  Scott had believed he was entitled to indemnification from
the Company for any amounts he might pay as a result of the adjudication or
settlement of the lawsuit.  The Company believed Scott did not have any right
to indemnification. In April of 1998, a settlement agreement was entered into
by the Company, resolving all outstanding differences between the Company and
Scott, who resigned as a director and Chairman of the Board.

ITEM 2.  CHANGES IN SECURITIES.  INAPPLICABLE

ITEM 3.  DEFAULTS UPON SENIOR SECURITIES.  INAPPLICABLE

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

ITEM 5.  OTHER INFORMATION.  INAPPLICABLE

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

         (a)  EXHIBITS.

              10.1  First Amendment to the Employment Agreement of
                    James P. Alampi dated as of March 23, 1998.

              10.2  Second Amendment to Revolving Credit Agreement dated as
                    of April 6, 1998.

              27.1  Financial Data Schedule


         (b)  REPORTS ON FORM 8-K.  No reports on Form 8-K were filed
              during fiscal quarter ending March 31, 1998.



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<PAGE>   14


                                   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: May 15, 1998        By:     /s/ Linda C. Larrabee
------------------        -----------------------------------------------------
                          Name:   Linda C. Larrabee
                          Title:  Senior Vice President, Chief Financial Officer
                                  and Secretary

                                (Duly Authorized Officer and Principal Financial
                                 Officer)



                                      14



<PAGE>   15


                                 EXHIBIT INDEX




EXHIBIT NO.
-----------
10.1*   First Amendment to the Employment Agreement of James P. Alampi dated as
        of March 23, 1998.

10.2    Second Amendment to Revolving Credit Agreement dated as of
        April 6, 1998.

27.1    Financial Data Schedule







































*    This item is a management contract or compensatory plan or arrangement
     required to be filed as an exhibit to this form pursuant to Item 601
     (b)(10)(iii) of Regulation S-K.

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