<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 April 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 April 30, 2001:

                Class                       Outstanding April 30, 2001
                -----                       --------------------------

    Common Stock, $0.001 Par Value                11,732,935 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 April 1, 2001 and December 31, 2000.....................................      3
         Condensed Consolidated Statements of Operations for the
              Three Month Periods ended April 1, 2001 and March 31, 2000....................      4
         Condensed Consolidated Statements of Cash Flows for the
              Three Month Periods ended April 1, 2001 and March 31, 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.................................................................     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
</TABLE>



                                       2
<PAGE>   3


                          INSURANCE AUTO AUCTIONS, INC.
                                AND SUBSIDIARIES
                      CONDENSED CONSOLIDATED BALANCE SHEETS
              (in thousands of dollars except share and per share)



                                                        APRIL 1,    DECEMBER 31,
                                                          2001         2000
                                                        --------    ------------
ASSETS                                                 (UNAUDITED)

Current assets:
     Cash and cash equivalents                          $ 28,384       $ 30,938
     Short-term investments                               12,810          4,859
     Accounts receivable, net                             49,551         48,091
     Inventories                                          14,274         10,588
     Other current assets                                  5,506          3,112
                                                        --------       --------
            Total current assets                         110,525         97,588
                                                        --------       --------
Property and equipment, net                               33,236         30,492
Other investments                                          1,115          2,240
Deferred income taxes                                      5,206          5,123
Intangible assets, principally goodwill, net             129,248        130,264
                                                        --------       --------
                                                        $279,330       $265,707
                                                        ========       ========

LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities:
     Current installments of long-term debt             $     37       $     37
     Accounts payable                                     47,458         38,176
     Accrued liabilities                                   6,393          6,171
     Accrued restructuring charges                         4,437           --
                                                        --------       --------
         Total current liabilities                        58,325         44,384
                                                        --------       --------
Long-term debt, excluding current installments            20,131         20,141
Other liabilities                                          3,859          3,001
Deferred income taxes                                     10,814         10,440
                                                        --------       --------
         Total liabilities                                93,129         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 11,732,935 and 11,715,936
     shares as of April 1, 2001 and December 31,
     2000, respectively                                      12             12
Additional paid-in capital                               137,069        136,962
Retained earnings                                         49,120         50,767
                                                        --------       --------
         Total shareholders' equity                      186,201        187,741
                                                        --------       --------
                                                        $279,330       $265,707
                                                        ========       ========



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)



                                                   THREE MONTH PERIODS ENDED
                                                   -------------------------
                                                    APRIL 1,     MARCH 31,
                                                      2001        2000
                                                   -------------------------
                                                         (UNAUDITED)
Net revenues:
     Vehicle sales                                  $ 40,217    $ 54,964
     Fee income                                       37,627      31,996
                                                    --------    --------
                                                      77,844      86,960
Cost and expenses:
     Cost of sales                                    55,025      63,855
     Direct operating expenses                        18,467      15,018
     Amortization of intangible assets                 1,006         948
     Special charges                                   6,047        --
                                                    --------    --------
         Earnings (loss) from operations              (2,701)      7,139

Other (income) expense:
     Interest expense                                    456         464
     Interest income                                    (368)       (411)
                                                    --------    --------
         Earnings (loss) before income taxes          (2,789)      7,086

Provision (benefit) for income taxes                  (1,144)      2,905
                                                    --------    --------
         Net earnings (loss)                        $ (1,645)   $  4,181
                                                    ========    ========

Net earnings (loss) per share:
     Basic                                          $   (.14)   $    .36
                                                    ========    ========
     Diluted                                        $   (.14)   $    .35
                                                    ========    ========

Weighted average shares outstanding:
     Basic                                            11,730      11,586
     Effect of dilutive securities -stock options        116         200
                                                    --------    --------
     Diluted                                          11,846      11,786
                                                    ========    ========


     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>
                                                                              THREE MONTH PERIODS ENDED
                                                                              -------------------------
                                                                                  APRIL 1,   MARCH 31,
                                                                                   2001        2000
                                                                              -------------------------
                                                                                     (unaudited)
<S>                                                                              <C>         <C>
Cash flows from operating activities:
Net earnings (loss)                                                              $ (1,645)   $  4,181
Adjustments to reconcile net earnings (loss) to net cash
   provided by operating activities:
     Depreciation and amortization                                                  2,335       2,384
     Gain on disposal of fixed assets                                                (407)        (13)
     Special charges                                                                6,047        --
     Change in assets and liabilities (net of effects of acquired companies):
     (Increase) decrease in:
       Investments, net                                                            (6,826)     (2,251)
       Accounts receivable, net                                                    (1,397)     (1,020)
       Inventories                                                                 (3,686)       (109)
       Other current assets                                                        (2,394)       (403)
       Other assets                                                                    36         111
     Increase (decrease) in:
       Accounts payable                                                             9,228      (1,894)
       Accrued liabilities                                                           (540)        504
       Deferred income taxes                                                          291       2,792
                                                                                 --------    --------
         Total adjustments                                                          2,687         101
                                                                                 --------    --------
     Net cash provided by operating activities                                      1,042       4,282
                                                                                 --------    --------

Cash flows from investing activities:
   Capital expenditures                                                            (4,928)     (3,032)
   Proceeds from disposal of fixed assets                                           1,340          21
   Acquisitions of businesses, net of cash acquired                                  (105)     (6,000)
                                                                                 --------    --------
       Net cash used in investing activities                                       (3,693)     (9,011)
                                                                                 --------    --------

Cash flows from financing activities:
   Proceeds from issuance of common stock                                             107         173
   Principal payments of long-term debt                                               (10)       (151)
                                                                                 --------    --------
       Net cash used in financing activities                                           97          22
                                                                                 --------    --------
Net decrease in cash                                                               (2,554)     (4,707)
Cash and cash equivalents at beginning of period                                   30,938      27,186
                                                                                 --------    --------
Cash and cash equivalents at end of period                                       $ 28,384    $ 22,479
                                                                                 ========    ========

Supplemental disclosures of cash flow information: Cash paid during the period
   for:
     Interest                                                                    $    870    $    860
                                                                                 ========    ========
     Income taxes                                                                $   --      $    112
                                                                                 ========    ========
</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 full reorganization is executed. The activity affecting the
     accrual for restructuring charges, which is included in accrued
     restructuring charges and other non-current liabilities, for the three
     months ended April 1, 2001 is as follows:


 (000's)                       Workforce  Facility    Towing
                               Reduction  Closing    and Other   Total
                               ---------  -------    ---------  ------
Balance at December 31, 2000   $  --      $  --      $  --      $  --
Charges to operations            2,376      1,739      1,932      6,047
Utilization of accrual            (213)      --         (497)      (710)
                               -------    -------    -------    -------
Balance at April 1, 2001       $ 2,163    $ 1,739    $ 1,435    $ 5,337
                               =======    =======    =======    =======



                                       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 1998, the Financial Accounting Standards Board issued Statement of
     Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
     Instruments and Hedging Activities", which addresses the accounting for
     derivative instruments. SFAS No. 133, as amended by SFAS No. 137 and SFAS
     No. 138, is effective beginning January 1, 2001. The Company does not have
     any derivative instruments or engage in hedging activities that are subject
     to the provisions of SFAS No. 133


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 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 sales. 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.

     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


                                       7
<PAGE>   8

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 April 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 April 1, 2001 Compared to the Three Months Ended March
31, 2000

     Net revenues of the Company decreased to $77.8 million for the three months
ended April 1, 2001, from $87.0 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 first quarter increased 18% to $37.6 million versus
$32.0 million in the first quarter of last year. This increase is the result of
both increased volume and pricing changes.

     Gross profit decreased 1% to $22.8 million for the three months ended April
1, 2001, from $23.1 million for the comparable period in 2000. The decline in
profitability reflects continued poor performance of 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 $18.5 million for the three months
ended April 1, 2001, from $15.0 million for the comparable period in 2000. The
increase is primarily the result of acquisitions and greenfields that were
completed in 2000.

     Interest expense decreased slightly to $456,000 for the three months ended
April 1, 2001, from $464,000 for the comparable period in 2000. Interest income
decreased to $368,000 for the 2001 first quarter versus $411,000 for the 2000
first quarter.

     The Company's effective income tax rate was 41% in both 2000 and 2001.


FINANCIAL CONDITION AND LIQUIDITY

     At April 1, 2001, the Company had current assets of $110.5 million,
including $28.4 million of cash and cash equivalents and $12.8 million of
short-term investments. Current liabilities were $58.3 million. The Company had
working capital of $52.2 million at April 1, 2001, a $1.0 million decrease from
December 31, 2000.

     At April 1, 2001, the Company's indebtedness consisted mostly of 8.6%
Senior Notes of $20.0 million that mature in 2002 and other debt aggregating
$168,000, which bears interest at 8.0%. 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 April 1, 2001 for the
post-retirement benefits


                                       8
<PAGE>   9

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 April 1, 2001.

     Capital expenditures were approximately $4.9 million for the three months
ended April 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. This 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 April 1, 2001, the Company had not
purchased any shares pursuant to this authorization.

     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.

OTHER

     On February 16, 2000, an Emery Worldwide DC-8 cargo jet crashed in to the
Company's facility in Rancho Cordova, California. The three Emery crew members
who were on board died, but there were no fatalities on the ground.

     Although no buildings were affected, approximately 850 vehicles at the
branch were either destroyed or damaged by the crash and the ensuing fire
("Inventory Damage"). The crash and fire also caused the release of hazardous
substances at the branch, necessitating certain environmental remediation and
property restoration activities, which have now been completed.

     The Company filed three claims with its insurance carrier: first, an
Inventory Damage claim; second, a "business interruption" claim because the
branch was closed for a brief period as a result of the crash; and third, a
property damage claim principally to the parking surfaces of the branch. At
April 1, 2001, IAA had received approximately $1.0 million from its insurance
carrier related to the Inventory Damage.

     Additionally, as of April 1, 2001, the Company had incurred approximately
$1.8 million of expenses from the environmental property remediation related to
the crash. The Company's insurance policy is limited for environmental property
remediation expenses and is likely not sufficient to cover all costs. Pursuant
to the terms of the Company's lease at this facility, IAA believes that it has a
claim which entitles it to recover one-half the cost of environmental property
remediation from the property's landlord.

     The Company's insurance policy also limits "business interruption" recovery
based on a co-insurance provision in the policy. The Company's former insurance
broker is negotiating a modification of the impact of this provision with the
insurance carrier.

     The Company intends to vigorously pursue any and all claims under
applicable law against Emery Worldwide and other potentially responsible parties
for the crash, including environmental costs incurred




                                       9
<PAGE>   10

by the Company. The Company concluded, during the fourth quarter of 2000, that
it was probable that not all expenses incurred related to this crash would be
reimbursed. As such, the Company's accrued clean-up costs of approximately $1.2
million were included within the Company's special charge for the fourth quarter
of 2000.

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, 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.



                                       10
<PAGE>   11

     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 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.



                                       11
<PAGE>   12

     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
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 $13.9 million of investments as of April 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.



                                       12
<PAGE>   13

         The Company has senior notes payable of $20 million at an interest rate
of 8.6%. 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.




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. INAPPLICABLE

ITEM 5. OTHER INFORMATION. INAPPLICABLE

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

        (a) EXHIBITS.

             3.1 Bylaws of the Registrant, as amended as of March 21, 2001.

            10.1 Amended and Restated Employment Agreement dated April 2, 2001
                 by and between the Company and Thomas C. O'Brien.

            10.2 Employment Agreement dated April 2, 2001 by and between the
                 Company and David Montgomery.

            10.3 Employment Agreement dated April 2, 2001 by and between the
                 Company and Scott Pettit.

            10.4 Separation Agreement dated March 31, 2001 by and between the
                 Company and Gaspare G. Ruggirello.

            10.5 Separation Agreement dated April 9, 2001 by and between the
                 Company and Donald J. Comis.

            10.6 Separation Agreement dated April 9, 2001 by and between the
                 Company and Gerald C. Comis.

            10.7 Separation Agreement dated April 9, 2001 by and between the
                 Company and Patrick T. Walsh.

            10.8 Separation Agreement dated March 9, 2001 by and between the
                 Company and Stephen L. Green.


        (b) REPORTS ON FORM 8-K.
            The Company filed a current report on Form 8-K on February 16, 2001
            to report a Shareholder Agreement among the Company, ValueAct
            Capital Partners, L.P., Value Act Capital Partners II, L. P., VA
            Partners, LLC, Jeffrey W. Ubben, Peter H. Kamin and George F. Hamel,
            Jr.


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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 16, 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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<PAGE>   15
                                 EXHIBIT INDEX

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


  3.1       Bylaws of the Registrant, as amended as of March 21, 2001.

 10.1       Amended and Restated Employment Agreement dated April 2, 2001 by and
            between the Company and Thomas C. O'Brien.

 10.2       Employment Agreement dated April 2, 2001 by and between the Company
            and David Montgomery.

 10.3       Employment Agreement dated April 2, 2001 by and between the Company
            and Scott Pettit.

 10.4       Separation Agreement dated March 31, 2001 by and between the Company
            and Gaspare G. Ruggirello.

 10.5       Separation Agreement dated April 9, 2001 by and between the Company
            and Donald J. Comis.

 10.6       Separation Agreement dated April 9, 2001 by and between the Company
            and Gerald C. Comis.

 10.7       Separation Agreement dated April 9, 2001 by and between the Company
            and Patrick T. Walsh.

 10.8       Separation Agreement dated March 9, 2001 by and between the Company
            and Stephen L. Green.




                                       15