<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 June 30, 1999

                                       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              60173-3855
--------------------------------------------------------------------------------
(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 June 30, 1999:

                Class                      Outstanding June 30, 1999
                -----                      -------------------------

    Common Stock, $0.001 Par Value             11,466,358 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 June 30, 1999 and December 31, 1998.....................................      3
         Condensed Consolidated Statements of Operations for the
              Three Month and Six Month Periods ended June 30, 1999 and June 30, 1998.......      4
         Condensed Consolidated Statements of Cash Flows for the
              Six Month Periods ended June 30, 1999 and June 30, 1998.......................      5
         Notes to Condensed Consolidated Financial Statements...............................      6

Item 2.  Management's Discussion and Analysis of Financial Condition
              and Results of Operations.....................................................      6

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..................................................................     14

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

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










                                       2

<PAGE>   3


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

<TABLE>
<CAPTION>
                                                               JUNE 30,     DECEMBER 31,
                                                                1999            1998
                                                                ----            ----
<S>                                                         <C>            <C>
ASSETS

Current assets:
     Cash and cash equivalents                              $ 16,342,000   $ 11,682,000
     Short-term investments                                   14,154,000     11,138,000
     Accounts receivable, net                                 34,135,000     37,415,000
     Inventories                                              11,432,000     11,229,000
     Other current assets                                      1,828,000      1,676,000
                                                            ------------   ------------
         Total current assets                                 77,891,000     73,140,000
                                                            ------------   ------------


Property and equipment, at cost, net                          23,727,000     22,312,000

Deferred income taxes                                          3,504,000      2,976,000

Other assets, principally goodwill, net                      127,038,000    128,916,000
                                                            ------------   ------------

                                                            $232,160,000   $227,344,000
                                                            ============   ============

LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities:
     Current installments of long-term debt                 $    216,000   $    216,000
     Accounts payable                                         25,305,000     30,939,000
     Accrued liabilities                                       6,367,000      6,097,000
     Income taxes                                              1,715,000        582,000
                                                            ------------   ------------
         Total current liabilities                            33,603,000     37,834,000
                                                            ------------   ------------

Long-term debt, excluding current installments                20,053,000     20,116,000
Accumulated postretirement benefits obligation                 3,345,000      3,485,000
Deferred income taxes                                          7,892,000      7,154,000
                                                            ------------   ------------

         Total liabilities                                    64,893,000     68,589,000
                                                            ------------   ------------

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
     11,466,358 and 11,327,169 shares as of June 30,
     1999 and December 31, 1998, respectively                     11,000         11,000
Additional paid-in capital                                   133,571,000    132,171,000
Retained earnings                                             33,685,000     26,573,000
                                                            ------------   ------------

         Total shareholders' equity                          167,267,000    158,755,000
                                                            ------------   ------------

                                                            $232,160,000   $227,344,000
                                                            ============   ============
</TABLE>

See accompanying notes to condensed consolidated financial statements





                                       3

<PAGE>   4


                          INSURANCE AUTO AUCTIONS, INC.
                                AND SUBSIDIARIES
                 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS



<TABLE>
<CAPTION>
                                                          Three Month Periods               Six Month Periods
                                                             Ended June 30,                    Ended June 30,
                                                             --------------                    --------------
                                                              (Unaudited)                       (Unaudited)

                                                          1999             1998             1999             1998
                                                          ----             ----             ----             ----
<S>                                                 <C>              <C>              <C>              <C>
Net Sales:
     Vehicle sales                                  $  54,411,000    $  51,894,000    $ 105,669,000    $  99,063,000
     Fee income                                        28,120,000       23,506,000       56,740,000       44,895,000
                                                    -------------    -------------    -------------    -------------
                                                       82,531,000       75,400,000      162,409,000      143,958,000
Cost and expenses:
     Cost of sales                                     59,836,000       56,375,000      119,777,000      108,466,000
     Direct operating expenses                         14,199,000       13,132,000       27,823,000       25,129,000
     Amortization of acquisition costs                    949,000          954,000        1,899,000        1,898,000
     Special charges                                            -                -                -        1,564,000
                                                    -------------    -------------    -------------    -------------

         Earnings from operations                       7,547,000        4,939,000       12,910,000        6,901,000

Other (income)expense:
     Interest expense                                     493,000          537,000          987,000        1,064,000
     Interest (income)                                   (326,000)        (222,000)        (551,000)        (396,000)
                                                    -------------    -------------    -------------    -------------

         Earnings before income taxes                   7,380,000        4,624,000       12,474,000        6,233,000

Income taxes                                            3,123,000        2,127,000        5,364,000        2,867,000
                                                    -------------    -------------    -------------    -------------

         Net earnings                               $   4,257,000    $   2,497,000    $   7,110,000    $   3,366,000
                                                    =============    =============    =============    =============

Earnings per share:
     Basic                                          $         .37    $         .22    $         .62    $         .30
                                                    =============    =============    =============    =============
     Diluted                                        $         .37    $         .22    $         .62    $         .30
                                                    =============    =============    =============    =============

Weighted average shares outstanding:
     Basic                                             11,421,000       11,312,000       11,381,000       11,309,000
     Effect of diluted securities - stock options         179,000          147,000          114,000          100,000
                                                    -------------    -------------    -------------    -------------
     Diluted                                           11,600,000       11,459,000       11,495,000       11,409,000
                                                    =============    =============    =============    =============
</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>
                                                                                      Six Month Periods
                                                                                         Ended June 30,
                                                                                     --------------------
                                                                                     1999            1998
                                                                                     ----            ----
<S>                                                                             <C>             <C>
Cash flows from operating activities:
Net earnings                                                                    $  7,110,000    $  3,366,000
Adjustments to reconcile net earnings to net cash
   provided by operating activities:
     Depreciation and amortization                                                 4,484,000       4,292,000
     (Gain) loss on disposal of fixed assets                                         (47,000)         59,000
     Change in assets and liabilities (net of effects of acquired companies):
     (Increase) decrease in:
       Short-term investments                                                     (3,016,000)     (6,856,000)
       Accounts receivable, net                                                    3,280,000      (2,443,000)
       Inventories                                                                  (203,000)     (1,753,000)
       Other current assets                                                         (152,000)        413,000
       Other assets                                                                  (21,000)         54,000
     Increase (decrease) in:
       Accounts payable                                                           (5,634,000)     (3,588,000)
       Accrued liabilities                                                           270,000        (371,000)
       Income taxes payable                                                        1,343,000       1,381,000
                                                                                ------------    ------------
         Total adjustments                                                           304,000      (8,812,000)
                                                                                ------------    ------------

     Net cash provided by operating activities                                     7,414,000      (5,446,000)
                                                                                ------------    ------------

Cash flows from investing activities:
   Capital expenditures                                                           (4,021,000)     (2,810,000)
   Proceeds from disposal of fixed assets                                             70,000               -
   Payments made in connection with acquired companies,
     net of cash acquired                                                                  -      (1,806,000)
                                                                                ------------    ------------

     Net cash used in investing activities                                        (3,951,000)     (4,616,000)
                                                                                ------------    ------------

Cash flows from financing activities:
   Proceeds from issuance of common stock                                          1,400,000         200,000
   Principal payments of long-term debt                                             (203,000)     (2,064,000)
                                                                                ------------    ------------

Net cash used in financing activities                                              1,197,000      (1,864,000)
                                                                                ------------    ------------

Net increase (decrease) in cash                                                    4,660,000     (11,926,000)

Cash and cash equivalents at beginning of period                                  11,682,000      25,972,000
                                                                                ------------    ------------

Cash and cash equivalents at end of period                                      $ 16,342,000    $ 14,046,000
                                                                                ============    ============

Supplemental disclosures of cash flow information:
   Cash paid during the year for:
     Interest                                                                   $    860,000    $    929,000
                                                                                ============    ============
     Income taxes                                                               $  4,121,000    $  1,487,000
                                                                                ============    ============
</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 audited consolidated
       financial statements and, in the opinion of the Company, 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, 1998

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.     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 a former director, who 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 the former director. This included a bonus payment
       for 1997 of $126,000 pursuant to a 1996 agreement between the Company and
       the former director. 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 the first
       quarter of 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.


                                       6

<PAGE>   7


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. 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 50 locations as of June 30,
1999. In February of 1998, the Company acquired Auto Disposal Company. ADC
operated two pools in Alabama.

              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 June 30, 1999 Compared to the Three Months Ended June 30,
1998

              Net sales of the Company increased to $82,531,000 for the three
months ended June 30, 1999, from $75,400,000 for the same three month period in
1998. Unit volume increased 8%, compared to the same period in 1998. The unit
volume increase was the result of the Company's increased sales efforts and
generally favorable market conditions. Gross profit increased 19% to $22,695,000
for the three months ended June 30, 1999, from $19,025,000 for the same period
in 1998. Gross profit per unit of $183 for the three months ended June 30, 1999
was 11% higher than for the comparable period of 1998. The increase in gross
profit per unit has been primarily the result of the implementation and faster
than expected rollout of the Company's gross profit enhancement initiatives,
including the conversion of fixed-fee consignment and purchase agreement
contract types to the generally more profitable percent of sale contract type
and the Company's focus on increasing the number and variety of vehicle
enhancement services. Approximately 15% of vehicles sold in the second quarter
of 1999 were sold under the percent of sale method versus 9% for


                                       7

<PAGE>   8


the same period last year. The purchase agreement sales method of processing
accounted for 29% of total volume, compared with 31% for the same period in
1998.

              Direct operating expenses increased to $14,199,000 for the three
months ended June 30, 1999, from $13,132,000 for the same period in 1998. Direct
operating expenses per unit increased to $115 for the three months ended June
30, 1999, as compared to $114 for the same period in 1998. The increase reflects
higher earned management incentives due to the improved earnings as well as
increased salary and labor costs largely associated with the increased volume.

              Amortization of acquisition costs decreased to $949,000 for the
three months ended June 30, 1999 from $954,000 for the comparable period in
1998.

              Interest expense decreased to $493,000 for the three months ended
June 30, 1999, from $537,000 for the same period in 1998. The change in interest
expense was attributable to a decrease in long-term debt as a result of the
Company's repayment of several notes payable to sellers related to certain
acquisitions. Interest income increased to $326,000 for the three month period
ended June 30, 1999, from $222,000 for the comparable period in 1998.

              Income taxes increased to $3,123,000 for the three months ended
June 30, 1999, from $2,127,000 for the comparable period in 1998. This increase
is the result of the increase in earnings, offset by a decrease in the Company's
effective tax rate from 46% in 1998 to an anticipated 43% for the full fiscal
year of 1999. The second quarter income tax provision included a retroactive
application of the new lower 1999 effective rate. The effective tax rate is
subject to ongoing review and evaluation by the Company.

              The Company's net earnings were $4,257,000 for the three months
ended June 30, 1999, a 70% increase from $2,497,000 for the comparable period in
1998.


Six Months Ended June 30, 1999 Compared to the Six Months Ended June 30, 1998

              Net sales of the Company increased to $162,409,000 for the six
months ended June 30, 1999, from $143,958,000 for the same six month period in
1998, a 13% increase. This is the result of an increase in the number of units
sold, as compared to the same period in 1998, and increased fee revenues
primarily in buyer fees.

              Unit volume for the six months ended June 30, 1999 increased 9%,
as compared to the same period in 1998. The increase was the result of more
units being available for sale due to strong vehicle assignments taken in the
fourth quarter of 1998 and early in the first quarter of 1999. The vehicle
assignments reflect an increase in same store sales due in part to severe winter
storms in select areas of the country and an increase in the charity business.

              The purchase agreement sales method of processing accounted for
29% of total volume, down 2% from the same period in 1998. The percent of sale
agreement sales method of processing accounted for 15% of total volume, up 7%
from the same period in 1998. The Company continues to focus on converting fixed
fee consignment and purchase agreement contract types to the generally more
profitable percent of sale contract type.

              Gross profit increased 20% to $42,632,000 for the six months ended
June 30, 1999, from $35,492,000 for the same period in 1998. Gross profit per
unit of $171 for the six months ended June 30, 1999 was 11% higher than for the
comparable period of 1998. The increase in gross profit per unit is the result
of the quicker than anticipated implementation of several gross profit
enhancement initiatives and a continued focus on price management. A key
emphasis of the gross profit enhancement initiatives has been on increasing the
number and variety of vehicle enhancement services which increase fee revenue
and the value of auctioned vehicles, both of which improve the Company's gross
profit per unit. The price


                                       8

<PAGE>   9
management initiative includes an ongoing 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 $27,823,000 for the six
months ended June 30, 1999, from $25,129,000 for the same period in 1998. Direct
operating expenses per unit increased to $111 for the six months ended June 30,
1999, as compared to $109 for the same period in 1998. The increase is the
result of higher earned management incentives, increased facility related costs
and a general increase in operating expenses.

              Amortization of acquisition costs associated with acquisitions
increased to $1,899,000 for the six months ended June 30, 1999 from $1,898,000
for the comparable period in 1998.

              Interest expense decreased to $987,000 for the six months ended
June 30, 1999, from $1,064,000 for the same period in 1998. The change in
interest expense was attributable to a decrease in long-term debt as a result of
the Company's repayment of several notes payable to sellers related to certain
acquisitions. Interest income increased to $551,000 for the six month period
ended June 30, 1999, from $396,000 for the comparable period in 1998. The
increase is the result of an increase in cash and short term investments.

              Income taxes increased to $5,364,000 for the six months ended June
30, 1999, from $2,867,000 for the comparable period in 1998. This increase is
the result of the increase in earnings. The Company's effective tax rate for the
six months ended June 30, 1999 was 43% versus 46% for the comparable period in
1998. The effective tax rate is subject to ongoing review and evaluation by the
Company.

              The Company's net earnings were $7,110,000 for the six months
ended June 30, 1999, a 69% increase from $4,211,000, before special charges, for
the comparable period in 1998.


FINANCIAL CONDITION AND LIQUIDITY

              At June 30, 1999, the Company had current assets of $77,891,000,
including $16,342,000 of cash and cash equivalents and $14,154,000 of short-term
investments. Current liabilities were $33,603,000. The Company had working
capital of $44,288,000 at June 30, 1999, an $8,982,000 increase from December
31, 1998.

              At June 30, 1999, 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 $3,345,000 and amounts due to the sellers related to certain
acquisitions. There were no borrowings outstanding on the Revolving Line of
Credit Facility at June 30, 1999.

              Capital expenditures were approximately $4,021,000 for the six
months ended June 30, 1999. 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.


                                       9

<PAGE>   10


RECENT DEVELOPMENTS

              The Company undertook an initiative, ("the Project"), in mid 1997,
the objective of which is to determine and assess the risks of the Year 2000
issue, and plan and institute mitigating actions to minimize those risks. The
Project team is being lead by the Company's Vice President and Chief Information
Officer. The scope of the Project includes both IT based systems and non IT
systems. Modifications required to bring the Company's IT systems into Year 2000
compliance were identified by the Project team. Based on work completed by the
Project team, the Company does not believe its non-IT system Year 2000
compliance issues represent a significant risk to the Company.

              The required modifications to the Company's standard transaction
processing system ("ESPS") have been completed. Based on the findings of the
Project team and the successful implementation of these required modifications,
the Company believes this system is Year 2000 compliant in all material
respects. The Company will continue Y2K testing of ESPS during the third quarter
- both alone and in conjunction with EDI trading partners. However, certain of
the Company's operations have yet to be converted from non-Year 2000 compliant
legacy systems currently in use to ESPS. These operations are scheduled for
conversion by November, 1999, although no assurances can be given the conversion
will be completed on schedule. Failure to convert these operations on a timely
basis could have a material adverse effect on the Company's financial position
or results of operations.

              The Company may be impacted by the effect the Year 2000 issue has
on the ability of the Company's Insurance customers to process automobile claims
and state departments of motor vehicles ("DMV's") to process titles on a timely
basis. Any delay in the timely processing of automobile claims that
significantly reduces the number of units the Company has available for sale
would have a material adverse affect on the Company's financial position or
results of operations. In addition, the Company relies on state DMV's to timely
process titles to vehicles. Because the Company must generally obtain title
prior to selling a vehicle, a significant delay in title processing would impact
the Company's ability to sell vehicles from inventory and have a material
adverse effect on the Company's financial position or results of operations.

              The Company has been, and will continue to be, in communication
with its principal insurance customers and the DMV's with regard to their Year
2000 readiness. None of the responses received to date suggests there will be
any interruption in their operations which would have a material adverse impact
on the Company although there can be no assurances given in this regard.
Contingency plans will continue to be developed during the third quarter of
1999.

              The cost to the Company of dealing with the Year 2000 issue is not
expected to be material. Although a portion of the IT personnel and related
management has been and will be employed in evaluating the problem, taking
corrective actions and preparing contingency plans, the Company does not believe
the IT projects or operations have been or will be adversely affected. Costs of
review, analysis and corrective action are expected to total less than $100,000.



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


                                       10

<PAGE>   11


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; 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 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 affect 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") 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 including
companies which are consolidating the dismantling industry 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 1998, vehicles supplied by the Company's
six largest suppliers accounted for approximately 44% of the Company's unit
sales. The largest suppliers, State Farm Insurance, Allstate Insurance
("Allstate"), and Farmers Insurance, each accounted for approximately 17%, 14%,
and 13%, respectively, of the Company's unit sales. 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 operating results and financial condition.



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<PAGE>   12


              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. From 1993 to 1996, increased
ACV's, on which the Company's costs are based, reduced the profitability that
the Company realizes on purchase agreement contracts. This could occur again if
used car prices increase faster than selling prices. Further 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 added adjustment and risk-sharing clauses
to its new standard purchase agreement contracts designed to provide some
protection to the Company and its customers from certain unexpected, significant
changes in the ACV's that are not accompanied by a comparable increase in sales
price. The Company has renegotiated or terminated all significant purchase
agreement contracts not conforming to the Company's standards for this type of
agreement.

              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. 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 require that the Company expends 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.

              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 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


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<PAGE>   13


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's operating results and financial condition.


ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.


         The Company had approximately $14,154,000 of short-term investments as
of June 30, 1999. These investments largely consisted of state government
obligations and had either variable rates of interest or stated interest rates
ranging from 3% to 7%. The Company's short-term investments are exposed to
certain market risks inherent with such assets. This risk is mitigated by the
Company's policy of investing in securities with high credit ratings and
investing through major financial institutions with high credit ratings.

         The Company has senior notes payable of $20,000,000 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.



              At the Annual Meeting of Shareholders of the Company held June 16,
1999, the shareholders (i) elected nine directors to serve on the Company's
Board of Directors, and (ii) ratified the Company's appointment of KPMG LLP to
serve as the Company's independent auditors for the fiscal year ended December
31, 1999. Shareholders holding 10,342,852 shares of Common Stock, representing
91.0% of the total number of shares outstanding and entitled to vote at the
meeting, were present in person or by proxy at the meeting.



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<PAGE>   14


The vote for nominated directors was as follows:

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

         Thomas J. O'Malia           10,677,591            11,561
         Christopher G. Knowles      10,677,100            12,052
         Maurice A. Cocca            10,678,841            10,311
         Susan B. Gould              10,677,591            11,561
         Peter H. Kamin              10,678,841            10,311
         Melvin R. Martin            10,677,591            11,561
         Joseph F. Mazzella          10,678,841            10,311
         Glen E. Tullman             10,678,841            10,311
         John K. Wilcox              10,677,591            11,561


The vote for ratifying the appointment of KPMG LLP was as follows:
For: 10,683,157; Against: 2,010; and Withheld: 3,985.


ITEM 5.  OTHER INFORMATION.  INAPPLICABLE


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

         (a)  EXHIBITS.

              10.1  Employment Agreement, dated June 3, 1999, by and between
                    Registrant and Christopher G. Knowles.

              10.2  First Amendment to the Employment Agreement, effective June
                    3, 1999 by and between Registrant and Christopher G.
                    Knowles.

              10.3  Separation Agreement, dated June 14, 1999, by and between
                    Registrant and Linda C. Larrabee.

              27.1  Financial Data Schedule

         (b)  REPORTS ON FORM 8-K.  No reports on Form 8-K were filed during
              fiscal quarter ending June 30, 1999.










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<PAGE>   15


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


                                 INSURANCE AUTO AUCTIONS, INC.




Date: August 16, 1999            By:    /s/ Stephen L. Green
      ---------------               -------------------------------------------
                                 Name:  Stephen L. Green
                                 Title: Vice President - Finance,
                                        Chief Financial Officer

                                        (Duly Authorized Officer and Principal
                                        Financial Officer)



















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<PAGE>   16


                                  EXHIBIT INDEX




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

10.1          Employment Agreement, dated June 3, 1999, by and between
              Registrant and Christopher G. Knowles.

10.2          First Amendment to the Employment Agreement, effective June 3,
              1999 by and between Registrant and Christopher G. Knowles.

10.3          Separation Agreement, dated June 14, 1999, by and between
              Registrant and Linda C. Larrabee.

27.1          Financial Data Schedule

















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