<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, 1997

                                     OR

[ ]   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
      EXCHANGE ACT OF 1934

For the transition period from _____________________ to _______________________

                       Commission File Number: 0-19594

                        INSURANCE AUTO AUCTIONS, INC.
           (Exact name of registrant as specified in its charter)


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

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

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

1270 West Northwest Highway, Palatine, Illinois 60067
-------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)

     Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
                                                           [ X ] Yes   [ ] No


                    APPLICABLE ONLY TO CORPORATE ISSUERS

Number of shares outstanding of each of the issuer's classes of common stock,
as of June 30, 1997:

                      Class                 Outstanding June 30, 1997
                      -----                 -------------------------
           Common Stock, $0.001 Par Value        11,291,492 shares





<PAGE>   2



                                    INDEX

                        INSURANCE AUTO AUCTIONS, INC.

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

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

         Condensed Consolidated Balance Sheets
           as of June 30, 1997 and December 31, 1996 ..............      3
         Condensed Consolidated Statements of Earnings for the
           Three Month Periods ended June 30, 1997 and June 30, 
           1996 and The Six Month Periods ended June 30, 1997 
           and June 30, 1996 ......................................      4
         Condensed Consolidated Statements of Cash Flows for the
           Six Month Periods ended June 30, 1997 and 
           June 30, 1996 ..........................................      5
         Notes to Condensed Consolidated Financial Statements .....      6

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

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

Item 1.  Legal Proceedings and Other Matters ......................     14

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

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

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

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

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

SIGNATURES ........................................................     16

EXHIBIT INDEX .....................................................     17

</TABLE>

                                      2



<PAGE>   3



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



<TABLE>
<CAPTION>


                                                           June 30,   December 31,
                                                            1997          1996
                                                        ------------  ------------
<S>                                                     <C>           <C>
ASSETS

Current assets:
  Cash, cash equivalents & short-term investments       $  9,274,000  $  5,888,000
  Accounts receivable, net                                29,596,000    34,371,000
  Inventories                                             10,759,000    10,162,000
  Other current assets                                     2,042,000     3,630,000
                                                        ------------  ------------
        Total current assets                              51,671,000    54,051,000
                                                        ------------  ------------

Property and equipment, at cost, net                      21,116,000    21,596,000

Other assets, principally goodwill, net                  134,399,000   136,157,000
                                                        ------------  ------------

                                                        $207,186,000  $211,804,000
                                                        ============  ============

LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities:
  Current installments of long-term debt                $  2,017,000  $  2,571,000
  Accounts payable                                        18,469,000    18,014,000
  Accrued liabilities                                     11,190,000    11,801,000
  Income taxes                                             2,489,000     1,986,000
                                                        ------------  ------------
        Total current liabilities                         34,165,000    34,372,000
                                                        ------------  ------------

Long-term debt, excluding current installments            24,313,000    30,843,000
                                                        ------------  ------------

       Total liabilities                                  58,478,000    65,215,000
                                                        ------------  ------------


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
  11,291,492 and 11,282,838 shares as of June 30, 1997
  and December 31, 1996, respectively                         11,000        11,000
Additional paid-in capital                               131,748,000   131,681,000
Retained earnings                                         16,949,000    14,897,000
                                                        ------------  ------------

       Total shareholders' equity                        148,708,000   146,589,000
                                                        ------------  ------------

                                                        $207,186,000  $211,804,000
                                                        ============  ============
</TABLE>



See accompanying notes to condensed consolidated financial statements.

                                      3



<PAGE>   4



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




<TABLE>
<CAPTION>

                                       Three Month Periods       Six Month Periods
                                         Ended June 30,            Ended June 30,
                                    ------------------------  -------------------------

                                        1997         1996         1997          1996
                                    -----------  -----------  -----------  ------------
<S>                                 <C>          <C>          <C>          <C>
Net sales:
 Vehicle sales                      $44,990,000  $55,556,000  $90,146,000  $108,215,000
 Fee income                          20,988,000   20,486,000   43,717,000    40,643,000
                                    -----------  -----------  -----------  ------------
                                     65,978,000   76,042,000  133,863,000   148,858,000
Cost and expenses:
 Cost of sales                       49,682,000   59,678,000  103,736,000   117,627,000
 Direct operating expenses           11,506,000   12,235,000   22,879,000    24,190,000
 Amortization of acquisition costs      945,000      938,000    1,895,000     1,865,000
 Special charge                         750,000          ---      750,000           ---
                                    -----------  -----------  -----------  ------------

     Earnings from operations         3,095,000    3,191,000    4,603,000     5,176,000

Other (income) expense:
 Interest expense                       669,000      768,000    1,405,000     1,576,000
 Interest income                       (241,000)    (246,000)    (399,000)     (400,000)
                                    -----------  -----------  -----------  ------------

     Earnings before income taxes     2,667,000    2,669,000    3,597,000     4,000,000

Income taxes                          1,147,000    1,148,000    1,547,000     1,720,000
                                    -----------  -----------  -----------  ------------

     Net earnings                   $ 1,520,000  $ 1,521,000  $ 2,050,000   $ 2,280,000
                                    ===========  -----------  ===========  ============


Net earnings per common and common
 equivalent shares outstanding      $       .13  $       .13  $       .18  $        .20
                                    ===========  ===========  ===========  ============

Weighted average common and common
 equivalent shares outstanding       11,299,000   11,369,000   11,306,000    11,355,000

</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,
                                                       ------------------------
                                                           1997         1996
                                                           ----         ----
<S>                                                    <C>          <C>
Cash flows from operating activities:
 Net earnings                                          $ 2,050,000  $ 2,280,000
                                                       -----------  -----------
Adjustments to reconcile net earnings to net cash
 provided by operating activities:
   Depreciation and amortization                         3,947,000    4,073,000
   Change in assets and liabilities (net of effects of
   acquired companies):
     (Increase) decrease in:
        Accounts receivable, net                         4,775,000    2,527,000
        Inventories                                       (597,000)   1,945,000
        Other current assets                             1,588,000      758,000
        Other assets                                      (137,000)     (22,000)
     Increase (decrease) in:
        Accounts payable                                   455,000   (1,808,000)
        Accrued liabilities                               (477,000)   1,767,000
        Income taxes                                       503,000    1,478,000
                                                       -----------  -----------
           Total adjustments                            10,057,000   10,718,000
                                                       -----------  -----------
           Net cash provided by operating activities    12,107,000   12,998,000
                                                       -----------  -----------

Cash flows from investing activities:
 Short-term investments                                          -      410,000
 Capital expenditures                                   (1,572,000)  (3,411,000)
 Payments made in connection with acquired companies      (132,000)  (1,675,000)
                                                       -----------  -----------

           Net cash used in investing activities        (1,704,000)  (4,676,000)
                                                       -----------  -----------

Cash flows from financing activities:
 Proceeds from issuance of common stock                     67,000       52,000
 Proceeds (payment) of line of credit and 
  notes payable                                         (4,640,000)   4,536,000
 Payment of notes payable to acquired companies         (2,444,000)  (1,854,000)
                                                       -----------  -----------

           Net cash provided by (used in) 
            financing activities                        (7,017,000)   2,734,000
                                                       -----------  -----------

           Net increase in cash                          3,386,000   11,056,000
                                                                               

Cash and cash equivalents at beginning of period         5,888,000      362,000
                                                       -----------  -----------

Cash and cash equivalents at end of period             $ 9,274,000  $11,418,000
                                                       ===========  ===========

Supplemental disclosures of cash flow information:
 Cash paid during the year for:
   Interest                                            $ 3,150,000  $ 1,266,000
   Income taxes                                          1,043,000      260,000
                                                       ===========  ===========

</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 management, reflect all adjustments (consisting of
    normal recurring adjustments) necessary for a fair presentation for each of
    the periods presented.  The results of operations for interim periods are
    not necessarily indicative of results for full fiscal years.

    As contemplated by the Securities and Exchange Commission ("SEC") under
    Rule 10-01 of Regulation S-X, the accompanying consolidated financial
    statements and related notes have been condensed and do not contain certain
    information that will be included in the Company's annual consolidated
    financial statements and notes thereto.  For further information, refer to
    the consolidated financial statements and footnotes thereto included in the
    Company's annual report on Form 10-K for the year ended December 31, 1996.

2.  INCOME TAXES

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

3.  NET EARNINGS PER SHARE

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

4.  RECENT DEVELOPMENTS

    The Financial Accounting Standards Board has recently issued Statement No.
    128, "Earnings per Share" (Statement No. 128), issued in March 1997 and is
    effective for interim and annual periods ending after December 15, 1997.
    The Company will adopt Statement No. 128 in the fourth quarter of 1997.
    Statement No. 128 requires the presentation of "Basic" earnings per share
    which represents net earnings divided by the weighted average share
    outstanding excluding the effects of common stock equivalents.  Dual
    presentation of "Diluted" earnings per share reflecting the dilutive
    effects of all common stock equivalents as determined by the treasury stock
    method, will also be required.  The Diluted presentation is similar to the
    historical presentation of fully diluted earnings per share.  Management
    believes the adoption of Statement No. 128 will not have a material impact
    on the Company's financial position or results of operations.

5.  SPECIAL CHARGE

    During the second quarter of 1997, the Company settled a securities class
    action lawsuit that had been pending against the Company and certain of its
    present and former officers and directors, in the United States District
    Court for the Central District of California.  The litigation was settled
    for $3.75 million, the substantial portion of which was paid by the
    Company's directors' and officers' liability insurance company.  The
    difference of $750,000 was recognized as a special charge to earnings in
    the second quarter of 1997.  The settlement is subject to finalization of
    formal settlement documents and court approval.


                                      6


<PAGE>   7



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 or implied.  The Company's
actual results could differ materially from those discussed herein.  Factors
that could cause or contribute to such differences include, but are not limited
to, those discussed in the Company's Annual Report on Form 10-K for the year
ended December 31, 1996 and this Form 10Q.  Among these risks are legislative
acts, weather conditions, market value of salvage declining, management
changes, outcome of litigation, competition, quality and quantity of inventory
available from suppliers, and dependence on key insurance company suppliers.


OVERVIEW

     The Company offers insurance companies and other vehicle suppliers
cost-effective salvage processing solutions through a variety of different
methods of sale, including fixed fee consignment, purchase agreement and
percentage of sale consignment.  Under the purchase agreement sales method, the
vehicle is owned by the Company and the sales price of the vehicle is recorded
in revenue.  Under the fixed fee and percentage of sale consignment sales
methods, the vehicle is not owned by the Company and only the fees associated
with the processing and sale of the vehicle are recorded in net sales.  By
assuming some of the risk inherent in owning the salvage vehicle instead of
selling on a consignment basis, the Company is potentially able to increase
profits by improving the value of the salvage vehicle prior to the sale.

     Under the purchase agreement method, IAA generally pays the insurance
company a pre-determined percentage of the Actual Cash Value ("ACV") to
purchase the vehicle, pursuant to the purchase agreement.  ACVs are the
estimated pre-accident fair value of a vehicle, adjusted for additional
equipment, mileage and other factors.  Until the significant rise in used car
prices and ACVs during 1995, the conversion from consignment sales to purchase
agreement sales generally benefited the Company.  During 1995, however, used
car prices and ACVs rose significantly.  Despite the increase in used car
prices and ACVs, prices at salvage auctions did not increase correspondingly.
Because the Company's purchase price is fixed by contract, the increased ACVs
has reduced profitability on the sale of vehicles under the purchase agreement
method.

     The Company has renegotiated some of its purchase agreement contracts and
is seeking to renegotiate certain others. If the relationship between ACVs and
salvage prices remains at its present level, the Company may continue to
encounter reduced profitability from purchase agreement contracts until they
expire or are renegotiated. The Company continues to offer purchase agreements
to those customers who select it, but generally at a lower percentage of ACV
than previously offered to customers, based on current vehicle values.  The
Company has added adjustment and risk-sharing clauses to its new standard
purchase agreements designed to provide some protection to the Company and its
customers from certain unexpected, significant changes in the ACV/salvage price
relationship.  Further changes in ACVs or the market or auction prices for
salvage vehicles could have a material effect on the Company's business,
operating results and financial condition.

     Since its initial public offering, the Company has grown mostly through
acquisitions.  From 1993 to mid 1995, the Company acquired numerous salvage
pools (the "Acquisitions") strategically located throughout the United States.
In 1996, the Company acquired one pool and developed one new site.
Acquisitions continue to be a key part of the Company's strategic plan for
growth.

     The Company's operating results are subject to fluctuations, including
quarterly fluctuations, that can result from a number of factors, some of which
are more significant for sales under the purchase agreement method.  See
"Factors That May Affect Future Results" in the Company's Annual Report on Form
10-K for the year ended December 31, 1996 and this Form 10Q for further
discussion of some of the factors that affect or could affect the Company's
business, operating results and financial condition.


                                      7


<PAGE>   8



RESULTS OF OPERATIONS

Three Months Ended June 30, 1997 Compared to the Three Months Ended June 30,
1996

     Net sales for the second quarter of 1997 were $65,978,000, which
represented a 13% decrease from 1996 second quarter net sales of  $76,042,000.
This is substantially the result of the decrease in purchase agreement unit
volume resulting from the conversion of selected purchase agreements to
consignment agreements.  Unit volumes in the second quarter of 1997 were down
1% compared with the second quarter of the prior year due to the termination of
some unprofitable purchase agreements.  Same store changes were the same for
the Company overall as there were no significant acquisitions or new facility
startups during 1996.

     Gross Profit decreased slightly to $16,296,000 for the three months ended
June 30, 1997, from $16,364,000 for the same period in 1996.  Gross profit as a
percentage of net sales increased to 25% versus 22% for the comparable period
of 1996.

     Direct operating expenses for the second quarter were $11,506,000, a 6%
decrease versus the second quarter of 1996 direct operating expenses of
$12,235,000.  Continued cost reduction efforts lowered direct operating
expenses to $102 per unit versus $107 per unit during the second quarter of
1996.  Amortization of acquisition costs associated with the Acquisitions
increased to $945,000 for the three month period ended June 30, 1997 from
$938,000 for the comparable period in 1996, as a result of the amortization of
goodwill for the acquisition made in 1996.

     During the second quarter of 1997, the Company settled a securities class
action lawsuit that had been pending against the Company and certain of its
present and former officers and directors, in the United States District Court
for the Central District of California.  The litigation was settled for $3.75
million, the substantial portion of which was paid by the Company's directors'
and officers' liability insurance company.  The difference of $750,000 was
recognized as a special charge to earnings in the second quarter of 1997.  The
settlement is subject to finalization of formal settlement documents and court
approval.

     Interest expense decreased to $669,000 for the 1997 second quarter, from
$768,000 for the same period in 1996.  The change in interest expense was
mostly attributable to a decrease in long-term debt as a result of the
Company's repayment of the proceeds from long term borrowings under the
Company's $15,000,000 Revolving Line of Credit Facility ("the Facility").

     Interest income of $241,000 was slightly lower in the 1997 second quarter
versus $246,000 for the comparable quarter in 1996.

     Income taxes of $1,147,000 for the three months ended June 30, 1997 were
essentially even with  the 1996 second quarter income taxes of $1,148,000.  The
Company's effective tax rate each period was 43%. The effective tax rate is
subject to ongoing review and evaluation by Management.

     The Company's net earnings were $1,520,000 for the three months ended June
30, 1997 versus the comparable period in 1996 of  $1,521,000.  Net earnings per
common share were unchanged at 13 cents per share.  Net earnings excluding the
special charge were $1,948,000, or 17 cents per share, for the second quarter
of 1997.

Six Months Ended June 30, 1997 Compared to the Six Months Ended June 30, 1996

     Net sales of the Company decreased to $133,863,000 for the six months
ended June 30, 1997, from $148,858,000 for the same six month period in 1996, a
10% decrease. Net sales were lower due to the conversion of selected purchase
agreements to the consignment agreement method of sale, the decline in the
average sales prices of salvage and a reduction in the availability of higher
value salvage resulting from insurance companies emphasis on repairing newer,
less damaged vehicles. Unit volume increased 2%, 


                                      8



<PAGE>   9



compared to the same period in 1996. Same store changes are the same as for 
the Company overall, when compared to the same period in 1996, as there were 
no significant acquisitions or new facility startups during 1996 or the first 
half of 1997. The purchase agreement sales method of processing accounted for 
71,000 vehicles, or 31% of total volume, down 11% from the same period in 1996.

     Gross profit decreased to $30,127,000 for the six months ended June 30,
1997, from $31,231,000 for the same period in 1996, a 4% decrease.  Gross
profit as a percentage of net sales, however, increased to 23% versus 21% for
the comparable period of 1996 resulting from the conversion of selected
purchase agreements to consignment agreements.

     Direct operating expenses decreased to $22,879,000 for the six months
ended June 30, 1997, from $24,190,000 for the same period in 1996, a 5%
decrease.  The decrease is the result of management's continued emphasis on the
reduction of direct operating expenses. Amortization of acquisition costs
associated with the Acquisitions increased to $1,895,000 for the six month
period ended June 30, 1997 from $1,865,000 for the comparable period in 1996,
as a result of the amortization of goodwill for the acquisition made in 1996.

     During the second quarter of 1997, the Company settled a securities class
action lawsuit that had been pending against the Company and certain of its
present and former officers and directors, in the United States District Court
for the Central District of California.  The litigation was settled for $3.75
million, the substantial portion of which was paid by the Company's directors'
and officers' liability insurance company.  The difference of $750,000 was
recognized as a special charge to earnings in the second quarter of 1997.  The
settlement is subject to finalization of formal settlement documents and court
approval.

     Interest expense decreased to $1,405,000 for the six months ended June 30,
1997, from $1,576,000 for the same period in 1996.  The change in interest
expense was mostly attributable to a decrease in long-term debt as a result of
the Company's repayment of the proceeds from long term borrowings under the
Company's $15,000,000 Revolving Line of Credit Facility.

     Interest income was flat at $399,000 for the six month period ended June
30, 1997, versus $400,000 for the comparable period in 1996.

     Income taxes decreased to $1,547,000 for the six months ended June 30,
1997, from $1,720,000 for the comparable period in 1996. This decrease is the
result of the decrease in earnings. The Company's effective tax rate for the
six months ended June 30, 1997 and the six months ended June 30, 1996 was 43%.
The effective tax rate is subject to ongoing review and evaluation by
Management.

     The Company's net earnings were $2,050,000 for the six months ended June
30, 1997, a 10% decrease from the comparable period in 1996 of  $2,280,000.
Net earnings per common share declined to 18 cents per share in 1997 versus 20
cents per share in 1996.  Net earnings excluding the special charge were
$2,478,000, or 22 cents per share, for the first six months of 1997.

FINANCIAL CONDITION AND LIQUIDITY

     At June 30, 1997, the Company had current assets of  $51,671,000,
including $9,274,000 of cash and cash equivalents, current liabilities of
$34,165,000 and working capital of $17,506,000. The $2,173,000 decrease in
working capital from December 31, 1996, was principally related to the
repayment of long term borrowings under the Facility.

     On April 4, 1997, the Company refinanced this revolving credit agreement
on similar terms with a different bank. The $15,000,000 facility is unsecured,
bears interest at the bank's prime rate or LIBOR, as defined, and matures on
April 1, 2000.


                                      9


<PAGE>   10



     At June 30, 1997, the Company's indebtedness consisted mostly of 8.6%
Senior Notes approximating $20,000,000, a post-retirement benefits liability
relating to the Underwriters Salvage Company acquisition of approximately
$4,001,000, amounts due to the sellers related to an acquisition aggregating
$1,833,000 with imputed interest at 7.5% and amounts due to the sellers of
smaller acquisitions aggregating $667,000 which bear interest at 8.0%.  There
were no borrowings outstanding on the Facility at June 30, 1997. During the 
second quarter, the Company made scheduled debt repayments to sellers of 
$1,798,000 and unscheduled debt repayments of $500,000.

     Capital expenditures were approximately $1,572,000 for the six months
ended June 30, 1997.  These capital expenditures primarily included upgrading
and expanding the Company's facilities and management information system.  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 through acquisitions and new facility
start-ups.  At some time in the future, the Company may require additional
financing.  There can be no assurance that additional financing, if required,
will be available on favorable terms.

     The Company's operating results have not historically been materially
affected by inflation.

RECENT DEVELOPMENTS

     The Financial Accounting Standards Board has recently issued Statement No.
128, "Earnings per Share" (Statement No. 128), issued in March 1997 and is
effective for interim and annual periods ending after December 15, 1997.  The
Company will adopt Statement No. 128 in the fourth quarter of 1997.  Statement
No. 128 requires the presentation of "Basic" earnings per share which
represents net earnings divided by the weighted average share outstanding
excluding the effects of common stock equivalents.  Dual presentation of
"Diluted" earnings per share reflecting the dilutive effects of all common
stock equivalents as determined by the treasury stock method, will also be
required.  The Diluted presentation is similar to the historical presentation
of fully diluted earnings per share.  Management believes the adoption of
Statement No. 128 will not have a material impact on the Company's financial
position or results of operations.


FACTORS THAT MAY AFFECT FUTURE RESULTS

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

     Quarterly Fluctuations.  The Company's operating results have in the past
and may in the future fluctuate significantly depending on a number of factors,
some of which are more significant for sales under the purchase agreement
method.  These factors include changes in the market value of salvage vehicles,
attendance at salvage auctions, delays or changes in state title processing,
fluctuations in Actual Cash Values ("ACVs") of salvage vehicles, changes in
regulations governing the processing of salvage vehicles, the availability and
quality of salvage vehicles and general weather conditions.  Inclement weather
conditions can result in lower attendance at auctions as well as impact the
availability of salvage.  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.  These factors are
further aggravated in the event the Company fails to renegotiate purchase
agreement contracts that are volume and mix dependent on availability of these
types of sales.  As a result, the Company believes that period-to-period
comparisons of its results of operations are not necessarily meaningful and
should not be relied upon as any indication of future performance.  In
addition, revenues for any future quarter are not predictable with any
significant degree of accuracy; the Company's expense levels are relatively
fixed.  If 


                                      10



<PAGE>   11




revenue levels are below expectations, operating results are likely to be 
adversely affected.  Due to all of the foregoing factors, it is likely that in 
some future quarters the Company's operating results will be below the
expectations of public market analysts and investors.

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

     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 1996, vehicles supplied by the Company's
three largest suppliers accounted for approximately 49% of the Company's unit
sales.  The largest suppliers, Allstate Insurance ("Allstate") and State Farm
Insurance, each accounted for approximately 20% of the Company's unit sales.  A
number of other insurance company suppliers have also contributed to the
profitability of the Company including 20th Century Insurance.  A loss or
reduction in the number of vehicles from any of these suppliers, or adverse
change in the agreements that such suppliers have with the Company, could have
a material adverse effect on the Company's business, operating results and
financial condition.

     Purchase Agreement Method of Sale.  The Company has entered into a number
of purchase agreements, including agreements with its most significant
insurance suppliers, that obligate the Company to purchase most salvage
vehicles offered to it at a formula percentage of ACV.  In recent times,
increased ACVs on which the Company's costs are based have reduced the
profitability that the Company realizes on purchase agreement contracts.  The
Company has renegotiated and continues to attempt to renegotiate its agreements
with certain of these suppliers.  There can be no assurance, however, that the
Company can renegotiate the terms of these agreements on terms favorable to the
Company.  The failure to renegotiate some or all of these agreements could have
a material adverse effect on the Company's operating results and financial
condition.  In addition, further increases in ACVs or declines in the market or
auction prices for salvage vehicles could have a material adverse effect on the
Company's business, operating results and financial condition.

     Governmental Regulation.  The Company's operations are subject to
regulation, supervision and licensing under various federal, state and local
statutes, ordinances and regulations.  The acquisition and sale of totaled and
recovered theft vehicles is regulated by state motor vehicle departments in
each of the locations in which the Company operates.  Changes in governmental
regulations or interpretations of existing regulations can result in increased
costs, reduced salvage vehicle prices and decreased profitability for the
Company.  For example, the Company believes legislation currently being
considered by Congress could have a negative impact on the number of buyers
attending an auction as well as increase some of the costs to those buyers.
This legislation could increase governmental regulation of certain operations
of the Company.  In addition to the regulation of sales and acquisitions of
vehicles, the Company is also subject to various local zoning requirements with
regard to the location of its auction and storage facilities.  These zoning
requirements vary from location to location.  Failure to comply with present or
future regulations or changes in existing regulations could have a material
adverse effect of the Company's business, operating results and financial
condition.


                                      11


<PAGE>   12




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

     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.

     Recent Management Changes.  There has recently been turnover in certain
key positions in the Company.  Additions of new personnel and departures of
existing personnel, particularly in key positions, can be disruptive, which
could have a material adverse effect upon the Company's business, operating
results and financial condition.

     Integration and Expansion of Facilities.  The Company seeks to increase
sales and profitability through acquisition of other salvage auction
facilities, new site expansion and the increase of salvage vehicle volume at
existing facilities.  There can be no assurance that the Company will continue
to acquire new facilities on terms economical to the Company or that the
Company will be able to add additional facilities on terms economical to the
Company or that the Company will be able to increase revenues at newly acquired
facilities above levels realized prior to acquisition. The Company's ability to
achieve these objectives is dependent, 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.
Finally, the Company has focused, and continues to focus, a significant amount
of effort toward integrating acquisitions and standardizing operations.  In the
future, the Company will be required to continue to improve its financial and
management controls, reporting systems and procedures on a timely basis and
expand, train and manage its employee work force.  The failure to improve these
systems on a timely basis and to successfully expand and train the Company's
work force could have a material adverse effect on the Company's business,
operating results and financial condition.

     Volatility of Stock Price.  The market price of the Company's common stock
has been and could continue to be subject to significant fluctuations in
response to various factors and events, including variations in the Company's
operating results, the timing and size of acquisitions and facility openings,
the loss of vehicle suppliers or buyers, the announcement of new vehicle supply
agreements by the Company 



                                      12



<PAGE>   13



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 expenditures for environmental compliance or remediation .
Environmental laws and regulations, however, could become more stringent over
time and there can be no assurance that the Company or its operations will not
be subject to significant compliance costs in the future.  To date, the Company
has not incurred expenditures for preventive or remedial action with respect to
contamination or the use of hazardous materials that have had a material
adverse effect on the Company's results of operations or 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.

                                      13


<PAGE>   14




PART II. OTHER INFORMATION.


ITEM 1.  LEGAL PROCEEDINGS.

     a)  During the second quarter of 1997, the Company settled a
         securities class action lawsuit that had been pending against the
         Company and certain of its present and former officers and directors,
         in the United States District Court for the Central District of
         California.  The litigation was settled for $3.75 million, the
         substantial portion of which was paid by the Company's directors' and
         officers' liability insurance company.  The difference of $750,000 was
         recognized as a special charge to earnings in the second quarter of
         1997.  The settlement is subject to finalization of formal settlement
         documents and court approval.

         The registrant previously reported on this lawsuit in its Form 10-Q for
         the quarterly period ended March 31, 1997.


ITEM 2.  CHANGES IN SECURITIES.  INAPPLICABLE


ITEM 3.  DEFAULTS UPON SENIOR SECURITIES.  INAPPLICABLE


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

At the Annual Meeting of Shareholders of the Company held June 18, 1997,
the shareholders (i) elected eight directors to serve on the Company's Board of
Directors, (ii) amended the Employee Stock Purchase Plan to give the Company
discretion to allow employees with less than six months of service to
participate, (iii) approved changing the Company's state of incorporation from
California to Illinois, and (iv) ratified the Company's appointment of KPMG
Peat Marwick LLP to serve as the Company's independent auditors for the fiscal
year ended December 31, 1997.  Shareholders holding 9,856,575 shares of Common
Stock, representing 87.3% of the total number of shares outstanding and
entitled to vote at the meeting, were present in person or by proxy at the
meeting.

The vote for nominated directors was as follows:

<TABLE>
<CAPTION>          

         Director                Votes for                Votes Withheld
         --------                ---------                --------------
         <S>                     <C>                         <C.
         Bradley S. Scott        9,826,894                   29,681
         James P. Alampi         9,837,605                   18,970
         Susan B. Gould          9,837,794                   18,781
         Melvin R. Martin        9,836,430                   20,145
         Thomas J. O'Malia       9,837,994                   18,581
         Christopher G. Knowles  9,837,474                   19,101
         Glen E. Tullman         9,837,824                   18,751
         Maurice A. Cocca        9,837,294                   19,281
</TABLE>


The vote for amending the Employee Stock Purchase Plan was as follows:  For:
7,606,055; Against: 2,155,869; and Votes Withheld:  12,747

The vote for changing the Company's state of incorporation was as follows:
For: 5,975,663; Against: 2,170,045; and Votes Withheld:  12,338.

The vote for ratifying the appointment of KPMG Peat Marwick LLP was as follows:
For: 9,751,285; Against: 102,507; and Votes Withheld:  2,783.

                                      14


<PAGE>   15



ITEM 5.  OTHER INFORMATION.  INAPPLICABLE


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


        (a)  EXHIBITS.
             ---------

             10.1 Insurance Auto Auctions, Inc. Employee Stock Purchase Plan

             10.2 Revolving Credit Agreement Dated as of April 4, 1997
                  Between Insurance Auto Auctions, Inc. as Borrower and LaSalle
                  National Bank as Lender.

             27.1 Financial Data Schedule



                                      15




<PAGE>   16




                                  SIGNATURES

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


INSURANCE AUTO AUCTIONS, INC.


Date: August 14, 1997    By: /s/ Linda C. Larrabee
      ---------------        -----------------------
                         Name:   Linda C. Larrabee
                         Title:  Senior Vice President, Chief Financial Officer
                                   and Secretary

                                 (Duly Authorized Officer and Principal 
                                   Financial and Accounting Officer)






                                      16



<PAGE>   17





                                EXHIBIT INDEX


10.1 Insurance Auto Auctions, Inc. Employee Stock Purchase Plan

10.2 Revolving Credit Agreement Dated as of April 4, 1997 Between Insurance
     Auto Auctions, Inc. as Borrower and LaSalle National Bank as Lender.

27.1 Financial Data Schedule






                                      17