<PAGE>


                                    UNITED STATES
                          SECURITIES AND EXCHANGE COMMISSION
                                WASHINGTON, D.C. 20549

                                      FORM 10-Q


                            X  QUARTERLY REPORT PURSUANT TO
                              SECTION 13 OR 15(d) OF THE
                           SECURITIES EXCHANGE ACT OF 1934 

                     FOR QUARTERLY PERIOD ENDED DECEMBER 31, 1996


                             COMMISSION FILE NO. 0-17490
                                           

                                 IN HOME HEALTH, INC.
                (Exact name of registrant as specified in its charter)


         MINNESOTA                                      41-1458213
(State or other jurisdiction of            (I.R.S. Employer Identification No.)
incorporation or organization)             




                              CARLSON CENTER, SUITE 500
                                 601 CARLSON PARKWAY
                          MINNETONKA, MINNESOTA  55305-5214
                       (Address of principal executive offices)
                                      (Zip Code)
                                           
                                     612-449-7500

                 (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.  Yes  x (1) No    


    As of January 31, 1997, the number of shares outstanding of the
registrant's common stock, $.01 par value was 16,295,897 shares. 

<PAGE>

                                 IN HOME HEALTH, INC.
                                        INDEX



                                                                PAGE NO.
                                                                --------

PART I.       FINANCIAL INFORMATION

    ITEM 1.   FINANCIAL STATEMENTS

                   Consolidated Balance Sheets -                  2-3
                   December 31, 1996 and September 30, 
                   1996

                   Consolidated Statements of Operations -          4
                   For the three months ended December 31, 
                   1996 and 1995

                   Consolidated Statements of Cash Flows -          5
                   For the three months ended December 31, 
                   1996 and 1995

                   Notes to Unaudited Consolidated               6-10
                   Financial Statements

    ITEM 2.        MANAGEMENT'S DISCUSSION AND ANALYSIS         11-14
                   OF THE FINANCIAL CONDITION AND RESULTS
                   OF OPERATIONS

PART II.           OTHER INFORMATION                               15


                                          1

<PAGE>


                                 IN HOME HEALTH, INC.
                             CONSOLIDATED BALANCE SHEETS
                                (AMOUNTS IN THOUSANDS)

                                        ASSETS



                                                      Dec. 31, 1996  Sept. 30,
                                                         (Unaudited)     1996
                                                          ----------   -------
Current Assets: 
 Cash and cash equivalents                                $10,393      $18,617
 Accounts receivable (net of allowances
   of $814 and $802 in December and
   September 1996, respectively)                           20,880       19,418
 Prepaid income tax                                         1,142        1,037
 Deferred income tax                                        3,265        3,389
 Prepaid expenses and other current assets                  1,534        1,592
                                                           ------       ------
   Total current assets                                    37,214       44,053
                                                           ------       ------

Property:
 Furniture and equipment                                    9,862        9,954
 Computer equipment and software                            8,574        8,561
 Leasehold improvements                                       887          823
                                                           ------       ------
   Total                                                   19,323       19,338

 Accumulated depreciation                                 (10,009)      (9,437)
                                                           ------       ------

      Property - net                                        9,314        9,901
                                                           ------       ------

Other Assets:
 Accounts receivable                                       23,330       22,018
 Goodwill, net                                              5,591        5,590
 Other assets                                               1,091        1,121
                                                           ------       ------
   Total other assets                                      30,012       28,729
                                                           ------       ------

Total Assets                                              $76,540      $82,683
                                                           ------       ------
                                                           ------       ------






              SEE NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS.

                                          2


<PAGE>




                                 IN HOME HEALTH, INC.
                       CONSOLIDATED BALANCE SHEETS (CONTINUED)
                                (AMOUNTS IN THOUSANDS)

                         LIABILITIES AND SHAREHOLDERS' EQUITY


                                                      Dec. 31, 1996  Sept. 30,
                                                         (Unaudited)     1996
                                                          ---------    -------
Current Liabilities:
 Current maturities of long-term debt                      $ 1,312     $ 1,455
 Accounts payable                                            2,626       3,662
 Accounts payable - related party                              965       1,006
 Accrued liabilities:
   Third party                                              11,799      13,568
   Compensation                                              5,033       6,859
   Insurance                                                 6,364       6,133
   Other                                                       450         487
                                                            ------      ------
      Total current liabilities                             28,549      33,170
                                                            ------      ------

Long-Term Debt                                                 793       1,080
Deferred Revenue                                               714         820
Deferred Rent Payable                                          243         267
Deferred Income Tax                                          1,808       1,822
Commitments and Contingencies                                  --          -- 

Redeemable Convertible Preferred Stock - 
 $1.00 par value, $20,000 redemption value, 
 authorized 200 shares; issued and outstanding
 December 31 and September 30 - 200 shares                  18,840      18,766

Shareholders' Equity:
 Preferred stock - authorized 800 shares                       --          -- 
 Common stock - $.01 par value:  
   authorized - 40,000 shares;
   issued and outstanding -
   December 31 - 16,296 shares;
   September 30 - 16,541 shares                                163         165
 Additional paid-in capital                                 23,475      23,978
 Retained earnings                                           1,955       2,615
                                                            ------      ------
      Total shareholders' equity                            25,593      26,758
                                                            ------      ------

Total Liabilities and Shareholders' Equity                 $76,540     $82,683
                                                            ------      ------
                                                            ------      ------

              SEE NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS.

                                          3

<PAGE>


                                 IN HOME HEALTH, INC.
                  CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
                FOR THE THREE MONTHS ENDED DECEMBER 31, 1996 AND 1995
                   (AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)


                                                              1996        1995
                                                            ------      ------

Revenue (net of Medicare reserves of
 $241 and $450 in 1996 and 1995, respectively)             $31,585     $32,468
                                                            ------      ------

Operating Expenses:
 Direct costs of revenue (primarily payroll related costs)  17,181      17,886
 General, administrative and selling expenses               14,508      14,473
                                                            ------      ------
   Total operating expenses                                 31,689      32,359
                                                            ------      ------

Income (Loss) From Operations                                 (104)        109
                                                            ------      ------

Interest:
 Interest income                                               223         205
 Interest expense                                              (89)       (134)
                                                            ------      ------
   Net interest income                                         134          71
                                                            ------      ------

Income Before Income Taxes                                      30         180
Income Tax Expense                                              16          82
                                                            ------      ------

Net Income                                                 $    14     $    98
                                                            ------      ------
                                                            ------      ------

Loss Applicable to Common Stock                            $  (660)    $  (404)
                                                            ------      ------
                                                            ------      ------

Loss Per Common and 
 Common Equivalent Share                                   $  (.04)    $  (.02)
                                                            ------      ------
                                                            ------      ------

Weighted Average Common and
 Common Equivalent Shares Outstanding                       16,416      16,473
                                                            ------      ------
                                                            ------      ------





              SEE NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS.


                                          4

<PAGE>

                                 IN HOME HEALTH, INC.
                  CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
                FOR THE THREE MONTHS ENDED DECEMBER 31, 1996 AND 1995
                                (AMOUNTS IN THOUSANDS)


                                                              1996        1995
                                                            ------      ------
Cash Flows From Operating Activities:
 Net income                                                $    14     $    98
 Adjustments:
 Depreciation and amortization                                 777         842
   Accounts receivable                                      (2,774)     (1,254)
   Prepaid expenses and other assets                          (348)        261
   Accounts payable                                         (1,077)        339
   Accrued liabilities                                      (3,401)      1,823
   Deferred liabilities                                        (20)       (827)
                                                            ------      ------

      Net cash provided (used) by operating activities      (6,829)      1,282
                                                            ------      ------

Cash Flows from Investing Activities:
 Business Acquisitions                                         (40)          -
 Acquisition of property                                       (77)       (300)
 Advances to officers and employees                            257          19
                                                            ------      ------
   Net cash provided (used) by investing activities            140        (281)
                                                            ------      ------

Cash Flows from Financing Activities:
 Payment of long term debt                                    (430)       (507)
 Issuance (repurchase) of common stock                        (505)         31
 Issuance of preferred stock and warrants                       -       17,987
 Preferred dividends paid                                     (600)       (454)
                                                            ------      ------
   Net cash provided (used) by financing activities         (1,535)     17,057
                                                            ------      ------

Cash and Cash Equivalents:
 Net increase (decrease)                                    (8,224)     18,058
 Beginning of period                                        18,617       3,665
                                                            ------      ------
   End of period                                           $10,393     $21,723
                                                            ------      ------
                                                            ------      ------

Supplemental Cash Flow Information:
 Cash paid during the period for:
   Interest                                                $    89     $   134
                                                            ------      ------
                                                            ------      ------
   Income taxes                                            $    11     $   246
                                                            ------      ------
                                                            ------      ------




              SEE NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS.


                                          5

<PAGE>

                                 IN HOME HEALTH, INC.
                 NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


1.  FINANCIAL STATEMENTS
    In the opinion of management of the Company, the accompanying unaudited
consolidated financial statements contain all adjustments (consisting of only
normal, recurring accruals) necessary to present fairly the financial position
of the Company and its subsidiaries as of December 31, 1996 and the results of
operations and its cash flows for the three month periods ended December 31,
1996 and 1995.  The results of operations for any interim period are not
necessarily indicative of the results for the year.  These interim consolidated
financial statements should be read in conjunction with the Company's annual
financial statements and related notes in the Company's Form 10-K.

2.  LOSS PER COMMON AND COMMON EQUIVALENT SHARE 
    Primary loss per common and common equivalent share is computed by dividing
the loss applicable to common stock, as adjusted for the dividends and accretion
on the Preferred Stock by the weighted average number of shares of common stock
and common stock equivalents, consisting of dilutive stock options and warrants,
outstanding during the period.  Loss per share assuming full dilution would be
substantially the same.

Primary loss per share for the three months ended December 31, 1996 and 1995 are
as follows (in thousands except per share data):

                                                              1996        1995
                                                            ------      ------
    Shares outstanding:
      Weighted average outstanding                          16,379      16,286
      Shares issuable in connection with stock
         options and warrants less shares
         purchasable from proceeds                              37         187
                                                            ------      ------
      Adjusted outstanding                                  16,416      16,473
                                                            ------      ------
                                                            ------      ------

    Adjusted loss applicable to common
    stockholders:
      Net income                                           $    14     $    98
      Dividends on preferred stock                            (600)       (454)
      Preferred stock accretion                                (74)        (48)
                                                            ------      ------
      Loss applicable to common stock                      $  (660)    $  (404)
                                                            ------      ------
                                                            ------      ------

    Loss per common and common
    equivalent share                                       $  (.04)    $  (.02)
                                                            ------      ------
                                                            ------      ------

3.  ACQUISITIONS
    Effective October 28, 1996, the Company acquired certain assets of
Community Health Professionals, Inc., a Maryland corporation engaged in
providing home care staffing services and all of the common stock of Health
Careers Institute, Inc., a Maryland corporation engaged in the business of a
post-secondary, non-degree school for various health care related classes.  The
purchase price totaled


                                          6

<PAGE>

$35,000 and the acquisitions were accounted for as purchases for financial
reporting purposes.  Goodwill of $40,000 has been recorded as of December 31,
1996.

    Neither of the acquisitions are individually significant and the operations
of the acquired businesses are included in the statement of operations from the
dates of acquisition. 

4.  COMMITMENTS AND CONTINGENCIES
    Approximately 62% of revenue for the three months ended December 31, 1996
was derived from services provided to Medicare beneficiaries through cost
reimbursement programs.  Primarily all of the payments for these services are
made by the Medicare program based on reimbursable costs incurred in rendering
the services.  Payments are made via an interim payment rate as services are
rendered.  Cost reports are filed with Medicare on an annual basis, which are
subject to audit and retroactive adjustment by Medicare.  The Company reports
revenue only for those costs that it believes are probable (as defined in
Statement of Financial Accounting Standards No. 5) of recovery under the
applicable Medicare statutes and regulations and reports its accounts receivable
balances at net realizable value.  The Company utilizes an extensive system of
internal controls to ensure such proper reporting of revenues.  The Company
employs personnel with significant Medicare reimbursement experience to prepare
its cost reports and to monitor its operations on an ongoing basis to identify
and seek to minimize those costs which are not reimbursed.  As a part of its
system of internal controls, the Company uses a detailed analysis process in
calculating its Medicare revenue at the time services are rendered.  This
process considers the nature and amounts of the disputed costs (as described in
more detail below) along with several authoritative, legal and historical
sources of information including:

 -  Applicable statutes and regulations, such as those contained in the Title
    XVIII of the Social Security Act, particularly Sec. 1861 (V) (1) (A)
    "Reasonable Cost" and 42 C.F.R. 413.9 "Cost Related to Patient Care",
    Health Care Financing Administration (HCFA) Publication 11 "Home Health
    Agency Manual", applicable sections of HCFA Publication 15-1 "Provider
    Reimbursement Manual" and intermediary letters and program memoranda issued
    by HCFA.
 -  Administrative decisions and rulings on related issues by the Provider
    Reimbursement Review Board and Administrative Law Judges.
 -  Judicial decisions from Federal District Courts on relevant cases.
 -  Consultation with independent industry experts such as Medicare Cost
    Reimbursement Consultants.
 -  Opinions of outside legal counsel who specialize in dealing with Medicare
    reimbursement issues.
 -  Historical knowledge gained internally from past Medicare audits.
 -  Meetings and other communication with Medicare Intermediaries, Blue Cross
    Association and HCFA.

    This detailed analysis process is updated on a quarterly basis, taking into
account any new information (such as decisions relating to the Company's
disputed costs, and administrative and judicial decisions relating to similar
issues) that may affect the determination of the net realizable value of
accounts receivable or of liabilities to repay amounts received for disputed
costs.  Results of this detailed analysis process are extrapolated to other
unaudited cost reporting years for all of the Company's operations, including
operations that have not yet been audited by Medicare, to estimate the gross
amount of reimbursement that would be affected.  The Company, through this
ongoing control and monitoring process, provides a reserve (by means of a
revenue reduction) for any costs incurred which the Company believes are not
probable of recovery.  This reserve is reported as a reduction of accounts
receivable for


                                          7

<PAGE>

disputed costs for which the Company may not ultimately receive payment.  The
Company has also reported as a liability disputed costs for which it has
received payment, which may have to be returned to Medicare.  Accordingly, the
Company believes that its accounts receivable are stated at net realizable
value, and that it has recorded all probable liabilities for repayment of
disputed costs.

    Over the years, Medicare auditors employed by the Medicare fiscal
intermediaries have, in connection with their retrospective audit process, taken
certain positions with respect to certain types of costs, claiming that they are
not reimbursable and thus not recoverable by the Company from the Medicare
program.  These positions are based on interpretations promulgated after the
period covered by the cost reports and applied retroactively, on interpretations
of cost reimbursement principles that are contrary to the Company's
interpretations, or on what the Company believes to be misapplications of
specific reimbursement principles, that could not have been foreseen at the time
services were rendered and revenue recorded.  These positions taken by Medicare
auditors are usually determined from Medicare's Notice of Program Reimbursement
("NPR") which typically are not received until two to three years after the
services are rendered.  In those situations where the Company decides to not
challenge an NPR finding, any revenue relating to these costs, as well as the
extrapolated impact, if any, on other open costs reporting years, if not written
off or provided for earlier, is written off as a revenue reduction at that time.
The results of all NPRs are included in the analysis process in calculating net
Medicare revenue as described above.

    The Company has received NPRs challenging $18.5 million of costs as of
December 31, 1996.  There was an additional $17.1 million of costs at December
31, 1996 related to open cost reporting years that are similar to the costs that
have been challenged on NPRs.  Together these amounts ($35.6 million at December
31, 1996) comprise the total amount the Company considers to be disputed costs. 
The major cost category in dispute, accounting for approximately 58% of total
disputed costs, is the treatment of certain personnel costs relating to the
Company's community liaison positions, which Medicare auditors allege are
unreimbursable sales costs; other costs in dispute relate to the cost of
physical therapists employed by the Company, the method of allocation of
administrative and general costs to branch operations and certain corporate
expenses.  These disputed costs (including the extrapolated impact) of $35.6
million at December 31, 1996 arose in the fiscal years ended September 30, 1996
($6.6 million), 1995 ($6.0 million), 1994 ($8.2 million), 1993 ($6.5 million),
1992 ($4.4 million), 1991 ($2.1 million) and $1.8 million for the three months
ended December 31, 1996.  The amount of disputed costs has increased over the
last several years as the Company's operations have grown,  Medicare auditors
have taken positions to disallow certain costs in certain cost reports as
non-reimbursable, and the Company has extrapolated that amount of costs that may
be challenged to other unaudited cost reporting years.  The normal Medicare
administrative appeal process may take several years to resolve these types of
disputes.

    The Company disagrees with the positions taken by the Medicare fiscal
intermediaries' auditors and the Health Care Financing Administration, and is
vigorously pursuing these matters through administrative and legal channels. 
The disputed cost analysis process related to the community liaison and physical
therapist positions (which comprise 66% of disputed costs) encompassed all of
the authoritative, legal and historical sources discussed above.  Based on this
review the Company believes that the majority of the community liaison costs are
probable of recovery, and that a relatively small portion of these costs are not
probable of recovery.  The Company has established, and is continuing to add to,
a reserve for the portion of these costs not considered probable of recovery. 
Since the reserves have been established, the Company has continued to review
whether the level is appropriate.  Nothing


                                          8

<PAGE>

has occurred in the legal or administrative process which the Company is
pursuing concerning the disputes which has caused the Company to conclude that
the reserve should be changed.  Therefore, no change has been made in the rate
of reserve used to record additional reserves on community liaison related costs
incurred on an ongoing basis.  On the physical therapist issue, the Company
believes Medicare has no basis in the regulations for its disallowance of
certain costs related to physical therapists employed by the Company, and
therefore the Company has not established a reserve for these disputed costs.

    Legal opinions have been received on both the community liaison and
physical therapist issues from an attorney specializing in Medicare
reimbursement issues indicating that it is probable that the Company will
prevail in both issues.  The Company received in March a favorable ruling on the
physical therapist issue by the HHS Provider Reimbursement Review Board (PRRB). 
In May 1996, this ruling was reversed by the Health Care Financing
Administration.  The Company has appealed the decision to the U.S. Federal
District Court in Minneapolis.  Because the PRRB previously ruled in the
Company's favor, the Company believes it has a strong basis for a favorable
outcome on such an appeal.  In June 1996, the PRRB ruled that approximately 53%
of the $1,700,000 of community liaison costs subject to review as part of this
hearing were reimbursable to the Company.  In August 1996, the Health Care
Financing Administration reversed this ruling.  The Company had previously
recorded a reserve equal to 16% of all revenue related to the $1,700,000 of
costs as well as other personnel costs relating to the Company's community
liaison position.  After careful assessment of the PRRB and Health Care
Financing Administrator's decisions and the facts and documentation supporting
the nature of the personnel costs at issue, the Company continues to believe
that the majority of the community liaison costs are recoverable under the
Medicare program.  The Company has concluded that the reserve on this issue in
total remains appropriate and has appealed the decision to the U.S. Federal
District Court in Minneapolis.

    The Company, based on its analysis process, believes that recovery of
$7,480,000 of total disputed costs (including the extrapolated impact) may not
be probable and, accordingly, has established reserves which totaled that amount
as of December 31, 1996.   The net amount of disputed costs which the Company
believes is probable of recovery has been included in revenues in the respective
years in which services were rendered and, to the extent not paid to the
Company, is included in accounts receivable.  Total accounts receivable (net of
reserves) due from Medicare at December 31, 1996 were $36,487,000, including the
receivables (net of reserves) for disputed costs of $28,081,000.  As of December
31, 1996 the Company had received $11,799,000 in payments from Medicare for
disputed costs.  Medicare may seek repayment for such amounts and accordingly,
the potential liability for repayments is recorded as Accrued Liabilities -
Third Party.  The Company believes it is probable that it has not incurred any
other liability to repay disputed costs.  In view of the expectation that
resolution of the disputed costs will not likely be accomplished within the next
twelve months, related net receivables of $23,330,000 as of December 31, 1996
have been classified as a non-current asset.  

5.  STOCK BASED COMPENSATION
    In fiscal year 1997, the Company adopted Statement of Financial
Accounting Standards No. 123 (SFAS 123), 'Accounting for Stock-Based
Compensation'.  SFAS 123 requires expanded disclosures of stock-based
compensation arrangements with employees and nonemployees and encourages a new
method of accounting for employee stock compensation awards based on their
estimated fair value at the date of grant and the recognition of associated
compensation expense over the service period in the income statement.  Companies
are permitted to continue following Accounting Principles Board Opinion No. 25
(APB 25), 'Accounting for Stock Issued to Employees', but must disclose pro
forma net income and pro


                                          9

<PAGE>

forma earnings per share, as if the fair value method of SFAS 123 had been
applied, in a footnote to the financial statements.  The fair value measurement
and recognition provisions of SFAS 123 must be applied to all stock-based
arrangements with nonemployees.  As permitted by SFAS 123, the Company has
elected to continue following the guidance of APB 25 for measurement and
recognition of stock-based transactions with employees.  SFAS 123 disclosures
are not required on an interim reporting basis unless a complete set of
financial statements is presented.


                                          10

<PAGE>

ITEM 2.

                  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
                         CONDITION AND RESULTS OF OPERATIONS


    The following discussion and analysis provides information which management
believes is relevant to an assessment and understanding of the Company's level
of operation and financial condition.  This discussion should be read with the
consolidated financial statements appearing in Item 1.

RESULTS OF OPERATIONS

    Revenue for the three months ended December 31, 1996 decreased 3% as
compared to the same period in the prior year.  Extended hours, infusion and
hospice revenue increased 41% from the first quarter of fiscal 1996.  This
increase, however, was offset by a 17% decline in Visit division volume.  The
Visit division volume continues to be impacted by the trend of Medicare
beneficiaries selecting coverage through HMO and Medicare risk providers and
increased competition from hospital based home care companies.

    Direct costs of revenue, as a percentage of sales, were 54% versus 55% for
the three months ended December 31, 1996 and 1995, respectively.  The decrease
was due to reduced Visit division volume with no corresponding reduction in
general, administrative and selling expenses. 

    General, administrative and selling expenses as a percent of revenue
increased to 46% in 1996 compared to 45% in 1995.  The increase was due to the
decrease in total revenue without a corresponding decrease in general
administrative and selling expenses.  General administrative and selling
expenses include costs related to development of elder care, cardiology and
hospice specialty programs.

    Net interest income was $134,000 for the three months ended December 31,
1996 as compared to $71,000 for the comparable period in the prior year. 
Interest earnings are a result of the earnings on the cash proceeds from the
investment by Manor Healthcare Corp. on October 24, 1995.

    Net income totaled $14,000 for the period ended December 31, 1996 versus
$98,000 for the same period in the prior year.  The decline in net income is a
result of the decline in Visit division volume. 

LIQUIDITY AND CAPITAL RESOURCES

    The Company's cash and cash equivalents decreased $8,224,000 to $10,393,000
at December 31, 1996.  During the first quarter of fiscal 1997 the Company paid
out $2.3 million for previously accrued settlements and severance agreements
with former employees and $2.6 million in repayments of Medicare overpayments
during fiscal 1996.  In addition, total accounts receivable increased $2.8
million principally as a result of increases in disputed costs with Medicare,
timing of payments from Medicare and an increase in receivables related to the
hospice program.

    Approximately 62% of revenue for the three months ended December 31, 1996
was derived from services provided to Medicare beneficiaries through cost
reimbursement programs.  Primarily all of the payments for these services are
made by the Medicare program based on reimbursable costs incurred in


                                          11

<PAGE>


rendering the services.  Payments are made via an interim payment rate as
services are rendered.  Cost reports are filed with Medicare on an annual basis,
which are subject to audit and retroactive adjustment by Medicare.  The Company
reports revenue only for those costs that it believes are probable (as defined
in Statement of Financial Accounting Standards No. 5) of recovery under the
applicable Medicare statutes and regulations and reports its accounts receivable
balances at net realizable value.  The Company utilizes an extensive system of
internal controls to ensure such proper reporting of revenues.  The Company
employs personnel with significant Medicare reimbursement experience to prepare
its cost reports and to monitor its operations on an ongoing basis to identify
and seek to minimize those costs which are not reimbursed.  As a part of its
system of internal controls, the Company uses a detailed analysis process in
calculating its Medicare revenue at the time services are rendered.  This
process considers the nature and amounts of the disputed costs (as described in
more detail below) along with several authoritative, legal and historical
sources of information including:

 -  Applicable statutes and regulations, such as those contained in the Title
    XVIII of the Social Security Act, particularly Sec. 1861 (V) (1) (A)
    "Reasonable Cost" and 42 C.F.R. 413.9 "Cost Related to Patient Care",
    Health Care Financing Administration (HCFA) Publication 11 "Home Health
    Agency Manual", applicable sections of HCFA Publication 15-1 "Provider
    Reimbursement Manual" and intermediary letters and program memoranda issued
    by HCFA.
 -  Administrative decisions and rulings on related issues by the Provider
    Reimbursement Review Board and Administrative Law Judges.
 -  Judicial decisions from Federal District Courts on relevant cases.
 -  Consultation with independent industry experts such as Medicare Cost
    Reimbursement Consultants.
 -  Opinions of outside legal counsel who specialize in dealing with Medicare
    reimbursement issues.
 -  Historical knowledge gained internally from past Medicare audits.
 -  Meetings and other communication with Medicare Intermediaries, Blue Cross
    Association and HCFA.

    This detailed analysis process is updated on a quarterly basis, taking into
account any new information (such as decisions relating to the Company's
disputed costs, and administrative and judicial decisions relating to similar
issues) that may affect the determination of the net realizable value of
accounts receivable or of liabilities to repay amounts received for disputed
costs.  Results of this detailed analysis process are extrapolated to other
unaudited cost reporting years for all of the Company's operations, including
operations that have not yet been audited by Medicare, to estimate the gross
amount of reimbursement that would be affected.  The Company, through this
ongoing control and monitoring process, provides a reserve (by means of a
revenue reduction) for any costs incurred which the Company believes are not
probable of recovery.  This reserve is reported as a reduction of accounts
receivable for disputed costs for which the Company may not ultimately receive
payment.  The Company has also reported as a liability disputed costs for which
it has received payment, which may have to be returned to Medicare. 
Accordingly, the Company believes that its accounts receivable are stated at net
realizable value, and that it has recorded all probable liabilities for
repayment of disputed costs.

    Over the years, Medicare auditors employed by the Medicare fiscal
intermediaries have, in connection with their retrospective audit process, taken
certain positions with respect to certain types of costs, claiming that they are
not reimbursable and thus not recoverable by the Company from the Medicare
program.  These positions are based on interpretations promulgated after the
period covered by the cost reports and applied retroactively, on interpretations
of cost reimbursement principles that are contrary to the Company's
interpretations, or on what the Company believes to be misapplications of 


                                          12

<PAGE>

specific reimbursement principles, that could not have been foreseen at the time
services were rendered and revenue recorded.  These positions taken by Medicare
auditors are usually determined from Medicare's Notice of Program Reimbursement
("NPR") which typically are not received until two to three years after the
services are rendered.  In those situations where the Company decides to not
challenge an NPR finding, any revenue relating to these costs, as well as the
extrapolated impact, if any, on other open costs reporting years, if not written
off or provided for earlier, is written off as a revenue reduction at that time.
The results of all NPRs are included in the analysis process in calculating net
Medicare revenue as described above.

    The Company has received NPRs challenging $18.5 million of costs as of
December 31, 1996.  There was an additional $17.1 million of costs at December
31, 1996 related to open cost reporting years that are similar to the costs that
have been challenged on NPRs.  Together these amounts ($35.6 million at December
31, 1996) comprise the total amount the Company considers to be disputed costs. 
The major cost category in dispute, accounting for approximately 58% of total
disputed costs, is the treatment of certain personnel costs relating to the
Company's community liaison positions, which Medicare auditors allege are
unreimbursable sales costs; other costs in dispute relate to the cost of
physical therapists employed by the Company, the method of allocation of
administrative and general costs to branch operations and certain corporate
expenses.  These disputed costs (including the extrapolated impact) of $35.6
million at December 31, 1996 arose in the fiscal years ended September 30, 1996
($6.6 million), 1995 ($6.0 million), 1994 ($8.2 million), 1993 ($6.5 million),
1992 ($4.4 million), 1991 ($2.1 million) and $1.8 million for the three months
ended December 31, 1996.  The amount of disputed costs has increased over the
last several years as the Company's operations have grown,  Medicare auditors
have taken positions to disallow certain costs in certain cost reports as
non-reimbursable, and the Company has extrapolated that amount of costs that may
be challenged to other unaudited cost reporting years.  The normal Medicare
administrative appeal process may take several years to resolve these types of
disputes.

    The Company disagrees with the positions taken by the Medicare fiscal
intermediaries' auditors and the Health Care Financing Administration, and is
vigorously pursuing these matters through administrative and legal channels. 
The disputed cost analysis process related to the community liaison and physical
therapist positions (which comprise 66% of disputed costs) encompassed all of
the authoritative, legal and historical sources discussed above.  Based on this
review the Company believes that the majority of the community liaison costs are
probable of recovery, and that a relatively small portion of these costs are not
probable of recovery.  The Company has established, and is continuing to add to,
a reserve for the portion of these costs not considered probable of recovery. 
Since the reserves have been established, the Company has continued to review
whether the level is appropriate.  Nothing has occurred in the legal or
administrative process which the Company is pursuing concerning the disputes
which has caused the Company to conclude that the reserve should be changed. 
Therefore, no change has been made in the rate of reserve used to record
additional reserves on community liaison related costs incurred on an ongoing
basis.  On the physical therapist issue, the Company believes Medicare has no
basis in the regulations for its disallowance of certain costs related to
physical therapists employed by the Company, and therefore the Company has not
established a reserve for these disputed costs.  

    Legal opinions have been received on both the community liaison and
physical therapist issues from an attorney specializing in Medicare
reimbursement issues indicating that it is probable that the Company will
prevail in both issues.  The Company received in March a favorable ruling on the
physical therapist issue by the HHS Provider Reimbursement Review Board (PRRB). 
In May 1996, this ruling was

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<PAGE>


reversed by the Health Care Financing Administration.  The Company has appealed
the decision to the U.S. Federal District Court in Minneapolis.  Because the
PRRB previously ruled in the Company's favor, the Company believes it has a
strong basis for a favorable outcome on such an appeal.  In June 1996, the PRRB
ruled that approximately 53% of the $1,700,000 of community liaison costs
subject to review as part of this hearing were reimbursable to the Company.  In
August 1996, the Health Care Financing Administration reversed this ruling.  The
Company had previously recorded a reserve equal to 16% of all revenue related to
the $1,700,000 of costs as well as other personnel costs relating to the
Company's community liaison position.  After careful assessment of the PRRB and
Health Care Financing Administrator's decisions and the facts and documentation
supporting the nature of the personnel costs at issue, the Company continues to
believe that the majority of the community liaison costs are recoverable under
the Medicare program.  The Company has concluded that the reserve on this issue
in total remains appropriate and has appealed the decision to the U.S. Federal
District Court in Minneapolis.

    The Company, based on its analysis process, believes that recovery of
$7,480,000 of total disputed costs (including the extrapolated impact) may not
be probable and, accordingly, has established reserves which totaled that amount
as of December 31, 1996.   The net amount of disputed costs which the Company
believes is probable of recovery has been included in revenues in the respective
years in which services were rendered and, to the extent not paid to the
Company, is included in accounts receivable.  Total accounts receivable (net of
reserves) due from Medicare at December 31, 1996 were $36,487,000, including the
receivables (net of reserves) for disputed costs of $28,081,000.  As of December
31, 1996 the Company had received $11,799,000 in payments from Medicare for
disputed costs.  Medicare may seek repayment for such amounts and accordingly,
the potential liability for repayments is recorded as Accrued Liabilities -
Third Party.  The Company believes it is probable that it has not incurred any
other liability to repay disputed costs.  In view of the expectation that
resolution of the disputed costs will not likely be accomplished within the next
twelve months, related net receivables of $23,330,000 as of December 31, 1996
have been classified as a non-current asset.  

    The Company has letter of credit facilities from a commercial bank totaling
$3,815,000.  These credit facilities are collateralized by secured investments
and will expire on December 15, 1997.

    The Company's current cash and cash equivalents are expected to provide
sufficient capital to fund the Company's operations and expansion plans through
fiscal 1997.


                                          14

<PAGE>


PART II - OTHER INFORMATION


ITEM 1 - LEGAL PROCEEDINGS - None

ITEM 2 - CHANGES IN SECURITIES - None

ITEM 3 - DEFAULTS UPON SENIOR SECURITIES - None

ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - None

ITEM 5 - OTHER INFORMATION - None

ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K 

         (a) Exhibits
                   (10)   Letter of Credit Agreement dated December 16, 1996
                          with First Bank National Association
                   (11)   Computation of Per Share Earnings

         (b) Reports on Form 8-K
                   None



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<PAGE>

                                      SIGNATURES



Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this Form 10-Q report to be signed on its behalf by
the undersigned thereunto duly authorized.



                                                        In Home Health, Inc.  
                                                      ------------------------
                                                                     Registrant



Date:    February 13, 1997                                 /s/ Mark L. Gildea  
                                                      ------------------------
                                                                 Mark L. Gildea
                                                        Chief Executive Officer




Date:    February 13, 1997                                   /Thomas R. Gross
                                                      ------------------------
                                                                Thomas R. Gross
                                                 Acting Chief Financial Officer
                                                    Vice President - Controller







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