<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 MARCH 31, 1997


                             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
    incorporation or organization)             Identification No.)



                                 601 CARLSON PARKWAY
                                      SUITE 500
                          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 March 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 - 
              March 31, 1997 and September 30, 1996                       2-3

              Consolidated Statements of Operations - 
              For the three and six months ended March 31, 
              1997 and 1996                                                 4

              Consolidated Statements of Cash Flows - 
              For the six months ended March 31, 1997 and 1996              5

              Notes to Consolidated Financial Statements                  6-10

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

PART II.      OTHER INFORMATION                                            15

<PAGE>

                                 IN HOME HEALTH, INC.
                             CONSOLIDATED BALANCE SHEETS
                          (DOLLARS AND SHARES IN THOUSANDS) 

                                        ASSETS


                                                     March 31, 1997   Sept. 30,
                                                      (Unaudited)       1996 
                                                     --------------   --------
Current Assets:
    Cash and cash equivalents                         $11,910          $18,617 
    Accounts receivable, net of allowances
         of $701 and $802 in March 1997 and
         September 1996, respectively                  18,787           19,418 
    Prepaid income tax                                    578            1,037 
    Deferred income tax                                 3,255            3,389 
    Prepaid expenses and other current assets           1,408            1,592 
                                                      -------          --------
      Total current assets                             35,938           44,053 
                                                      -------          --------

Property:
    Furniture and equipment                             9,833            9,954 
    Computer equipment and software                     8,600            8,561 
    Leasehold improvements                                907              823 
                                                      -------          --------
         Total                                         19,340           19,338 

    Accumulated depreciation                          (10,635)          (9,437)
                                                      -------          --------

              Property - net                            8,705            9,901 
                                                      -------          --------

Other Assets:
    Accounts receivable                                24,039           22,018 
    Goodwill, net                                       5,558            5,590 
    Other assets                                        1,043            1,121 
                                                      -------          --------
         Total other assets                            30,640           28,729 
                                                      -------          --------

Total Assets                                          $75,283          $82,683 
                                                      -------          --------
                                                      -------          --------




              SEE NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS. 

<PAGE>

                                 IN HOME HEALTH, INC.
                       CONSOLIDATED BALANCE SHEETS (CONTINUED)
                          (DOLLARS AND SHARES IN THOUSANDS)
                                           
                         LIABILITIES AND SHAREHOLDERS' EQUITY


                                                     March 31, 1997   Sept. 30,
                                                      (Unaudited)       1996 
                                                     --------------   --------
Current Liabilities:
    Current maturities of long-term debt              $ 1,124          $ 1,455
    Accounts payable                                    2,811            3,662
    Accounts payable - related party                      894            1,006
    Accrued liabilities:     
         Third party                                   12,448           13,568
         Compensation                                   4,712            6,859
         Insurance                                      6,372            6,133
         Other                                            440              487
                                                      -------          --------
              Total current liabilities                28,801           33,170
                                                      -------          --------

Long-Term Debt                                            549            1,080
Deferred Revenue                                          609              820
Deferred Rent Payable                                     225              267
Deferred Income Tax                                     1,787            1,822
Commitments and Contingencies                              --               --

Redeemable Convertible Preferred Stock - 
    $1.00 par value, $20,000 redemption value,
    authorized 200 shares; issued and outstanding
    March 31 and September 30 - 200 shares             18,913           18,766

Shareholders' Equity:
    Preferred stock - authorized 800 shares                --               --
    Common stock - $.01 par value:
         authorized - 40,000 shares;
         issued and outstanding - 
         March 31 - 16,296 shares;
         September 30 - 16,541 shares                     163              165
    Additional paid-in capital                         23,475           23,978
    Retained earnings                                     761            2,615
                                                      -------          --------
              Total shareholders' equity               24,399           26,758
                                                      -------          --------

Total Liabilities and Shareholders' Equity            $75,283          $82,683
                                                      -------          --------
                                                      -------          --------


              SEE NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS.

<PAGE>

                                 IN HOME HEALTH, INC.
                  CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
              FOR THE THREE AND SIX MONTHS ENDED MARCH 31, 1997 AND 1996
                   (AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)


                                        Three Months Ended  Six Months Ended
                                            March 31            March 31
                                        ------------------  ----------------
                                         1997       1996     1997       1996
                                         ----       ----     ----       ----
Revenue (net of Medicare reserves of
    $210, $400, $451, $850 for the
    respective periods)               $31,375    $31,792  $62,960    $64,260 
                                      -------    -------  -------    -------
Operating Expenses:
    Direct costs of revenue 
     (primarily payroll related costs) 17,717     17,141   34,898     35,027
    General, administrative
     and selling expenses              14,376     14,569   28,884     29,042
                                      -------    -------  -------    -------
          Total operating expenses     32,093     31,710   63,782     64,069
                                      -------    -------  -------    -------

Income (Loss) From Operations            (718)        82     (822)       191
                                      -------    -------  -------    -------

Interest:
    Interest income                       180        353      403        558 
    Interest expense                      (63)      (107)    (152)      (241)
                                      -------    -------  -------    -------
         Net interest income              117        246      251        317 
                                      -------    -------  -------    -------

Income (Loss) Before Income Taxes        (601)       328     (571)       508 
Income Tax Expense (Benefit)              (80)       202      (64)       284 
                                      -------    -------  -------    -------

Net Income (Loss)                     $  (521)   $   126  $  (507)   $   224 
                                      -------    -------  -------    -------
                                      -------    -------  -------    -------

Loss Applicable to Common Stock       $(1,194)   $  (546) $(1,854)   $  (950)
                                      -------    -------  -------    -------
                                      -------    -------  -------    -------

Loss Per Common and
  Common Equivalent Share             $  (.07)   $  (.03) $  (.11)   $  (.06)
                                      -------    -------  -------    -------
                                      -------    -------  -------    -------

Weighted Average Common
  and Common Equivalent
  Shares Outstanding                   16,322     16,443   16,366     16,458
                                      -------    -------  -------    -------
                                      -------    -------  -------    -------



              SEE NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS.

<PAGE>

                                 IN HOME HEALTH, INC.
                  CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
                   FOR THE SIX MONTHS ENDED MARCH 31, 1997 AND 1996
                                (AMOUNTS IN THOUSANDS)


                                                        1997            1996
                                                        ----            ----

Cash Flows From Operating Activities:
    Net income (loss)                                $  (507)        $   224 
    Adjustments:
      Depreciation and amortization                    1,561           1,620 
      Accounts receivable                             (1,390)         (1,473)
      Prepaid expenses and other assets                  222             126 
      Accounts payable                                  (963)             55 
      Accrued liabilities                             (3,075)          4,330 
      Deferred liabilities                              (154)         (1,158)
                                                     -------          -------
        Net cash provided (used) by 
            operating activities                      (4,306)          3,724 
                                                     -------          -------

Cash Flows From Investing Activities:
    Business acquisitions                                (47)             --  
    Acquisition of property                             (137)           (785)
    Advances to officers and employees                   350              10 
                                                     -------          -------
        Net cash provided (used) by 
            investing activities                         166            (775)
                                                     -------          -------

Cash Flows From Financing Activities:
    Payment of long-term debt                           (862)           (998)
    Issuance (repurchase) of common stock               (505)             24 
    Issuance of preferred stock and warrants              --          17,720 
    Preferred dividends paid                          (1,200)         (1,053)
                                                     -------          -------
        Net cash provided (used) by 
            financing activities                      (2,567)         15,693 
                                                     -------          -------

Cash and Cash Equivalents:
    Net increase (decrease)                           (6,707)         18,642 
    Beginning of period                               18,617           3,665 
                                                     -------          -------
        End of period                                $11,910         $22,307 
                                                     -------          -------
                                                     -------          -------
Supplemental Cash Flow Information:
    Cash paid during the period for:   
      Interest                                       $   152         $   241 
                                                     -------          -------
                                                     -------          -------
      Income taxes                                   $    24         $ 1,167 
                                                     -------          -------
                                                     -------          -------

Noncash Investing and Financing Activities:
  Property acquired by capital lease                 $    --         $   128 
                                                     -------          -------
                                                     -------          -------


              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 March 31, 
1997 and the results of operations for the three and six months and cash 
flows for the six month periods ended March 31, 1997 and 1996.  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 and six months ended March 31,
1997 and 1996 are as follows (in thousands, except per share data):

<TABLE>
<CAPTION>
                                                                Three Months                   Six Months
                                                            -------------------           --------------------
                                                            1997           1996           1997           1996
                                                            ----           ----           ----           ----
    <S>                                                   <C>            <C>            <C>            <C>
    Shares outstanding:
         Weighted average outstanding                     16,296         16,290         16,338         16,288 
         Shares issuable in connection with stock
         options and warrants less shares
              purchasable from proceeds                       26            153             28            170
                                                          ------          -----          -----         ------ 
              Adjusted outstanding                        16,322         16,443         16,366         16,458 
                                                          ------          -----          -----         ------ 
                                                          ------          -----          -----         ------ 
    Adjusted loss applicable to
    common stockholders:               
         Net income (loss)                               $  (521)       $   126        $  (507)       $   224 
         Dividends on preferred stock                       (600)          (599)        (1,200)        (1,053)
         Preferred stock accretion                           (73)           (73)          (147)          (121) 
                                                          ------          -----          -----         ------ 

    Loss applicable to common stock                      $(1,194)       $  (546)       $(1,854)       $  (950)
                                                          ------          -----          -----         ------ 
                                                          ------          -----          -----         ------ 

    Loss per common and common
    equivalent share                                     $  (.07)       $  (.03)       $  (.11)       $  (.06)
                                                          ------          -----          -----         ------ 
                                                          ------          -----          -----         ------ 
</TABLE>

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-

<PAGE>

degree school for various health care related classes.  The purchase price 
totaled $35,000 and the acquisitions were accounted for as purchases for 
financial reporting purposes.  Goodwill of $47,000 has been recorded as of 
March 31, 1997.

    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 six months ended March 31, 1997
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 disputed costs for which the Company may not ultimately 
receive payment.  The Company has also reported as a liability disputed costs 

<PAGE>

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 $18.2 million of costs as of
March 31, 1997.  There was an additional $18.2 million of costs at March 31, 
1997 related to open cost reporting years that are similar to the costs that 
have been challenged on NPRs.  Together these amounts ($36.4 million at 
March 31, 1997) comprise the total amount the Company considers to be 
disputed costs. The major cost category in dispute, accounting for 
approximately 59% 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 $36.4 million at March 31, 1997 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 $2.6 million for the six months ended March 31, 1997.  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 68% 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 

<PAGE>

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 1996 a favorable 
ruling on the physical therapist issue by the Health and Human Services 
Provider Reimbursement Review Board (PRRB).  In May 1996, this ruling was 
reversed by the Health Care Financing Administration.  The Company appealed 
the decision to the U.S. Federal District Court in Minneapolis.  During the 
second quarter of fiscal 1997, the Company was notified that the U.S. 
District Court granted the Company's motion to set aside the decision by the 
Health Care Financing Administration which denied the Company reimbursement 
of some of its costs for providing physical therapy services provided in 
1992.  The Court found that the Health Care Financing Administration had 
provided an insufficient explanation of its decision, and therefore, the 
decision was arbitrary and capricious.  The Court remanded the matter to the 
Secretary of the Health Care Financing Administration for further proceedings 
consistent with its order.  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
$7,678,000 of total disputed costs (including the extrapolated impact) may 
not be probable and, accordingly, has established reserves which totaled that 
amount as of March 31, 1997.   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 March 31, 1997 were 
$34,490,000, including the receivables (net of reserves) for disputed costs 
of $28,760,000.  As of March 31, 1997 the Company had received $12,448,000 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 $24,039,000 as of March 31, 1997 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

<PAGE>

(APB 25), 'Accounting for Stock Issued to Employees', but must disclose pro 
forma net income and pro 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.

6.  RECENTLY ISSUED ACCOUNTING STANDARD
    In February 1997, the Financial Accounting Standards Board has issued
Statement of Financial Accounting Standard No. 128, "Earnings Per Share" 
which will be effective in fiscal 1998.  The Company does not expect the 
impact of the new standard to have a material effect on the financial 
statements.

<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 and six months ended March 31, 1997 decreased 1%
and 2%, respectively, over the same periods in the prior year.  The decline 
in revenue is primarily a result of a 14% decrease in Visit division volume 
through March 31, 1997, offset by a 38% increase in Extended Hours, Infusion 
and Hospice revenue.

    Direct costs of revenue, as a percentage of sales, were 56% and 55%
for the three and six months ended March 31, 1997 versus 54% and 55% for the 
same periods of the previous year.  Increase for the three months ended 
March 31, 1997 is a result of margin pressures in the Extended Hours, 
Infusion and Hospice divisions.

    General, administrative and selling expenses for the three and six
months ended March 31, 1997 were 46%, respectively, versus 46% and 45% for 
the same periods of the previous year.  These expenses have increased as a 
percentage of sales as a result of the decrease in revenue without a 
corresponding reduction in general, administrative and selling expenses.

    Net interest income for the three and six month periods ended March 31, 
1997 was $117,000 and $251,000 versus $246,000 and $317,000 for the same 
periods of the previous year.  The decrease in interest income is due to less 
interest bearing cash and cash equivalents resulting from approximately 
$4.9 million in payments for previously accrued settlements and severance 
agreements and repayment of prior year Medicare overpayments.

    Net loss totaled $507,000 for the six months ended March 31, 1997
versus net income of $224,000 through the six month period ended March 31, 
1996. Net loss for the three months ended March 31, 1997 totaled $521,000 
versus net income of $126,000 for the same period of the prior year.   The 
net loss is a result of  profit margins below expectations on Extended Hours, 
Hospice and Infusion revenue coupled with a decline in Visit division volume.

LIQUIDITY AND CAPITAL RESOURCES

    The Company's cash and cash equivalents decreased $6,707,000 to
$11,910,000 at March 31, 1997.  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.  The Company also paid $1.2 million 
in preferred dividends to Manor Healthcare Corp. for the six months ended 
March 31, 1997.  In addition, total accounts receivable increased 
$1.4 million for the six months ended March 31, 1997 principally as a result 
of increases in 

<PAGE>

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 six months ended March 31, 1997
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 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.

<PAGE>

    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 $18.2 million of costs as of
March 31, 1997.  There was an additional $18.2 million of costs at March 31, 
1997 related to open cost reporting years that are similar to the costs that 
have been challenged on NPRs.  Together these amounts ($36.4 million at 
March 31, 1997) comprise the total amount the Company considers to be 
disputed costs. The major cost category in dispute, accounting for 
approximately 59% 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 $36.4 million at March 31, 1997 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 $2.6 million for the six months ended March 31, 1997.  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 68% 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.  

<PAGE>

    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 1996 a favorable 
ruling on the physical therapist issue by the Health and Human Services 
Provider Reimbursement Review Board (PRRB).  In May 1996, this ruling was 
reversed by the Health Care Financing Administration.  The Company appealed 
the decision to the U.S. Federal District Court in Minneapolis.  During the 
second quarter of fiscal 1997, the Company was notified that the 
U.S. District Court granted the Company's motion to set aside the decision by 
the Health Care Financing Administration which denied the Company 
reimbursement of some of its costs for providing physical therapy services 
provided in 1992.  The Court found that the Health Care Financing 
Administration had provided an insufficient explanation of its decision, and 
therefore, the decision was arbitrary and capricious.  The Court remanded the 
matter to the Secretary of the Health Care Financing Administration for 
further proceedings consistent with its order.  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
$7,678,000 of total disputed costs (including the extrapolated impact) may 
not be probable and, accordingly, has established reserves which totaled that 
amount as of March 31, 1997.   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 March 31, 1997 were 
$34,490,000, including the receivables (net of reserves) for disputed costs 
of $28,760,000.  As of March 31, 1997 the Company had received $12,448,000 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 $24,039,000 as of March 31, 1997 have been classified as a 
non-current asset.  

    The Company has letter of credit facilities from a commercial bank
totaling $3,348,000.  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.

<PAGE>

PART II - OTHER INFORMATION


ITEM 1 - LEGAL PROCEEDINGS - None.

ITEM 2 - CHANGE IN SECURITIES - None.

ITEM 3 - DEFAULTS UPON SENIOR SECURITIES - None.

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

         The Company held its Annual Meeting of Shareholders on
         March 6, 1997.  The shareholders present in person or
         in proxy voted to re-elect the existing board of
         directors.  Each nominee received the number of votes
         indicated below.  There were no broker non-votes with
         respect to the election of directors.
         
         Nominees            Votes For      Withheld  
         --------            ----------     --------
         Mark L. Gildea      17,765,753     352,537
         James J. Lynn       17,753,408     364,882
         Donald C. Tomasso   17,789,684     328,606
         Joseph Buckley      17,780,325     337,965
         James M. Rempe      17,787,899     330,391

         The shareholders approved the amendment to the 1991 Employee Stock
         Purchase Plan by a vote of 17,357,712 shares in favor, 569,663 shares
         against, 81,300 shares abstaining and zero broker non-voted.
         
         The shareholders ratified the selection of Deloitte & Touche LLP as
         the Company's independent auditors for 1997 by a vote of 17,928,785
         shares in favor, 126,227 shares against, 63,278 abstaining and zero
         shares broker non-voted. 

ITEM 5 - OTHER INFORMATION - None.

ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K

         (a)  Exhibits
                   (11) Computation of Per Share Earnings

         (b)  Reports on Form 8-K

                   None

<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:  May 8, 1997                           /s/Mark L. Gildea   
                                          ------------------------
                                                    Mark L. Gildea
                                           Chief Executive Officer





Date:  May 8, 1997                           /s/Thomas R. Gross   
                                          ------------------------
                                                   Thomas R. Gross
                                           Chief Financial Officer