<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, 1998


                            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)    


                                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    No    
                                                    ---       ---

     As of January 8, 1999, the number of shares outstanding of the 
registrant's common stock, $.03 par value was 5,479,736 shares.

<PAGE>

                                 IN HOME HEALTH, INC.
                                  TABLE OF CONTENTS

<TABLE>
<CAPTION>
                                                                       PAGE NO.
                                                                       --------
<S>            <C>                                                     <C>
PART I.        FINANCIAL INFORMATION

     ITEM 1.   FINANCIAL STATEMENTS

               Consolidated Balance Sheets - 
               December 31, 1998 and September 30, 1998                    2-3

               Consolidated Statements of Operations - 
               For the Three Months Ended December 31, 
               1998 and 1997                                               4

               Consolidated Statements of Cash Flows - 
               For the Three Months Ended December 31, 
               1998 and 1997                                               5

               Notes to Unaudited Consolidated Financial Statements        6-8

     ITEM 2.   MANAGEMENT'S DISCUSSION AND ANALYSIS 
               OF FINANCIAL CONDITION AND RESULTS OF
               OPERATIONS                                                  9-12

PART II.       OTHER INFORMATION                                           13
</TABLE>

<PAGE>

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



                                        ASSETS

<TABLE>
<CAPTION>
                                                             Dec. 31, 1998     Sept. 30,
                                                               (Unaudited)          1998
                                                             -------------     ---------
<S>                                                          <C>               <C>
Current Assets:

  Cash and cash equivalents                                     $ 22,866         $ 21,462
  Accounts receivable, net of allowances of $1,111 and
     $1,175 in December and September 1998, respectively          11,918           13,598
  Deferred income tax                                              1,198            1,269
  Prepaid expenses and other current assets                          994              970
                                                                --------         --------
       Total current assets                                       36,976           37,299
                                                                --------         --------
Property:

  Furniture and equipment                                          7,924            8,123
  Computer equipment and software                                  6,779            6,771
  Leasehold improvements                                             501              529
                                                                --------         --------
     Total                                                        15,204           15,423
  Accumulated depreciation                                       (11,151)         (10,954)
                                                                --------         --------
       Property - net                                              4,053            4,469
                                                                --------         --------
Other Assets:

  Accounts receivable, long-term                                     977              988
  Goodwill, net                                                    5,234            5,274
  Other assets                                                       304              330
                                                                --------         --------
     Total other assets                                            6,515            6,592
                                                                --------         --------

Total Assets                                                    $ 47,544         $ 48,360
                                                                --------         --------
</TABLE>


            SEE NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS.


                                       2

<PAGE>

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

                      LIABILITIES AND SHAREHOLDERS' EQUITY

<TABLE>
<CAPTION>
                                                                  Dec. 31, 1998      Sept. 30,
                                                                    (Unaudited)           1998
                                                                  -------------      ---------
<S>                                                               <C>                <C>
Current Liabilities:

  Current maturities of long-term debt                               $    189         $    219
  Accounts payable                                                      2,882            2,612
  Accounts payable - related party                                        107              111
  Accrued liabilities:

     Third party                                                       12,325           12,669
     Compensation                                                       3,091            3,225
     Insurance                                                          3,026            3,246
     Restructuring                                                        330              456
     Other                                                                529              538
                                                                     --------         --------
       Total current liabilities                                       22,479           23,076
                                                                     --------         --------

Long-Term Debt                                                             18               44
Deferred Revenue                                                           20               41
Deferred Rent Payable                                                     187              198
Deferred Income Tax                                                     1,210            1,288
Commitments and Contingencies                                            --               --

Redeemable Convertible Preferred Stock - $1.00 par value,
  $13,000 redemption value, authorized 130 shares; issued
  and outstanding December 31 and September 30 - 130 shares            12,633           12,584

Shareholders' Equity:

  Redeemable Convertible Preferred Stock - $1.00 par value,
     $7,000 redemption value, authorized 70 shares; issued
     and outstanding December 31 and September 30 - 70 shares           7,000            7,000
  Preferred stock - authorized 800 shares                                --               --
  Common stock - $.03 par value, authorized 13,334 shares;
     issued and outstanding December 31- 5,480 shares
     and September 30 - 5,479 shares                                      164              164
  Additional paid-in capital                                           23,675           23,675
  Retained deficit                                                    (19,842)         (19,710)
                                                                     --------         --------
     Total shareholders' equity                                        10,997           11,129
                                                                     --------         --------

Total Liabilities and Shareholders' Equity                           $ 47,544         $ 48,360
                                                                     --------         --------
                                                                     --------         --------
</TABLE>

            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, 1998 AND 1997
                (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
                                                           1998             1997
                                                           ----            -----
<S>                                                    <C>              <C>
Revenue [net of Medicare reserves of
  ($57) and $77 in 1998 and 1997, respectively]        $ 18,571         $ 27,858
                                                       --------         --------

Operating Expenses:
  Direct costs of revenue  (primarily payroll
       related costs)                                    10,359           16,125
  General, administrative and selling expenses            8,034           11,059
                                                       --------         --------
       Total operating expenses                          18,393           27,184
                                                       --------         --------

Income from operations                                      178              674
                                                       --------         --------

Interest:

  Interest income                                           345              216
  Interest expense                                           (6)             (30)
                                                       --------         --------
Net interest income                                         339              186
                                                       --------         --------

Income before income taxes                                  517              860
Income tax expense                                         --               --
                                                       --------         --------

Net income                                             $    517         $    860
                                                       --------         --------
                                                       --------         --------

Net income (loss) available to common
  shareholders                                         $   (132)        $    186
                                                       --------         --------
                                                       --------         --------

Basic and diluted earnings (loss) per share            $   (.02)        $    .03
                                                       --------         --------
                                                       --------         --------
</TABLE>


            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, 1998 AND 1997
                             (DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
                                                              1998             1997
                                                             -----            -----
<S>                                                       <C>              <C>
Cash Flows From Operating Activities:

  Net income                                              $    517         $    860
  Adjustments:
     Depreciation and amortization                             393              709
     Loss on disposal of assets                                103              165
     Accounts receivable                                     1,691            2,645
     Prepaid expenses and other assets                         (31)            (103)
     Accounts payable                                          270           (1,606)
     Accounts payable - related party                           (4)              15
     Accrued liabilities                                      (833)          (1,556)
     Deferred revenue                                          (21)            (105)
     Deferred rent payable                                     (11)             (11)
     Deferred income tax                                        (7)            --
                                                          --------         --------

       Net cash provided by operating activities             2,067            1,013
                                                          --------         --------

Cash Flows From Investing Activities:

  Acquisition of property                                      (13)             (18)
  Repayments of advances to officers and employees               6                8
                                                          --------         --------

     Net cash used by investing activities                      (7)             (10)
                                                          --------         --------

Cash Flows From Financing Activities:

  Payment of long-term debt                                    (56)            (308)
  Preferred dividends paid                                    (600)            (600)
                                                          --------         --------

     Net cash used by financing activities                    (656)            (908)
                                                          --------         --------

Cash and Cash Equivalents:

  Net increase                                               1,404               95
  Beginning of period                                       21,462           13,853
                                                          --------         --------
     End of period                                        $ 22,866         $ 13,948
                                                          --------         --------
                                                          --------         --------
</TABLE>
                                           
              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, 1998 and the
results of operations and cash flows for the three months ended December 31,
1998 and 1997.  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.        BASIC AND DILUTED EARNINGS PER SHARE 
          The following table reflects the calculation of basic and diluted
earnings (loss) per share for the three months ended December 31, 1998 and 1997.
Earnings per share amounts presented for 1997 have been restated for the 
one-for-three reverse stock split effective December 1, 1998.  (See Note 6.)

<TABLE>
<CAPTION>
                                                                  (in thousands, except per
                                                                         share amounts)
                                                                       1998           1997
                                                                       ----           ----
<S>                                                                <C>             <C>
          EARNINGS PER SHARE:      
          Net income                                               $    517        $   860
          Dividends on preferred stock                                 (600)          (600)
          Preferred stock accretion                                     (49)           (74)
                                                                   --------        -------
          Net income (loss) available to common shareholders       $   (132)       $   186
                                                                   --------        -------
                                                                   --------        -------
          Weighted average shares outstanding                         5,480          5,466
                                                                   --------        -------

          Basic and diluted earnings (loss) per share              $   (.02)       $   .03
                                                                   --------        -------
                                                                   --------        -------
</TABLE>

          Options to purchase 272,142 and 427,286 shares of common stock were 
outstanding at December 31, 1998 and 1997, respectively. These options were 
not included in the computation of diluted earnings per share because the 
options' exercise price was greater than the average market price of the 
common shares.

          Redeemable convertible preferred stock was issued to ManorCare 
Health Services, Inc., a wholly owned subsidiary of HCR ManorCare, Inc. 
("HCR"), in October 1995.  As of December 31, 1998, 130,000 preferred shares 
may be redeemed in cash at the option of the holder or the Company on and 
after the fifth anniversary of their issuance, while 70,000 shares can be 
redeemed only at the option of the Company on and after the fifth 
anniversary.  The redeemable preferred shares are initially convertible into 
3,333,334 common shares at an initial conversion price of $6.00 per share.  
In December 1998, an agreement was signed with HCR to modify the terms of the 
preferred shares. Under the terms of the modification agreement, HCR 
irrevocably waived the voting rights of the preferred stock, except with 
respect to any proposal presented to the Company's stockholders to (i) wind 
up, dissolve or liquidate the Company or revoke or forfeit its charter, (ii) 
amend the Company's articles of incorporation, (iii) merge or consolidate or 
enter into an exchange agreement with another


                                       6

<PAGE>

corporation, or (iv) sell, lease, transfer or otherwise dispose of all or 
substantially all of the Company's assets not in the usual and regular course 
of business.  In consideration, the Company waived its right to pay dividends 
on the preferred stock in shares of its common stock.  A private warrant 
issued in October 1995 to HCR to purchase 2 million shares of common stock at 
$11.25 per share expired in October 1998.  The impact of the redeemable 
convertible preferred stock and the warrant on diluted earnings (loss) per 
share would be anti-dilutive and, therefore, they have been excluded from the 
computation of basic and diluted earnings per share.

3.        RESTRUCTURING CHARGE
          During fiscal 1997, the Company recorded $2,476,000 in 
restructuring charges as a result of the implementation of a plan to 
restructure its field operations and reduce the Company's cost structure. The 
charge includes $1,820,000 of costs associated with lease costs and related 
equipment write-offs associated with the closing of eight pharmacies, the 
consolidation of seven sites in multi-site markets, the relocation of eight 
other sites to more economical locations and $361,000 of severance costs 
related to administrative staff reductions.

          Total expenditures related to facilities consolidation were $29,000 
during the three months ended December 31, 1998 as compared to $240,000 for 
the same period of the previous year.  As of December 31, 1998, $330,000 of 
costs, comprised of lease costs and related equipment write-offs associated 
with vacated sites, remain to be paid out and are included in other current 
liabilities.  The restructuring plan is expected to be substantially complete 
by the end of the third quarter of fiscal 1999.

4.        COMMITMENTS AND CONTINGENCIES   
          Approximately 46% and 59% of revenue for the three months ended 
December 31, 1998 and 1997, respectively, was derived from services provided 
to Medicare beneficiaries, for which payment is based on cost.  Payments for 
reimbursable services are made by the Medicare program based on reimbursable 
costs incurred in rendering services.  Medicare makes interim payments as 
services are rendered, and the Company files cost reports 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. 
          
          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.  When the Company disagrees with findings of the Medicare 
fiscal intermediaries, it seeks relief through administrative and legal 
channels. Based on a detailed analysis of statutes and regulations, 
administrative and judicial decisions, and consultation with independent 
industry experts and legal counsel, the Company provides a reserve (by means 
of a revenue deduction) for any costs incurred which are not probable of 
recovery.  At December 31, 1998, total disputed costs were $3,901,000; the 
Company believes that recovery of $2,924,000 of such costs (including 
extrapolation for all unsettled cost reporting periods) may not be probable 
and, accordingly, has established reserves totaling $2,924,000 as of December 
31, 1998.
          
          At December 31, 1998, disputed costs totaling $977,000 were not 
reserved, all of which relate to the compensation of physical therapists 
employed by the Company.  The Medicare intermediary took the position that 
contractor physical therapist salary equivalency guidelines should be applied 
to the Company's employee physical therapists, and thus disallowed certain 
physical therapy costs for the fiscal 1992 cost reporting period.  The 
Company appealed to the Provider Reimbursement Review 


                                       7

<PAGE>

Board ("PRRB") and received a favorable ruling in February 1996.  In April 
1996, the Health Care Financing Administration ("HCFA") reversed the PRRB 
ruling and disallowed all of the disputed costs.  The Company appealed to the 
U.S. Federal District Court ("District Court") in Minneapolis, which ruled in 
favor of the Company, declaring HCFA's decision contrary to law and set it 
aside.  In August 1998, HCFA appealed the decision to the Eighth Circuit 
Court of Appeals.  The Company, based on its assessment and the opinion of 
its legal counsel, Lindquist & Vennum P.L.L.P. of Minneapolis, Minnesota, 
continues to believe that it is probable that the Company will ultimately 
prevail in this case.
          
          At December 31, 1998, total accounts receivable (net of reserves) 
due from Medicare were $6,828,000.  Based on the progress toward resolution 
of the disputed costs, management estimates that net receivables of $977,000 
will not be realized within the next twelve months, and accordingly, has 
classified net receivables of $977,000 as a non-current asset.  Accrued 
liabilities to third-party at December 31, 1998 represent payments from 
Medicare in excess of amounts that the Company believes it will be entitled 
to upon ultimate settlement of Medicare cost reports.

5.        INCOME TAXES
          At September 30, 1998, the Company had federal operating loss 
carryforwards of $9,100,000 which will expire in 2012.  Management believes 
it is more likely than not that certain of these net operating loss 
carryforwards and other temporary differences may expire unused and, 
accordingly, has established a valuation allowance against them.  During the 
three months ended December 31, 1998, income tax expense of $200,000 was 
offset by utilizing a portion of the net operating loss carryforwards versus 
$400,000 for the same period of the previous year.

6.        REVERSE STOCK SPLIT
          On November 17, 1998, the Company declared a one-for-three reverse 
stock split effective the close of business December 1, 1998.  The Board of 
Directors declared the reverse split to reduce the number of outstanding 
shares of common stock and thereby encourage an increase in the price per 
share of the common stock on the public market in an effort to maintain 
eligibility for the continued trading on the NASDAQ National Market.  While 
the Company believes the reverse split should allow the common stock to 
continue to trade on the NASDAQ National Market, this depends on the Company 
meeting eligibility requirements in the future, and the Company can provide 
no assurance that such requirements will be met.

          The par value of the common stock was increased from $.01 to $.03 
and the outstanding shares were decreased from 16,437,000 to 5,480,000 at 
December 31, 1998.  All references in the accompanying financial statements 
to the number of common shares and the per share amounts have been restated 
to reflect the reverse stock split.

7.        RECENTLY ISSUED ACCOUNTING STANDARDS
          In June 1997, the Financial Accounting Standards Board issued 
Statement of Financial Accounting Standard No. 131 "Disclosures about 
Segments of an Enterprise and Related Information" which is effective for the 
Company in fiscal 1999.  In its fiscal 1999 Form 10-K, the Company will 
disclose information relating to three segments:  Extended Hours Division, 
Visit Division, and Hospice Division.


                                       8

<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

          The Balanced Budget Act of 1997 (the "Budget Act") and the Omnibus 
Consolidated and Emergency Supplemental Appropriations Act for Fiscal Year 
1999 (the "Appropriations Act") require HCFA to implement a prospective 
payment system ("PPS") for home health agencies by October 1, 2000.  Until 
PPS is implemented, the Budget Act established an Interim Payment System 
("IPS"), effective October 1, 1997, that reimburses home health agencies the 
lesser of: (1) actual, reasonable costs, (2) per-visit cost limits, or (3) 
newly implemented per-beneficiary cost limits.  The IPS program rates were 
announced April 1, 1998, but given effect retroactively to October 1, 1997.  
In response to the implementation of IPS, the Company initiated a series of 
cost reduction programs and care delivery process improvements.  

          Revenue for the three months ended December 31, 1998 decreased 33% 
over the same period in the prior year.  The decrease in revenue occurred 
primarily in cost reimbursed revenue due to cost reduction initiatives in 
response to lower Medicare payments under the new per-beneficiary limits 
announced in 1998.  Visit Division revenue decreased 46% due to a decrease in 
patient visits and corporate cost reductions implemented in an effort to 
minimize the impact of IPS.  Extended Hours Division revenue declined 18% due 
to a reduction in the volume of new low margin cases accepted and a lack of 
staffing for certain service offerings in several markets.  Infusion Pharmacy 
revenue decreased 65% primarily as a result of a reduction of infusion 
product offerings in a number of markets and the closure of pharmacies as a 
part of the Company's restructuring plan.  Hospice Division revenue increased 
13% due to increased patient census.

          Direct costs, as a percent of revenue, were 56% versus 58% for the 
three months ended December 31, 1998 and 1997, respectively.  This reduction 
was principally the result of the Company's cost reduction program.  

          General, administrative and selling expenses for the three months 
ended December 31, 1998 were $8,034,000, a decrease of $3,025,000 from the 
same period last year due to the cost reduction initiatives implemented last 
year. As a percent of revenue, however, expenses increased to 43% from 40% 
last year due to the decrease in revenues.

          Net interest income for the three months ended December 31, 1998 
was $339,000 versus $186,000 for the same period of the previous year.  The 
increase in net interest income was principally attributable to higher 
average cash balances resulting from improved cash flow from operations and 
reductions in interest expense due to reduction of long-term debt.


                                       9

<PAGE>

          Net income for the three months ended December 31, 1998 was 
$517,000, compared to $860,000 for the same period of the previous year.  Net 
loss available to common shareholders was $132,000 for the three months ended 
December 31, 1998, compared to income of $186,000 for the same period of the 
previous year.  The reduction in net income is due primarily to the decreased 
volume in the Visit Division in response to IPS, resulting in less cost 
reimbursement of general and administrative costs within that division, and 
increased general and administrative allocations to the other divisions.  
While gross margins for Extended Hours and Hospice have been maintained and 
general and administrative costs have been reduced, these divisions have not 
generated enough new revenue to compensate for the shift of general and 
administrative costs from the Visit Division.  The difference between net 
income and net income available to common shareholders is primarily the 
result of the preferred stock dividend to ManorCare Health Services, Inc., a 
wholly owned subsidiary of HCR ManorCare, Inc. ("HCR") for its $20 million 
preferred stock investment in In Home Health.  Basic and diluted loss per 
share was $.02 compared to earnings of $.03 per share last year.

LIQUIDITY AND CAPITAL RESOURCES

          The Company's cash and cash equivalents increased $1,404,000 to 
$22,866,000 at December 31, 1998 from $21,462,000 at September 30, 1998. Net 
cash provided from operating activities for the three months ended December 
31, 1998 was $2,067,000, which was primarily the result of the decrease in 
total accounts receivable.  During the three months ended December 31, 1998, 
the Company paid $600,000 to HCR for preferred stock dividends.

          Approximately 46% and 59% of revenue for the three months ended 
December 31, 1998 and 1997, respectively, was derived from services provided 
to Medicare beneficiaries, for which payment is based on cost.  Payments for 
reimbursable services are made by the Medicare program based on reimbursable 
costs incurred in rendering services.  Medicare makes interim payments as 
services are rendered, and the Company files cost reports 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. 
          
          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.  When the Company disagrees with findings of the Medicare 
fiscal intermediaries, it seeks relief through administrative and legal 
channels. Based on a detailed analysis of statutes and regulations, 
administrative and judicial decisions, and consultation with independent 
industry experts and legal counsel, the Company provides a reserve (by means 
of a revenue deduction) for any costs incurred which are not probable of 
recovery.  At December 31, 1998, total disputed costs were $3,901,000; the 
Company believes that recovery of $2,924,000 of such costs (including 
extrapolation for all unsettled cost reporting periods) may not be probable 
and, accordingly, has established reserves totaling $2,924,000 as of December 
31, 1998.
          
          At December 31, 1998, disputed costs totaling $977,000 were not
reserved, all of which relate to the compensation of physical therapists
employed by the Company.  The Medicare intermediary took the position that
contractor physical therapist salary equivalency guidelines should be applied to
the Company's employee physical therapists, and thus disallowed certain physical
therapy costs for the fiscal 1992 cost reporting period.  The Company appealed
to the Provider Reimbursement Review 


                                       10

<PAGE>

Board ("PRRB") and received a favorable ruling in February 1996.  In April 
1996, the Health Care Financing Administration ("HCFA") reversed the PRRB 
ruling and disallowed all of the disputed costs.  The Company appealed to the 
U.S. Federal District Court ("District Court") in Minneapolis, which ruled in 
favor of the Company, declaring HCFA's decision contrary to law and set it 
aside.  In August 1998, HCFA appealed the decision to the Eighth Circuit 
Court of Appeals.  The Company, based on its assessment and the opinion of 
its legal counsel, Lindquist & Vennum P.L.L.P. of Minneapolis, Minnesota, 
continues to believe that it is probable that the Company will ultimately 
prevail in this case.
          
          At December 31, 1998, total accounts receivable (net of reserves) 
due from Medicare were $6,828,000.  Based on the progress toward resolution 
of the disputed costs, management estimates that net receivables of $977,000 
will not be realized within the next twelve months, and accordingly, has 
classified net receivables of $977,000 as a non-current asset.  Accrued 
liabilities to third-party at December 31, 1998 represent payments from 
Medicare in excess of amounts that the Company believes it will be entitled 
to upon ultimate settlement of Medicare cost reports.
          
          The Company has letter of credit facilities from a commercial bank 
totaling $1,915,000.  These credit facilities are collateralized by secured 
investments and will expire in December 1999.

          Management believes cash provided by operations and existing cash 
balances are sufficient to meet the Company's financial requirements for the 
foreseeable future.
          
YEAR 2000
          
     The Company has assessed and continues to assess the potential impact of 
the Year 2000 issue affecting most corporations, primarily concerning the 
ability of information systems to properly recognize and process information 
relating to the year 2000 and beyond.

     The Company began addressing the Year 2000 issue in fiscal 1997, 
primarily in the business systems area, such as general ledger, payroll, and 
accounts payable, which were modified and are now compliant.  Remaining 
systems, such as the internally developed operations systems, phone system, 
and wide area network were targeted for modification or replacement by 
January 31, 1999.  The Company estimates it will be over 90% compliant by 
January 31, 1999.  In December 1998 and January 1999 the Company performed 
additional financial analysis on the costs of upgrading the hardware 
components of current hardware versus replacing the current hardware for full 
Year 2000 compliance.  Based on reduced ongoing operational costs, the 
Company decided to replace rather than upgrade existing hardware.  The new 
hardware is scheduled for delivery in March 1999.  Full compliance is now 
expected early in the third quarter of fiscal 1999.  The estimated cost of 
Year 2000 compliance is $275,000, and is not expected to have a material 
impact on the Company's financial performance.

     Principal risk areas for the Company would be the potential inability to
bill its principal third-party payer, Medicare, for services rendered to
patients, or the inability of the third-party payer's systems to recognize the
billing data, delaying payment for services rendered.  The Health Care Finance
Administration ("HCFA") published a targeted date of December 31, 1998 for Year
2000 compliance, and has delayed other projects to accomplish their tasks.  As
of January 20, 1999, HCFA published their quarterly report for October on their
web site and estimated that 85% of the code for Medicare fee-for-service had
been renovated as of September 30, 1998.  The Company is not aware of any
significant exposure due to its own or the systems of third-parties; however,
there can be no guarantee that the systems of third-parties on which the Company
relies will be converted in a timely manner, or that such 


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<PAGE>

failure would not have a material adverse impact on the Company.  The Company 
will continue to monitor publications of HCFA and its principal Fiscal 
Intermediary, United Government Services, and develop contingency plans as 
conditions merit.
          
FORWARD LOOKING INFORMATION

          Statements included in this Form 10-Q that are not historical or 
current facts are "forward-looking statements" made pursuant to the safe 
harbor provisions of the Private Securities Litigation Reform Act of 1995 and 
are subject to certain risks and uncertainties that could cause actual 
results to differ materially.  The Company's ability to succeed in the future 
is dependent upon government regulation, third party reimbursement, 
competition and factors affecting the health care industry in general.  The 
Company's future results of operations and financial condition will be 
affected by factors such as (i) proposed changes to the Medicare 
reimbursement system from a retrospective cost-based system to a prospective 
payment system, (ii) settlements which may be reached with the Department of 
Health and Human Services regarding cost reports, and (iii) its ability to 
establish and maintain close working relationships with referral sources, 
including payers, hospitals, physicians and other health care professionals.  
As a result of these developments, the Company is not able to conclude that 
it is more likely than not that it will be able to generate future earnings 
which will allow it to utilize its NOLs and, accordingly, has established a 
valuation allowance against the NOLs.  Please refer to our Form 10-K for the 
fiscal year ended September 30, 1998 for a more thorough discussion of 
forward looking information.


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<PAGE>

PART II - OTHER INFORMATION


ITEM 1 -  LEGAL PROCEEDINGS - None.
          
ITEM 2 -  CHANGE IN SECURITIES - On December 22, 1998, the Registrant entered
          into a Second Preferred Stock Modification Agreement (the "Agreement")
          with ManorCare Health Services, Inc. ("ManorCare"), a wholly owned
          subsidiary of HCR ManorCare, Inc., to modify the terms of the 200,000
          shares of the Company's convertible preferred stock held by ManorCare.

          Under the terms of the Agreement, ManorCare irrevocably waived the
          right of the preferred stock to vote on an as-if-converted basis along
          with the common stock, except with respect to any proposal presented
          to the Company's stockholders to (i) wind up, dissolve or liquidate
          the Company or revoke or forfeit its charter, (ii) amend the Company's
          articles of incorporation, (iii) merge or consolidate or enter into an
          exchange agreement with another corporation, or (iv) sell, lease,
          transfer or otherwise dispose of all or substantially all of the
          Company's assets not in the usual and regular course of business.  The
          waiver only applies in cases where the preferred stock has the right
          to vote on an as-if-converted basis with holders of common stock.  

          In consideration for ManorCare entering into the Agreement, the
          Company waived the right to pay the 12% dividends on the preferred
          stock in the form of shares of common stock.  The Company has in the
          past paid this dividend in the form of cash, and as a result of the
          waiver, will continue to do so.

          In addition to the 200,000 preferred shares, ManorCare continues to
          own 41% of the Company's outstanding common stock.  The Agreement does
          not effect the voting rights of these shares of common stock.  As a
          result of the Agreement, ManorCare no longer has majority voting power
          with respect to the election of the Company's Board of Directors.

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 - 
               Exhibit 27 - Financial Data Schedule.

               (b)  Reports on Form 8-K - A report on Form 8-K was filed
               December 22, 1998 containing disclosure pursuant to Item 5 of
               Form 8-K.  See ITEM 2 above.


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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 1, 1999                                   /s/Wolfgang von Maack
                                                    ---------------------------
                                                             Wolfgang von Maack
                                                        Chief Executive Officer





Date:  February 1, 1999                               /s/Robert J. Hoffman, Jr.
                                                    ---------------------------
                                                         Robert J. Hoffman, Jr.
                                                 Acting Chief Financial Officer


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