1
                              UNITED STATES
                   SECURITIES AND EXCHANGE COMMISSION

                         Washington, D.C. 20549

                                FORM 10-Q


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

            For the quarterly period ended SEPTEMBER 30, 1998

                    Commission File Number: 0-19822


                    LITCHFIELD FINANCIAL CORPORATION
         (Exact name of registrant as specified in its charter)


   MASSACHUSETTS                              04-3023928
 (State or other jurisdiction       (I.R.S. Employer Identification No.)
of incorporation or organization)


 430 MAIN STREET, WILLIAMSTOWN, MA               01267
(Address of principal executive offices)      (Zip Code)


   Registrant's telephone number, including area code: (413) 458-1000


          (Former name, former address and former fiscal year,
                      if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the  preceding 12 months (or for such  shorter  period that the  registrant  was
required  to file  such  reports),  and  (2) has  been  subject  to such  filing
requirements for the past 90 days.

                                Yes X No


As of  November  9,  1998,  there  were  6,840,797  shares  of  common  stock of
Litchfield Financial Corporation outstanding.


<PAGE>



                                FORM 10-Q

                                   66


                    LITCHFIELD FINANCIAL CORPORATION
                                FORM 10-Q

                    QUARTER ENDED SEPTEMBER 30, 1998

                                  INDEX

                                      PAGE
PART I - FINANCIAL INFORMATION

     Item 1. Financial Statements                                     3

     Item 2. Management's Discussion and Analysis of
             Financial Condition and Results of Operations           14


PART II - OTHER INFORMATION

     Item 1. Legal Proceedings                                        21

     Item 2. Changes in Securities                                    21

     Item 3. Defaults Upon Senior Securities                          21

     Item 4. Submission of Matters to a Vote of Security Holders      21

     Item 5. Other Information                                        22

     Item 6. Exhibits and Reports on Form 8-K                         36


SIGNATURES                                                            37



<PAGE>

<TABLE>

                     PART I - FINANCIAL INFORMATION
                      Item 1. Financial Statements

                    LITCHFIELD FINANCIAL CORPORATION
                       Consolidated Balance Sheets
           (In thousands, except share and per share amounts)
<S>                                                <C>          <C>
                                                   September    December
                                                      30,          31,
                                                     1998         1997
                                                  ---------       ----
                                                 (unaudited)
                                  ASSETS
Cash and cash equivalents......................   $  14,732    $ 19,295
Restricted cash................................      28,941      23,496
Loans held for sale, net of allowance for loan
losses of
   $778 in 1998 and $1,388 in 1997.............      11,131      16,366
Other loans, net of allowance for loan losses of
   $2,526 in 1998 and $2,044 in 1997...........     155,694      86,307
Retained interests in loan sales, net of             28,954      30,299
allowance for loan losses of
   $3,202 in 1998 and $2,445 in 1997...........
Other..........................................      13,142      11,027
                                                     ------      ------
      Total assets.............................    $252,594    $186,790
                                                   ========    ========

                   LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
   Lines of credit.............................   $  40,840    $    177
   Term note payable and mortgage payable......       1,500       5,210
   Accounts payable and accrued liabilities....       6,702       6,479
   Dealer/developer reserves...................      10,028      10,655
   Deferred income taxes.......................       8,681       6,851
                                                     ------      ------
                                                     67,751      29,372

   9.3% Notes..................................      20,000      20,000
   8.45% Notes due 2002........................      51,750      51,750
   8.875% Notes due 2003.......................      15,066      15,317
   10% Notes due 2004..........................      18,240      18,280
                                                     ------      ------
                                                    105,056     105,347

Stockholders' equity
   Preferred stock, $.01 par value; authorized
1,000,000 shares, none
      issued and outstanding...................         ---         ---
   Common stock, $.01 par value; authorized
12,000,000 shares, 6,840,797 shares issued and 
     outstanding in 1998 and 5,656,609
      shares issued and outstanding in 1997....          68          56
   Additional paid in capital..................      57,634      36,681
   Accumulated other comprehensive income......       1,273       1,071
   Retained earnings...........................      20,812      14,263
                                                     ------      ------
      Total stockholders' equity...............      79,787      52,071
                                                     ------      ------
      Total liabilities and stockholders' equity   $252,594    $186,790
                                                   ========    ========





 See accompanying notes to unaudited consolidated financial statements.

</TABLE>

<PAGE>

<TABLE>

                    LITCHFIELD FINANCIAL CORPORATION
                    Consolidated Statements of Income
           (In thousands, except share and per share amounts)
                                Unaudited

<S>                                                <C>          <C>
                                                    Three Months Ended
                                                         Sept. 30,
                                                     1998        1997
Revinues:                                                                                                                        
   Interest and fees on loans...................     $ 6,819       $5,025
   Gain on sale of loans........................       2,906        2,684
   Servicing and other fee income...............         740          554
                                                      10,465        8,263

Expenses:
   Interest expense.............................       3,423        2,733
   Salaries and employee benefits...............       1,277          883
   Other operating expenses.....................         906          889
   Provision for loan losses....................         360          244
                                                       5,966        4,749

Income before income taxes and extraordinary item      4,499        3,514
Provision for income............................       1,732        1,353
Income before extraordinary item................       2,767        2,161
Extraordinary item (net of tax benefit of $48)..         (77)        ---
Net income......................................      $2,690       $2,161


Basic per common share amounts:
   Income before extraordinary item.............      $  .40       $  .38
   Extraordinary item...........................        (.01)        ---
   Net income...................................      $  .39       $  .38

Basic weighted average number of shares.........    6,835,775   5,629,644

Diluted per common share amounts:
   Income before extraordinary .................      $  .39       $  .36   
   Extraordinary item...........................        (.01)        ---
   Net income...................................      $  .38       $  .36   

Diluted weighted average number of shares.......    7,158,882   5,980,698

</TABLE>











 See accompanying notes to unaudited consolidated financial statements.


<PAGE>

<TABLE>


                    LITCHFIELD FINANCIAL CORPORATION

                    Consolidated Statements of Income
           (In thousands, except share and per share amounts)
                                Unaudited
<S>                                               <C>             <C>

                                                  Nine Months Ended Sept.
                                                            30,
                                                    1998             1997
Revenues:
   Interest and fees on loans...................   $18,107         $14,354
   Gain on sale of loans........................     8,585           6,751
   Servicing and other fee income...............     1,699           1,256
                                                    28,391          22,361

Expenses:
   Interest expense.............................    10,115           7,775
   Salaries and employee benefits...............     3,557           2,529
   Other operating expenses.....................     2,775           2,645 
   Provision for loan 1osses....................     1,170             979
                                                    17,617          13,928

Income before income taxes and extraordinary item   10,774           8,433
Provision for income taxes......................     4,148           3,247
Income before extraordinary item................     6,626           5,186
Extraordinary item (net of tax benefit of $48)..       (77)           ---
Net income......................................    $6,549          $5,186


Basic per common share amounts:
  Income before extraordinary item..............    $ 1.09          $  .94 
  Extraordinary item............................      (.01)           ---
  Net income....................................    $ 1.08          $  .94

Basic weighted average number of shares           6,083,183      5,545,497

Diluted per common share amounts:
  Income before extraordinary item..............    $ 1.03          $  .88
  Extraordinary item............................      (.01)           ---
  Net income....................................    $ 1.02          $  .88  

Diluted weighted average........................  6,432,422       5,876,651


 See accompanying notes to unaudited consolidated financial statements.
</TABLE>


<TABLE>


                    LITCHFIELD FINANCIAL CORPORATION
             Consolidated Statements of Comprehensive Income
                             (In thousands)
                                Unaudited

<S>                                               <C>           <C>


                                                    Three Months Ended
                                                         Sept. 30,
                                                       1998       1997

Net income......................................      $2,690     $2,161
Other comprehensive income, net of tax:
   Net unrealized gain on retained interests in           
           loan sales...........................          22        159

Comprehensive income............................      $2,712     $2,320  








                                                      Nine Months Ended 
                                                         Sept. 30,
                                                        1998      1997

Net income........................................     $6,549   $5,186
Other comprehensive income, net of tax:
   Net unrealized gain on retained interests in           
   loan sales.....................................        202      682
Comprehensive income..............................     $6,751   $5,868










 See accompanying notes to unaudited consolidated financial statements.


</TABLE>
<TABLE>


                    LITCHFIELD FINANCIAL CORPORATION
             Consolidated Statement of Stockholders' Equity
                  (In thousands, except share amounts)
                                Unaudited

<S>                             <C>       <C>             <C>            <C>        <C>

                                         Accumulated
                                         Additional       Other
                                 Common   Paid In      Comprehensive     Retained
                                 Stock    Capital         Income         Earnings    Total

Balance, December 31, 1997..      $56     $36,681         $1,071         $14,263    $52,071

 Issuance of  1,184,188 
  shares of common stock....       12      20,914            ---             ---     20,926                  

 Other comprehensive income,
  net of tax................      ---         ---            202             ---        202

 Tax benefit from stock
  options exercised.........      ---          39            ---             ---         39

 Net income.................      ---         ---            ---            6,549     6,549
Balance, September 30, 1998.      $68     $57,634          $1,273         $20,812   $79,787
                                  ===     =======          ======         =======   =======
                                                               



</TABLE>



See accompanying notes to unaudited consolidated financial statements.

<PAGE>
<TABLE>



                    LITCHFIELD FINANCIAL CORPORATION

                  Consolidated Statements of Cash Flows
                             (In thousands)
                                Unaudited
<S>                                                  <C>          <C>

                                                      Nine Months Ended
                                                          Sept. 30,
                                                       1998        1997
                                                      -----        -----
Cash flows from operating activities:
   Net income.....................................   $ 6,549      $ 5,186
   Adjustments to reconcile net income to net cash 
   provided by (used in) operating activities:
     Gain on sale of loans........................    (8,585)      (6,751)
     Amortization and depreciation................       735          412
     Amortization of retained interests in loan 
     sales........................................     4,569        3,441
     Provision for loan losses....................     1,170          979
     Deferred income taxes........................     1,830        1,780
     Net changes in operating assets and liabilities:
          Restricted cash.........................    (5,445)      (1,925)
          Loans held for sale.....................     6,748      (12,530)
          Retained interests in loan sales........    (1,903)      (1,588)
          Dealer/developer reserves...............      (627)         262
          Net change in other assets and liabilities  (1,652)       1,185
                                                      ------        -----
          Net cash provided by (used in) operating  
          activities..............................     3,389       (9,549)
                                                       -----       ------
                                                
Cash flows from investing activities:
    Net originations, purchases and principal       
    payments on other loans......................   (128,624)     (37,831)
    Other loans sold.............................     58,822       40,790
    Collections on retained interests in loan sales    5,863        3,567
    Capital expenditures and other assets........     (1,296)        (548)
    Investments in affiliates....................       (306)         ---
       Net cash (used in) provided by investing      
       activities................................    (65,541)        5,978
                                                     --------       ------
Cash flows from financing activities:
    Net borrowings (payments) on lines of credit.     42,163       (15,827)
    Proceeds from issuance of 9.3% Notes.........       ---         20,000
    Retirement of long-term Notes................       (291)         (613)
    Payments on term note........................     (5,210)       (1,631)
    Net proceeds from issuance of common stock..      20,927         1,994
      Net cash provided by financing activities.      57,589         3,923

Net (decrease) increase in cash and cash             
equivalents......................................     (4,563)          352
Cash and cash equivalents, beginning of period...     19,295         5,557
Cash and cash equivalents, end of period.........    $14,732        $5,909

Supplemental Schedule on Noncash Financing and
                          Investing Activities:
 Exchange of loans for retained interests in
 loan sales....................................      $   692        $  577   
    Transfers from loans to real estate acquired    
    through foreclosure.........................     $ 1,104        $  815

Supplemental Cash Flow Information:
    Interest paid...............................     $ 9,948        $7,556
    Income taxes paid...........................     $ 1,419        $1,455

</TABLE>

 See accompanying notes to unaudited consolidated financial statements.

<PAGE>




                                    FORM 10-Q

                    LITCHFIELD FINANCIAL CORPORATION
               NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                               Unaudited

A. Basis of Presentation


     The accompanying  unaudited consolidated interim financial statements as of
September 30, 1998 and for the three and nine month periods ended  September 30,
1998 and  1997,  have  been  prepared  in  accordance  with  generally  accepted
accounting   principles  for  interim   financial   information   and  with  the
instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do
not include all of the information and footnotes  required by generally accepted
accounting  principles  for  complete  financial  statements.  In the opinion of
management, all adjustments (consisting of normal accruals) considered necessary
for a fair presentation have been included.  Operating results for the three and
nine month periods ended September 30, 1998, are not  necessarily  indicative of
the  results  expected  for the year  ending  December  31,  1998.  For  further
information,  refer to the consolidated  financial  statements and notes thereto
included in Litchfield  Financial  Corporation's  annual report on Form 10-K for
the year ended December 31, 1997.

     In 1997,  the  Financial  Accounting  Standards  Board issued  Statement of
Financial  Accounting  Standard No. 130, "Reporting  Comprehensive  Income." The
Company adopted the  requirements  of this Statement in the first quarter.  This
Statement  established  standards  for  reporting  comprehensive  income and its
components and requires this  disclosure be added as a new item in the financial
statements.


B.  Gain on Sale of  Loans and Retained Interests in Loan Sales


     Gains on sales of loans are based on the  difference  between the allocated
cost basis of the assets sold and the proceeds received, which includes the fair
value of any  assets or  liabilities  that are newly  created as a result of the
transaction.  Newly created interests,  which consist primarily of interest only
strips and  recourse  obligations,  are  initially  recorded at fair value.  The
previous  carrying amount is allocated  between the assets sold and any retained
interests based on their relative fair values at the date of transfer.  Retained
interests in transferred assets consist primarily of subordinate portions of the
principal balance of transferred assets and interest only strips.

     The Company estimates fair value using discounted cash flow analysis (using
discount  rates  commensurate  with the risks  involved),  because quoted market
prices  are  not  readily  available.   The  Company's   analysis   incorporates
assumptions that market participants would be expected to use in their estimates
of future cash flows, including assumptions about return on investment, defaults
and prepayment  rates. The Company considers  retained  interests in loan sales,
such as  subordinated  pass-through  certificates  and interest only strips,  as
available for sale.

     There is  generally no  servicing  asset or  liability  because the Company
estimates  that the  benefits  of  servicing  are  offset by the  related  costs
associated with its servicing responsibilities.

      Since its inception,  the Company has sold  $451,554,000  of loans at face
value  ($348,198,000  through December 31, 1997). The principal amount remaining
on the loans sold was  $232,272,000  at September 30, 1998 and  $179,790,000  at
December 31, 1997. In connection with certain loan sales, the

<PAGE>



                                    FORM 10-Q

                    LITCHFIELD FINANCIAL CORPORATION
        NOTES  TO  CONSOLIDATED   FINANCIAL  STATEMENTS  -  (Continued)  Company
guarantees,  through  replacement  or  repayment,  loans  that  default  up to a
specified  percentage  of loans  sold.  Dealer/developer  guaranteed  loans  are
secured  by  repurchase  or  replacement  guarantees  in  addition  to,  in most
instances, dealer/developer reserves.

     The Company's exposure to loss on loans sold in the event of nonperformance
by the  consumer,  default by the  dealer/developer  on its  guarantee,  and the
determination  that the  collateral is of no value was  $10,756,000 at September
30,  1998  ($9,238,000  at  December  31,  1997).  Such  amounts  have  not been
discounted.  The Company  repurchased  $57,000  and  $104,000 of loans under the
recourse  provisions  of loan sales during the three months ended  September 30,
1998 and 1997.  Loans purchased  during the nine months ended September 30, 1998
and 1997 were $201,000 and $558,000,  respectively, and $740,000 during the year
ended  December 31,  1997.  In addition,  when the Company  sells loans  through
securitization programs, the Company commits either to replace or repurchase any
loans that do not conform to the requirements thereof in the operative loan sale
documents.  As of September  30, 1998,  $27,582,000  of the  Company's  cash was
restricted  as credit  enhancements  in connection  with certain  securitization
programs.  To date,  the Company has  participated  $10,240,000 of A&D and Other
Loans without recourse to the Company ($6,936,000 through December 31, 1997).

     The  Company's  Serviced  Portfolio  is  geographically   diversified  with
collateral and consumers located in 46 and 50 states, respectively. The Serviced
Portfolio  consists of the principal amount of loans serviced by or on behalf of
the  Company,  except loans  participated  without  recourse to the Company.  At
September  30,  1998,  16.1% and 11.2% of the Serviced  Portfolio by  collateral
location was located in Texas and Florida (19.1% and 8.7% at December 31, 1997),
respectively and 17.5% and 15.8% of the Serviced  Portfolio by borrower location
was  located  in  Florida  and Texas  (12.9% and 19.1% at  December  31,  1997),
respectively. No other state accounted for more than 8.5% of the total by either
collateral or borrower location.


C. Allowance for Loan Losses and Recourse Obligations

The total allowance for loan losses consists of the following:
<TABLE>
<S>                                             <C>           <C>
                                                 September    December
                                                    30,          31,
                                                   1998         1997
     Allowance  for  losses on loans held for  $  778,000    $1,388,000
     sale
     Allowance for losses on other loans.....   2,526,000     2,044,000
     Recourse    obligation    on    retained   3,202,000     2,445,000
     interests in loan sales.................  $6,506,000    $5,877,000

</TABLE>


D.  Debt

     In January 1997, the Company amended a line of credit,  secured by consumer
receivables  and other secured  loans,  to increase the line from  $5,000,000 to
$8,000,000.  This  line  of  credit  matures  in  January  1999.  There  were no
outstanding borrowings at September 30, 1998 or December 31, 1997.

     In March 1997, the Company entered into an additional  $25,000,000  secured
line of  credit.  The  outstanding  borrowings  under  this  line of  credit  at
September 30, 1998 were  $7,440,000 and there were no outstanding  borrowings at
December 31, 1997.  The facility is secured by loans to  developers  of vacation
ownership  interest  resorts  ("VOI  resorts"),  popularly  known  as  timeshare
resorts,  for the acquisition and development of VOI resorts  ("Facility A") and
the related financing of consumer purchases of VOIs ("Facility B"). Although the
maximum  amount  that can be  borrowed  on each  facility  is  $15,000,000,  the
aggregate  outstanding  borrowings  cannot  exceed  $25,000,000.  This  facility
expires in March 2000.

     In May 1997, the Company renewed and amended an additional  secured line of
credit to  increase  the line from  $30,000,000  to  $50,000,000  and extend the
maturity to April 2000. The outstanding  borrowings under this line of credit at
September 30, 1998 were  $10,250,000.  There were no  outstanding  borrowings at
December 31, 1997.  This line of credit is secured by consumer  receivables  and
other secured loans.

     In December  1997,  the  Company  amended an  additional  line of credit to
increase the line from $20,000,000 to $30,000,000.  Outstanding borrowings under
this line of credit at  September  30,  1998,  were  $23,150,000.  There were no
outstanding borrowings at December 31, 1997. This facility is secured by certain
retained  interests in loan sales,  cash  collateral  accounts and certain other
loans and matures in September 1999.

     In March 1998, the Company renewed an additional $3,000,000 line of credit,
which is secured by consumer  receivables and other secured loans.  This line of
credit matures in March 1999.  There were no outstanding  borrowings  under this
line of credit at September 30, 1998 and December 31, 1997.

     In March 1998, the Company  amended the $1,500,000  construction  mortgage,
secured by certain  assets of the Company,  extending the maturity date to March
2009.  Outstanding  borrowings under this construction  mortgage were $1,500,000
and $8,000 at September 30, 1998 and December 31, 1997, respectively.

     Interest  rates on the above lines of credit range from the  Eurodollar  or
LIBOR rates plus 2% to the prime rate plus 1.25%. The Company is not required to
maintain  compensating  balances or forward sales commitments under the terms of
these lines of credit.

     As of  September  30,  1998 and  December  31,  1997,  the  Company  had no
unsecured lines of credit.

     The Company has a revolving  line of credit and sale facility as part of an
asset backed  commercial  paper  facility with a multi-seller  commercial  paper
issuer ("Conduit A"). In June 1998, the Company amended the facility to increase
the  facility to  $150,000,000,  subject to certain  terms and  conditions.  The
facility expires in June 2001.

     In  connection  with  the  facility,  the  Company  formed  a  wholly-owned
subsidiary,   Litchfield  Mortgage  Securities  Corporation  1994  ("LMSC"),  to
purchase  loans from the Company.  LMSC either  pledges the loans on a revolving
line of credit with  Conduit A or sells the loans to Conduit A. Conduit A issues
commercial  paper or other  indebtedness to fund the purchase or pledge of loans
from LMSC. Conduit A is not affiliated with the Company or its affiliates. As of
September 30, 1998 and December 31, 1997, the outstanding balance of the sold or
pledged  loans  securing  this  facility  was  $131,439,000  and   $108,625,000,
respectively.  There were no  outstanding  borrowings  at  September  30,  1998.
Outstanding  borrowings  under  the line of  credit at  December  31,  1997 were
$169,000. Interest is payable on the line of credit at an interest rate based on
certain commercial paper rates.

     In March 1997,  the Company  closed an additional  revolving line of credit
and sale facility of $25,000,000  with another  multi-seller of commercial paper
conduit ("Conduit B"). The facility,  which expires in March 2000, is subject to
certain  terms  and  conditions,   credit  enhancement   requirements  and  loan
eligibility criteria. The outstanding aggregate balance of the loans pledged and
sold under the facility at any time cannot exceed $25,000,000.

     In  connection  with  the  facility,  the  Company  formed  a  wholly-owned
subsidiary,  Litchfield Capital Corporation 1996 ("LCC"), to purchase loans from
the  Company.  LCC either  pledges the loans on a revolving  line of credit with
Conduit B or sells the loans to Conduit B. Conduit B issues  commercial paper or
other  indebtedness to fund the purchase or pledge of loans from LCC.  Conduit B
is not affiliated with the Company or its  affiliates.  As of September 30, 1998
and December 31, 1997, the outstanding aggregate balance of the loans sold under
the  facility  was  $10,981,000  and  $12,517,000,  respectively.  There were no
outstanding  borrowings  under the line of credit as of  September  30,  1998 or
December 31, 1997. Interest is payable on the line of credit at an interest rate
based on certain commercial paper rates.

     In  September of 1998,  the Company  redeemed a term note which was payable
monthly based on  collections  from the  underlying  collateral  resulting in an
extraordinary  loss of $77,000,  net of applicable  tax benefit of $48,000.  The
note was  collateralized by certain of the Company's  retained interests in loan
sales and cash.  The balance  outstanding on the note was $5,210,000 at December
31, 1997.

     In April 1997, the Company issued unsecured notes with an initial principal
balance of $20,000,000. Interest is payable at 9.3% semiannually in arrears. The
notes require  principal  reductions of $7,500,000,  $6,000,000,  $6,000,000 and
$500,000 in March 2001, 2002, 2003 and 2004, respectively.

     In November 1997, the Company completed a public offering of $51,750,000 of
8.45% Notes due 2002 ("1997  Notes"),  which are  unsecured  obligations  of the
Company.  The proceeds were used to repay the outstanding  balance on certain of
the  Company's  lines of credit and to retire  the 10% Notes due 2002.  The 1997
Notes allow for a maximum annual  redemption at the election of the  noteholders
of $2,588,000  and contain  certain  restrictions  regarding the payment of cash
dividends and require the maintenance of certain financial ratios.

     Previously,  the Company  completed public debt offerings of $17,570,000 in
May 1993 ("1993 Notes") and $18,400,000 in March 1995 ("1995  Notes").  The 1993
Notes and the 1995 Notes bear interest at 8 7/8% and 10%, respectively,  and are
due 2003 and 2004, respectively. The 1993 Notes and the 1995 Notes are unsecured
obligations  of the Company and each such issuance  allows for a maximum  annual
redemption by noteholders of 5% of the original  principal  amount  thereof.  In
June 1997, the noteholders  redeemed,  and the Company paid $613,000 of the 1993
Notes. In April of 1998, the noteholders redeemed,  and the Company paid $40,000
of the 1995 Notes.  In June of 1998, the noteholders  redeemed,  and the Company
paid $251,000 of the 1993 Notes.

E. Derivative Financial Instruments Held for Purposes Other than
Trading


     The Company's  objective in managing interest rate exposure is to match its
proportion  of fixed  versus  variable  rate assets,  liabilities  and loan sale
facilities.  In June 1997,  the  Company  entered  into two  interest  rate swap
agreements.  The  swap  agreements  involve  the  payment  of  interest  to  the
counterparty  at the prime rate on a  notional  amount of  $110,000,000  and the
receipt of  interest  at the  commercial  paper rate plus a spread and the LIBOR
rate  plus  a  spread  on  notional  amounts  of  $80,000,000  and  $30,000,000,
respectively.  The swap agreements expire in June, 2000. There is no exchange of
the notional amounts upon which the interest payments are based.

     The differential to be paid or received as interest rates change is accrued
and  recognized  as an  adjustment  to interest  income or expense  (the accrual
accounting  method.)  The  related  amount  receivable  from or  payable  to the
counterparty is included in other assets or other  liabilities.  The fair values
of the swap  agreements  are not  recognized  in the financial  statements.  The
Company intends to keep the contracts in effect until they mature in June 2000.

     In June, 1994, the Company entered into an interest rate cap agreement with
a bank in order to manage its exposure to certain  increases in interest  rates.
The interest  rate cap  entitles  the Company to receive an amount,  based on an
amortizing  notional  amount,  which at September 30, 1998 was $3,860,000,  when
commercial paper rates exceed 8%. If payments were to be received as a result of
the cap  agreement,  they would be accrued as a reduction  of interest  expense.
This agreement expires in July 2003.

     The  Company is exposed to credit loss in the event of  non-performance  by
the swap counterparty or cap provider.


F. Subsequent Events


     In  October  1998,  the  Company  issued  unsecured  notes  with an initial
principal  balance of  $10,000,000  ("Series A Notes").  Interest  is payable at
8.25%  monthly in arrears.  The net proceeds from the sale of the Series A Notes
were used for general corporate purposes.



<PAGE>



                                    FORM 10-Q

Item 2.  MANAGEMENT'S  DISCUSSION  AND  ANALYSIS OF  FINANCIAL  CONDITION
AND RESULTS OF OPERATIONS

Forward-looking Statements

    Except for the historical information contained or incorporated by reference
in this Form 10-Q, the matters discussed or incorporated by reference herein are
forward-looking  statements.  Such forward-looking  statements involve known and
unknown  risks,  uncertainties  and other  factors  that may  cause  the  actual
results,  performance or achievements of the Company, or industry results, to be
materially  different  from any  future  results,  performance  or  achievements
expressed or implied by such forward-looking  statements.  Such factors include,
among  others,  the risk  factors set forth under "Risk  Factors" as well as the
following: general economic and business conditions; industry trends; changes in
business strategy or development plans;  availability and quality of management;
and availability,  terms and deployment of capital.  Special attention should be
paid  to  such  forward-looking   statements  including,  but  not  limited  to,
statements  relating  to  (i)  the  Company's  ability  to  execute  its  growth
strategies and to realize its growth  objectives and (ii) the Company's  ability
to obtain sufficient  resources to finance its working capital needs and provide
for its known obligations. Refer to the Company's annual report on Form 10-K for
the year ended 1997 for a complete  list of  factors as  discussed  under  "Risk
Factors".

Overview

     Litchfield  Financial  Corporation (the "Company") is a diversified finance
company  that  provides  financing  to  creditworthy  borrowers  for  assets not
typically  financed by banks.  The Company provides such financing by purchasing
consumer loans and by making loans to businesses secured by consumer receivables
or other assets.

     The Company  purchases  consumer loans (the "Purchased  Loans")  consisting
primarily of loans to purchasers of rural and vacation properties ("Land Loans")
and vacation ownership  interests  popularly known as timeshare  interests ("VOI
Loans").  The Company also provides  financing to rural land dealers,  timeshare
resort   developers   and  other  finance   companies   secured  by  receivables
("Hypothecation  Loans") and to dealers and developers for the  acquisition  and
development of rural land and timeshare resorts ("A&D Loans"). In addition,  the
Company purchases other loans, such as consumer home equity loans, mortgages and
construction  loans,  and  provides  financing  to other  businesses  secured by
receivables or other assets ("Other Loans").

     Land Loans are typically secured by one to twenty acre rural parcels.  Land
Loans are  secured  by  property  located  in 35  states,  predominantly  in the
southern United States.  VOI Loans  typically  finance the purchase of ownership
interests  in fully  furnished  vacation  properties.  VOI Loans are  secured by
property  located  in  18  states,  predominantly  in  California,  Florida  and
Pennsylvania.  The Company requires most dealers or developers from whom it buys
loans to guarantee repayment or replacement of any loan in default.  Ordinarily,
the Company  retains a percentage  of the purchase  price as a reserve until the
loan is repaid.

     The Company extends Hypothecation Loans to land dealers,  resort developers
and  other  finance  companies  secured  by  receivables.   Hypothecation  Loans
typically have advance rates of 75% to 90% of the current balance of the pledged
receivables and variable interest rates based on the prime rate plus 2% to 4%.
     The Company also makes A&D Loans to land dealers and resort  developers for
the acquisition and development of rural land and timeshare  resorts in order to
finance  additional  receivables  generated  by the A&D  Loans.  At the time the
Company makes A&D Loans, it typically receives an exclusive right to purchase or
finance the related consumer receivables generated by the sale of the subdivided
land or timeshare  interests.  A&D Loans  typically have loan to value ratios of
60% to 80% and variable interest rates based on the prime rate plus 2% to 4%.

     The principal  sources of the Company's  revenues are (i) interest and fees
on loans, (ii) gains on sales of loans and (iii) servicing and other fee income.
Gains on sales of loans are based on the  difference  between the allocated cost
basis of the assets sold and the  proceeds  received,  which  includes  the fair
value of any  assets or  liabilities  that are newly  created as a result of the
transaction.  Because  a  significant  portion  of  the  Company's  revenues  is
comprised of gains realized upon sales of loans,  the timing of such sales has a
significant effect on the Company's results of operations.


Results of Operations

     The following  table sets forth the  percentage  relationship  to revenues,
unless  otherwise  indicated,   of  certain  items  included  in  the  Company's
statements of income.

<TABLE>
<S>                                     <C>      <C>    <C>      <C> 
                                        Three Months     Nine Months
                                            Ended            Ended

                                       September 30,    September 30,
                                         1998     1997    1998    1997
   Revenue                               ----     ----    ----    ----       
       Interest and fees on loans......  65.1%    60.8%   63.8%   64.2%
       Gain on sale of loans...........  27.8     32.5    30.2    30.2
       Servicing and other fee income..   7.1      6.7     6.0     5.6
                                         ----     ----    ----    ----
                                        100.0    100.0   100.0   100.0
                                        -----    -----   -----   -----
   Expenses
       Interest expense................  32.7     33.1    35.6    34.8
       Salaries and employee benefits..  12.2     10.7    12.5    11.3
       Other operating expenses........   8.7     10.8     9.8    11.8
       Provision for loan losses.......   3.4      2.9     4.1     4.4
                                         ----     ----    ----    ----
                                         57.0     57.5    62.0    62.3
                                         ----     ----    ----    ----

   Income before income taxes and        
   extraordinary item..................  43.0     42.5    38.0    37.7
   Provision for income taxes..........  16.6     16.3    14.6    14.5
                                         ----     ----    ----    ----
   Income before extraordinary item....  26.4     26.2    23.4    23.2
   Extraordinary item..................  (0.7)     ---    (0.3)    ---
                                         ----     ----    ----    ----
   Net income..........................  25.7%    26.2%   23.1%   23.2%
                                         ====     ====    ====    ====
</TABLE>

     Revenues  increased  26.6% and 27.0% to $10,465,000 and $28,391,000 for the
three and nine months ended  September 30, 1998, from $8,263,000 and $22,361,000
for the same  periods in 1997.  Net income for the three and nine  months  ended
September  30,  1998  increased  24.5% and 26.3% to  $2,690,000  and  $6,549,000
compared  to  $2,161,000  and  $5,186,000  for the same  periods  in 1997.  Loan
originations  grew 83.0% and 90.9% to $93,784,000 and $256,861,000 for the three
and nine months ended September 30, 1998 from  $51,235,000 and  $134,546,000 for
the same periods in 1997. The Serviced Portfolio increased 40.5% to $417,455,000
at September 30, 1998 from $297,098,000 at September 30, 1997.

     Interest  and fees on loans  increased  35.7% and 26.1% to  $6,819,000  and
$18,107,000  for the  three  and nine  months  ended  September  30,  1998  from
$5,025,000 and $14,354,000 for the same periods in 1997, primarily as the result
of the higher average balance of other loans during the 1998 period. The average
rate earned on the Serviced  Portfolio  decreased to 12.0% at September 30, 1998
from 12.3% at September  30, 1997,  primarily due to the effect of the growth in
Hypothecation Loans as a percentage of the portfolio.  Hypothecation Loan yields
are  usually  less than Land Loan or VOI Loan  yields,  but  Hypothecation  Loan
servicing costs and loan losses are generally less as well.

     Gain on the  sale of loans  increased  8.3% and  27.2%  to  $2,906,000  and
$8,585,000  for the  three  and  nine  months  ended  September  30,  1998  from
$2,684,000  and $6,751,000 in the same periods in 1997. The volume of loans sold
decreased  10.9% to  $34,474,000  for the three months ended  September 30, 1998
from $38,694,000 during the three months ended September 30, 1997. The volume of
loans sold increased 32.2% to  $103,356,000  for the nine months ended September
30, 1998 from  $78,195,000  during the same period in 1997. For the three months
ended September 30, 1998,  compared to the same period in 1997, the gain on sale
of loans increased  despite a decrease in the volume of loans sold primarily due
to a higher  percentage  of Land  Loans  sold  than  Hypothecation  Loans  sold.
Hypothecation  Loan sales  typically  yield less than Land  Loans.  For the nine
months  ended  September  30,  1998,  compared to the same  period in 1997,  the
percentage  increase  in the gain on sale of loans  was  slightly  less than the
percentage  increase  in the  volume of loans sold  primarily  due to the slight
increase in Hypothecation  Loans sold during the nine months ended September 30,
1998.

     Servicing  and other fee income  increased  33.6% and 35.3% to $740,000 and
$1,699,000 for the three and nine months ended September 30, 1998, from $554,000
and  $1,256,000  for the same periods in 1997 largely due to the increase in the
other fee income including certain  processing fees, a prepayment penalty from a
Hypothecation  Loan and a significant  repayment fee from an A&D Loan.  Although
loans serviced for others  increased  33.5% to  $232,272,000 as of September 30,
1998  from  $174,009,000  at  September  30,  1997,  servicing  income  remained
relatively  constant  due to an increase in  Hypothecation  Loans  serviced  for
others and a decrease in the average servicing fee per loan.

     Interest  expense  increased  25.2% and 30.1% to $3,423,000 and $10,115,000
during the three and nine months ended  September 30, 1998 from  $2,733,000  and
$7,775,000  for the same  periods in 1997.  The  increase  in  interest  expense
primarily  reflects an increase in average  borrowings  which was only partially
offset by lower  rates.  During the three and nine months  ended  September  30,
1998,  borrowings averaged  $142,225,000 and $140,577,000,  respectively,  at an
average rate of 8.8% for both periods  compared to $112,159,000 and $105,688,000
at an average  rate of 9.0% and 9.1% during the same  periods in 1997.  Interest
expense includes the amortization of deferred debt issuance costs.

     Salaries and employee benefits  increased 44.6% and 40.6% to $1,277,000 and
$3,557,000 for the three and nine months ended  September 30, 1998 from $883,000
and $2,529,000 for the same periods in 1997 because of an increase in the number
of employees in 1998 and, to a lesser extent, an increase in salaries. Personnel
costs as a percentage of revenues increased to 12.2% and 12.5% for the three and
nine months ended  September  30, 1998  compared to 10.7% and 11.3% for the same
periods in 1997. However,  as a percentage of the Serviced Portfolio,  personnel
costs  remained  constant at 1.2% and 1.1% for the three and nine  months  ended
September 30, 1998, respectively, compared to the same periods in 1997.
     Other operating expenses increased 1.9% and 4.9% to $906,000 and $2,775,000
for the three and nine  months  ended  September  30,  1998  from  $889,000  and
$2,645,000  for the same  periods in 1997.  As a percentage  of revenues,  other
operating  expenses  decreased  to 8.7% and 9.8% for the three  and nine  months
ended  September  30,  1998  compared  to 10.8% and 11.8% for the  corresponding
periods in 1997.  As a percentage  of the Serviced  Portfolio,  other  operating
expenses  decreased to 0.9% for both the three and nine months  ended  September
30, 1998 from 1.2% for the same  periods in 1997.  A portion of the  increase in
the number of  employees  in 1998 and the  resulting  increase in  salaries  and
employee  benefits and the  corresponding  decrease in other operating  expenses
relates  to the  resumption  in  July  1998  of  certain  customer  service  and
collections activities from a third party servicer.

     During the three and nine months ended  September  30, 1998,  the provision
for loan  losses  increased  47.5% and 19.5% to  $360,000  and  $1,170,000  from
$244,000 and $979,000 for the same periods in 1997  primarily  due to the growth
of the Serviced Portfolio.


Liquidity and Capital Resources

     The Company's  business  requires  continued  access to short and long-term
sources of debt  financing  and equity  capital.  The Company's  principal  cash
requirements  arise  from  loan  originations,  repayment  of debt on  maturity,
payments of operating and interest expenses and loan repurchases.  The Company's
primary sources of liquidity are loan sales, short-term borrowings under secured
lines of  credit,  long-term  debt and  equity  offerings  and cash  flows  from
operations.

     Since its  inception,  the Company has sold  $451,554,000  of loans at face
value  ($348,198,000  through December 31, 1997). The principal amount remaining
on the loans sold was  $232,272,000  at September 30, 1998 and  $179,790,000  at
December 31, 1997. In connection with certain loan sales, the Company commits to
repurchase  from  investors any loans that become 90 days or more past due. This
obligation  is subject  to  various  terms and  conditions,  including,  in some
instances,  a  limitation  on the  amount of loans  that may be  required  to be
repurchased. There were approximately $10,756,000 of loans at September 30, 1998
which the  Company  could be required to  repurchase  in the future  should such
loans  become 90 days or more past due.  The  Company  repurchased  $57,000  and
$201,000 as compared to $104,000  and  $558,000 of such loans under the recourse
provisions  of loan sales during the three and nine months ended  September  30,
1998 and 1997,  respectively.  As of  September  30,  1998,  $27,582,000  of the
Company's cash was restricted as credit  enhancement for certain  securitization
programs.  To date,  the Company has  participated  $10,240,000 of A&D and Other
Loans without recourse to the Company ($6,936,000 through December 31, 1997).

     The Company funds its loan purchases in part with borrowings  under various
lines of credit. Lines are paid down when the Company receives the proceeds from
the sale of the loans or when cash is otherwise available. These lines of credit
totaled  $116,000,000  at September 30, 1998 and December 31, 1997.  Outstanding
borrowings  on the lines of credit  were  $40,840,000  at  September  30,  1998.
Interest  rates on these lines of credit range from the Eurodollar or LIBOR rate
plus 2% to the prime rate plus 1.25%.  The  Company is not  required to maintain
compensating  balances  or forward  sales  commitments  under the terms of these
lines of credit.

     The Company also finances its loan  purchases  with two  revolving  line of
credit and sale facilities as part of asset backed  commercial  paper facilities
with multi-seller commercial paper issuers. Such facilities totaled $175,000,000
at September 30, 1998 and $150,000,000 at December 31, 1997. As of September 30,
1998 and December 31, 1997,  the  outstanding  balances of loans sold or pledged
under these facilities were $142,420,000 and $121,142,000,  respectively.  There
were no  outstanding  borrowings  under these lines of credit at  September  30,
1998.  Outstanding  borrowings  under  these  lines of credit  were  $169,000 at
December 31, 1997. Interest is payable on these lines of credit based on certain
commercial paper rates.

     In June 1998,  the Company issued  1,000,000  shares of common stock at $19
per share.  The net proceeds of the offering were  $17,695,000  and were used to
pay down certain lines of credit. In connection with the underwriters' option to
purchase  additional  shares to cover  over-allotments,  the  Company  issued an
additional  166,500  shares in July 1998.  Net proceeds of these shares  totaled
$2,990,000 and were also used to pay down certain lines of credit.

     The  Company  also  finances  its  liquidity  needs  with  long-term  debt.
Long-term debt totaled  $105,056,000  at September 30, 1998 and  $105,347,000 at
December 31, 1997.

     In September  of 1998,  the Company  redeemed a term note  payable  monthly
based  on  the  collection  of  the  underlying   collateral   resulting  in  an
extraordinary  loss of $77,000,  net of applicable  tax benefit of $48,000.  The
note was  collateralized by certain of the Company's  retained interests in loan
sales and cash.  The balance  outstanding on the note was $5,210,000 at December
31, 1997.

     In June 1997, the Company  entered into two interest rate swap  agreements.
The swap agreements  involve the payment of interest to the  counterparty at the
prime rate on a notional amount of  $110,000,000  and the receipt of interest at
the  commercial  paper  rate plus a spread  and the LIBOR  rate plus a spread on
notional  amounts  of  $80,000,000  and  $30,000,000,   respectively.  The  swap
agreements  expire in June 2000.  There is no exchange of the  notional  amounts
upon which interest payments are based.

     In June, 1994, the Company entered into an interest rate cap agreement with
a bank in order to manage its exposure to certain  increases in interest  rates.
The interest  rate cap  entitles  the Company to receive an amount,  based on an
amortizing  notional  amount,  which at September 30, 1998 was $3,860,000,  when
commercial paper rates exceed 8%. If payments were to be received as a result of
the cap agreement, they would be accrued as a reduction of interest expense.
This agreement expires in July 2003.

     Historically,  the Company has not required major capital  expenditures  to
support its operations.


Credit Quality and Allowances for Loan Losses

     The Company maintains  allowances for loan losses and recourse  obligations
on  retained  interests  in loan  sales  at  levels  which,  in the  opinion  of
management,  provide  adequately for current and estimated future losses on such
assets.  Past-due loans (loans 30 days or more past due which are not covered by
dealer/developer  reserves  and  guarantees)  as a  percentage  of the  Serviced
Portfolio  as of September  30, 1998,  decreased to 1.05% from 1.20% at December
31, 1997.  Management  evaluates  the adequacy of the  allowances on a quarterly
basis by examining current  delinquencies,  the characteristics of the accounts,
the value of the  underlying  collateral,  and general  economic  conditions and
trends.  Management also evaluates the extent to which dealer/developer reserves
and guarantees can be expected to absorb loan losses.  When the Company does not
receive guarantees on loan portfolios  purchased,  it adjusts its purchase price
to reflect  anticipated losses and its required yield. This purchase  adjustment
is recorded as an increase in the allowance for loan losses and is used only for
the respective  portfolio.  A provision for loan losses is recorded in an amount
deemed  sufficient by management to maintain the allowances at adequate  levels.
Total allowances for loan losses and recourse  obligations on retained interests
in loan sales  increased  to  $6,506,000  at  September  30,  1998  compared  to
$5,877,000 at December 31, 1997.  The allowance  ratio (the  allowances for loan
losses  divided by the amount of the Serviced  Portfolio)  at September 30, 1998
decreased to 1.56% from 1.93% at December 31, 1997  primarily as a result of the
increase in Hypothecation Loans as a percentage of the Serviced Portfolio.

     As part of the Company's  financing of Purchased  Loans,  arrangements  are
entered  into  with  dealers  and  resort   developers,   whereby  reserves  are
established to protect the Company from potential  losses  associated  with such
loans.  As  part  of  the  Company's  agreement  with  the  dealers  and  resort
developers,  a portion of the amount payable to each dealer and resort developer
for a Purchased  Loan is retained by the Company and is available to the Company
to absorb loan losses for those loans. The Company  negotiates the amount of the
reserves with the dealers and  developers  based upon various  criteria,  two of
which are the  financial  strength  of the dealer or  developer  and credit risk
associated with the loans being purchased. Dealer/developer reserves amounted to
$10,028,000  and  $10,655,000  at  September  30, 1998 and  December  31,  1997,
respectively.   The  Company  generally  returns  any  excess  reserves  to  the
dealer/developer  on a  quarterly  basis as the  related  loans  are  repaid  by
borrowers.


Year 2000 Compliance

     Many currently  installed  computer systems and software products are coded
to accept only two-digit  entries in the date code field and cannot  distinguish
21st  century  dates  from 20th  century  dates.  As a result,  many  companies'
software  and  computer  systems may need to be upgraded or replaced in order to
comply with "Year 2000" requirements.

     State of Readiness.  The Company is in the process of  evaluating  the year
2000 readiness of the information technology systems used in its operations ("IT
Systems")  and its non-IT  Systems,  such as building  security,  voice mail and
other systems.  The process consists of the following phases: (i) identification
of all IT Systems and non-IT  Systems;  (ii) assessment of repair or replacement
requirements; (iii) repair or replacement; (iv) testing; (v) implementation; and
(vi) creation of contingency plans in the event of year 2000 failures.

     The Company's  current  financial and accounting  software was installed in
October  1998,  and the supplier has informed the Company that such  software is
year 2000  compliant.  The Company  uses a third party  servicer to perform some
functions,  such as receipt and posting of loan  payments and other loan related
activity.  The third party  servicer  has  represented  to the Company  that its
systems are year 2000  compliant.  In addition,  the Company relies upon various
vendors,  governmental agencies,  utility companies,  telecommunication  service
companies,  delivery  service  companies  and other  service  providers  who are
outside of its control.  There is no assurance that such parties will not suffer
a year 2000 business  disruption,  which could have a material adverse effect on
the Company's financial condition and results of operations.

     During  1998,  the  Company  circulated  a  questionnaire  to  vendors  and
customers with whom the Company has material relationships to obtain information
about  year  2000  compliance.  Until  the  review  of these  questionnaires  is
completed,  the Company  will not be able to  effectively  evaluate  whether any
remediation  efforts are  necessary  with  respect to its IT Systems  (except as
described above) or non-IT Systems.

     Costs.  To date, the Company has not incurred any material  expenditures in
connection with identifying or evaluating year 2000 compliance  issues.  Most of
its expenses have related to the opportunity  cost of time spent by employees of
the Company  evaluating  year 2000  compliance  matters  generally.  The Company
believes that internally  generated funds or available cash should be sufficient
to cover the  projected  costs  associated  with any  modifications  to existing
software to make it year 2000  compliant.  However,  no assurances  can be given
that  such  modifications  can be made in a timely  and cost  effective  manner.
Failure to make timely modifications could, in a worse case scenario,  result in
the  inability to process  loans and loan related data and could have a material
adverse  effect on the Company.  At this time,  the Company does not possess the
information  necessary to estimate the potential  impact of year 2000 compliance
issues  relating to its other  IT-Systems,  non-IT  Systems,  its  vendors,  its
customers,  and other parties. Such impact,  including the effect of a year 2000
business  disruption,  could have a  material  adverse  effect on the  Company's
financial condition and results of operations.

     Contingency  Plan.  The Company has not yet developed a year  2000-specific
contingency  plan. If further year 2000 compliance  issues are  discovered,  the
Company then will evaluate the need for one or more  contingency  plans relating
to such issues.


Inflation

     Inflation  has not had a  significant  effect  on the  Company's  operating
results to date.























PART II - OTHER INFORMATION


Item 1.  Legal Proceedings

        None

Item 2.  Changes in Securities

        None

Item 3.  Defaults Upon Senior Securities

        None

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

        None



























<TABLE>



       Item 5.  Other Information
                    SUMMARY CONSOLIDATED FINANCIAL INFORMATION
                          (Dollars in thousands, except per share data)
<S>                     <C>       <C>       <C>        <C>       <C>       <C>       <C>
                                                           Nine Months Ended
                              Year Ended December 31,         September 30,
                         1997     1996       1995       1994      1993     1998      1997
                         ----     ----       ----       ----      ----     ----      ----
Statement of IncomeData (1):            
Revenues:
  Interest and fees  
on loans...............$ 19,374  $ 14,789  $ 11,392  $  5,669  $  4,330  $ 18,107  $ 14,354
  Gain on sale of    
loans..................   8,564     7,331     5,161      4,847    4,550     8,585     6,751
  Servicing and      
other fee income.......   1,753     1,576       908        459      501     1,699     1,256
                         ------    ------    ------     ------   ------    ------    ------
    Total revenues...    29,691    23,696    17,461     10,975    9,381    28,391    22,361
                         ------    ------    ------     ------   ------    ------    ------
Expenses:
  Interest expense...    10,675     7,197     6,138      3,158    2,717    10,115     7,775
  Salaries and       
employee benefits......   3,399     2,824      2,798     1,776    1,350     3,557     2,529
  Other operating
expenses...............   3,480     3,147      2,120     1,164    1,017     2,775     2,645
  Provision for 
loan losses............   1,400     1,954        890       559      620     1,170       979
                         ------    ------     ------    ------   ------    ------    ------  
      Total expenses...  18,954    15,122     11,946     6,657    5,704    17,617    13,928
                         ------    ------     ------    ------   ------    ------    ------
Income before
income taxes and 
  extraordinary item... 10,737      8,574       5,515     4,318   3,677    10,774    8,433
Provision for 
  income taxes.........  4,134      3,301       2,066     1,619   1,426     4,148    3,247
                        ------     ------      ------    ------  ------    ------    ------
Income before
extraordinary item.....  6,603      5,273       3,449     2,699   2,251     6,626    5,186
Extraordinary item (2)    (220)       ---         ---      (126)    ---       (77)     ---
                        ------      ------      ------   ------   ------    ------   ------
    Net income....... $  6,383   $  5,273    $  3,449  $  2,573 $ 2,251   $ 6,549  $  5,186
                        ======     ======       ======   ======  ======    ======    ======
Basic per common share amounts:
 Income before 
  extraordinary item...$  1.19   $    .97    $    .80  $    .66   $ .55    $ 1.09  $    .94
  Extraordinary item...   (.04)        --          --      (.03)     --      (.01)       --
                         ------      ----       ------   -------  ------  --------   ------
  Net income per
share..................$ 1.15    $    .97    $    .80  $    .63   $ .55    $ 1.08  $     .94   
                       =======    =======       ======    ======  ======   =======   =======
Basic weighted
 average number
  of shares
 outstanding...........5,572,465  5,441,636  4,315,469  4,116,684  4,065,688  6,083,183  5,545,497
Diluted per common
share amounts:
  Income before  
extraordinary item...  $ 1.12    $   .93     $   .76   $    .63   $ .53     $ 1.03  $     .88 
  Extraordinary item...  (.04)        --          --       (.03)     --       (.01)        --
                        ------      ----        ------   -------  ------    --------    ------
  Net income per    
share..................$ 1.08    $   .93     $   .76   $    .60   $ .53     $ 1.02  $     .88
                        =====       ====        ======   =======  ======    =========   =======          
Diluted weighted
average number
  of shares
outstanding............5,909,432  5,682,152  4,524,607  4,282,884  4,216,151  6,432,422  5,876,651
Cash dividends
 declared per 
  common  share........$  .06    $   .05     $   .04   $    .03    $ .02     $ --    $     --        

Other Statement of
Income Data:
Income before
 extraordinary item
 as a percentage
 of  revenues.......... 22.3%      22.3%       19.8%      24.6%    24.0%      23.4%       23.2%
Ratio of EBITDA to
 interest   expense (3)  2.17       2.90        2.44       3.31     2.81       2.13        2.16
Ratio of earnings 
to fixed charges(4)....  2.01       2.19        1.90       2.37     2.35       2.07        2.08
Return on average
assets (5).............  3.8%       4.0%        3.7%       4.6%     5.0%       3.9%        4.3% 
Return on average
equity (5)............. 14.1%      13.3%       16.6%      17.2%    17.0%      13.9%       14.9% 
----------
</TABLE>

(1) Certain  amounts in the 1993 through 1996  financial  information  have been
restated  to conform to the 1997 and 1998  presentation.  (2)  Reflects  loss on
early  extinguishment of a portion of the 1992 Notes (as defined herein), net of
applicable tax benefit of $76,000, for 1994, of the remainder of the 1992 Notes,
net of  applicable  tax  benefit  of  $138,000,  for 1997,  and of the term note
payable,  net  applicable  tax  benefit of $48,000,  for 1998.  (3) The ratio of
EBITDA to interest  expense is required to be  calculated  for the twelve  month
period immediately preceding each calculation date, pursuant to the terms of the
indentures to which the Company is subject. EBITDA is defined as earnings before
deduction of taxes, depreciation,  amortization, and interest expense (but after
deduction for any extraordinary item). (4) For purposes of calculating the ratio
of earnings to fixed charges, earnings consist of income before income taxes and
extraordinary items and fixed charges. Fixed charges consist of interest charges
and the  amortization  of debt  expense.  (5) The return on  average  assets and
average equity for the nine month periods are calculated on an annualized basis.
Calculations are based on income before extraordinary item.

        SUMMARY CONSOLIDATED FINANCIAL INFORMATION - (Continued)
              (Dollars in thousands, except per share data)
<TABLE>
<S>                     <C>        <C>       <C>       <C>        <C>       <C>
                                   December 31,               Sept. 30,
Balance Sheet Data (6):  1997       1996       1995      1994      1993      1998
 
Total assets..........$186,790   $152,689   $112,459   $63,487   $54,444   $252,594
Loans held for sale (7) 16,366     12,260     14,380    11,094     5,931     11,131
Other loans (7).......  86,307     79,996     33,613    15,790    10,306    155,694
Retained interests in 
loan sales (7)........  30,299     28,912     22,594    11,996    11,764     28,954 
Secured debt..........   5,387     43,727      9,836     5,823       --      42,340
Unsecured debt........ 105,347     46,995     47,401    29,896    32,302    105,056
Stockholders' equity..  52,071     42,448     37,396    16,610    14,722     79,787



                                                                          Nine Months
                                                                             Ended
                               Year Ended, December 31,                    Sept. 30,
Other Financial Data:    1997        1996      1995      1994      1993      1998
                        ------      ------     -----    -----      -----    -----
Loans purchased and  
originated (8)........$184,660   $133,750   $121,046  $ 59,798  $ 42,410   $256,861
Loans sold (8)........  98,747     54,936     65,115    40,116    28,099    103,356
Loans participated (8)   6,936        --         --        --       --        3,304
Serviced Portfolio (9) 304,102    242,445    176,650   105,013    84,360    417,455
Loans serviced for
others................ 179,790    129,619    111,117    72,731    59,720    232,272
Dealer/developer
reserves..............  10,655     10,628      9,644     6,575     4,926     10,028 
Allowance for loan 
losses (10)...........   5,877      4,528      3,715     1,264     1,064      6,506
Allowance ratio (11)..    1.93%      1.87%      2.10%     1.20%     1.26%      1.56%
Delinquency ratio (12)    1.20%      1.34%      1.73%      .93%      .61%      1.05%
Net charge-off ratio 
(8)(13)...............     .74%       .94%       .67%      .38%      .69%       .56%  
Non-performing asset
ratio (14)............    1.03%      1.57%      1.35%     1.02%     1.48%       .88%
----------
</TABLE>

(6) In 1997 the Company adopted Statement of Financial  Accounting Standards No.
    125,  "Accounting  for  Transfers  and  Servicing  of  Financial  Assets and
    Extinguishments of Liabilities."  Consequently,  certain amounts included in
    the 1993 through 1996 financial statements have been reclassified to conform
    with the 1997 and 1998 presentation: "Subordinated pass through certificates
    held to maturity,"  "Excess  servicing asset" and "Allowance for loans sold"
    have been  reclassified as "Retained  interests in loan sales." In addition,
    "Loans held for investment" have been reclassified as "Other loans."
(7) Amount  indicated is net of allowance for losses and recourse  obligation on
    retained interests in loan sales.
(8) During the relevant period.
(9) The Serviced Portfolio consists of the principal amount of loans serviced by
    or on behalf of the Company,  except loans participated  without recourse to
    the Company.
(10)The  allowance  for loan  losses  includes  allowance  for losses  under the
    recourse provisions of loans sold. See Note C to financial statements.
(11)The allowance  ratio is the allowances for loan losses divided by the amount
    of the Serviced Portfolio.
(12)The  delinquency  ratio is the  amount of  delinquent  loans  divided by the
    amount of the Serviced  Portfolio.  Delinquent  loans are those which are 30
    days or more past due which are not covered by dealer/developer  reserves or
    guarantees and not included in other real estate owned.
(13)The net  charge-off  ratio is  determined  by  dividing  the  amount  of net
    charge-offs for the period by the average Serviced Portfolio for the period.
    The September 30, 1998 amount is calculated on an annualized basis.
(14)The  non-performing  asset ratio is  determined  by dividing  the sum of the
    amount of those  loans  which  are 90 days or more  past due and other  real
    estate owned by the amount of the Serviced Portfolio.


<PAGE>



                                BUSINESS


Overview


     Litchfield  Financial  Corporation (the "Company") is a diversified finance
company  that  provides  financing  to  creditworthy  borrowers  for  assets not
typically  financed by banks.  The Company provides such financing by purchasing
consumer loans and by making loans to businesses secured by consumer receivables
or other assets.

     The Company  purchases  consumer loans (the "Purchased  Loans")  consisting
primarily of loans to purchasers of rural and vacation properties ("Land Loans")
and vacation ownership  interests  popularly known as timeshare  interests ("VOI
Loans").  The Company also provides  financing to rural land dealers,  timeshare
resort   developers   and  other  finance   companies   secured  by  receivables
("Hypothecation  Loans") and to dealers and developers for the  acquisition  and
development of rural land and timeshare resorts ("A&D Loans"). In addition,  the
Company purchases other loans, such as consumer home equity loans, mortgages and
construction  loans,  and  provides  financing  to other  businesses  secured by
receivables or other assets ("Other Loans").

     The principal  sources of the Company's  revenues are (i) interest and fees
on loans, (ii) gains on sales of loans and (iii) servicing and other fee income.
Gains on sales of loans are based on the  difference  between the allocated cost
basis of the assets sold and the  proceeds  received,  which  includes  the fair
value of any  assets or  liabilities  that are newly  created as a result of the
transaction.  Because  a  significant  portion  of  the  Company's  revenues  is
comprised of gains realized upon sales of loans,  the timing of such sales has a
significant effect on the Company's results of operations.



Characteristics of the Serviced Portfolio, Loan Purchases and
Originations


    The  following  table  shows the  growth in the  diversity  of the  Serviced
Portfolio  from  primarily   Purchased  Loans  to  a  mix  of  Purchased  Loans,
Hypothecation Loans, A&D Loans and Other Loans:

<TABLE>
<S>                     <C>     <C>      <C>    <C>     <C>     <C>
                                    December 31,                  Sept.
                                                                   30,
                         1997    1996    1995   1994    1993      1998
                        ------  ------  ------ ------  ------    -----
Purchased Loans..........56.6%   67.1%   81.6%  85.3%   89.0%    42.6%
Hypothecation Loans......26.9    20.7    12.5    9.0     5.0     34.0
A&D Loans................13.7     8.7     3.1    3.3     4.3     12.1
Other Loans...............2.8     3.5     2.8    2.4     1.7     11.3
                          ---   -----   -----  -----   -----     ----
          Total.........100.0%  100.0%  100.0% 100.0%  100.0%   100.0%
                        =====   =====   =====  =====   =====    =====
</TABLE>




     The  following  table shows the growth in the  diversity  of the  Company's
originations  from  primarily  Purchased  Loans  to a mix  of  Purchased  Loans,
Hypothecation Loans, A&D Loans and Other Loans:
<TABLE>
<S>                 <C>     <C>    <C>    <C>    <C>     <C>      <C>
                                                         Nine Months
                             Year Ended December 31,     Ended

                                                         Sept. 30,

                      1997   1996   1995   1994   1993    1997    1998
                     ------ ------ ------ ------ ------ ------   ------
Purchased Loans.....  30.3%  49.9%  71.4%  67.6%  77.8%   16.7%   34.4%
Hypothecation Loans.  37.1   29.6   20.9   22.2   11.8    48.5    34.6
A&D Loans...........  24.0   14.4    3.1    6.0    7.1    12.1    22.6
Other Loans.........   8.6    6.1    4.6    4.2    3.3    22.7     8.4
                     -----  -----  -----  -----  -----    ----    ----
Total..............  100.0% 100.0% 100.0% 100.0% 100.0%  100.0%  100.0%
                     =====  =====  =====  =====  =====   =====   =====

</TABLE>

   (1) Purchased Loans

    The Company provides indirect  financing to consumers through a large number
of  experienced  land  dealers  and resort  developers  from which it  regularly
purchases Land Loans and VOI Loans. The dealers and resort developers make loans
to consumers  generally  using the Company's  standard  forms and subject to the
Company's  underwriting criteria. The Company then purchases such loans from the
land  dealers  and  resort  developers  on an  individually  approved  basis  in
accordance with its credit guidelines.

    Each land dealer and resort developer from whom the Company  purchases loans
is interviewed by the Company and approved by its credit  committee.  Management
evaluates  each land  dealer's  and  resort  developer's  experience,  financial
statements and credit references and inspects a substantial  portion of the land
dealer's and resort developer's  inventory of land and VOIs prior to approval of
loan purchases.

    In order to  enhance  the  creditworthiness  of loans  purchased  from  land
dealers and resort  developers,  the Company typically requires land dealers and
resort  developers  to guarantee  payment of the loans and  typically  retains a
portion of the  amount  payable  by the  Company to each land  dealer and resort
developer on purchase of the loan. The retained portion, or reserve, is released
to the land dealer or resort developer as the related loan is repaid.

    Prior to  purchasing  Land Loans or VOI Loans,  the  Company  evaluates  the
credit and payment history of each borrower in accordance with it's underwriting
guidelines,  performs  borrower  interviews  on a sample of loans,  reviews  the
documentation  supporting the loans for  completeness and obtains an appropriate
opinion from local legal counsel.  The Company  purchases only those loans which
meet its credit standards.

    The Company also purchases  portfolios of seasoned loans primarily from land
dealers and resort developers.  The land dealers or resort developers  typically
guarantee  the loans  sold and the  Company  typically  withholds  a reserve  as
described above.  Management believes that the portfolio  acquisition program is
attractive to land dealers and resort  developers  because it provides them with
liquidity  to  purchase  additional   inventory.   The  Company  also  purchases
portfolios of seasoned loans from  financial  institutions  and others.  Sellers
generally do not guarantee  such loans,  but the Company sets aside a portion of
the purchase discount as an allowance for future loan losses.

    In evaluating  such  seasoned  portfolios,  the Company  conducts its normal
review  of  the  borrower's   documentation,   payment  history  and  underlying
collateral.  However,  the Company  may not always be able to reject  individual
loans.

    The Company's portfolio of Purchased Loans is secured by property located in
38 states.
<TABLE>
<S>                      <C>    <C>    <C>      <C>     <C>    <C>

                             Principal Amount of Loans
                                    December 31,                Sept.
                                                                 30,
                         1997    1996   1995    1994    1993    1998
                         ----    ----   ----    ----    ----    ----
   Southwest...............30%    26%    16%     19%     18%      31%
   South...................31     31     31      37      33       31
   West....................17     20     20       3       2       19
   Mid-Atlantic............10     10     16      16      17        8
   Northeast...............12     13     17      25      30       11
                           --     --     --      --      --      ---
        Total.............100%   100%   100%    100%    100%     100%
                          ===    ===    ===     ===     ===      ===
</TABLE>


      a. Land Loans

    Dealers  from  whom  the  Company   purchases   Land  Loans  are   typically
closely-held  firms with  annual  revenues  of less than $3.0  million.  Dealers
generally purchase large rural tracts (generally 100 or more acres) from farmers
or other owners and  subdivide  the property into one to twenty acre parcels for
resale  to  consumers.  Generally  the  subdivided  property  is  not  developed
significantly  beyond the  provision of graded  access  roads.  In  recreational
areas,  sales are made primarily to urban consumers who wish to use the property
for a vacation or retirement home or for recreational  purposes such as fishing,
hunting or  camping.  In other  rural  areas,  sales are more  commonly  made to
persons  who will  locate  a  manufactured  home on the  parcel.  The  aggregate
principal amount of Land Loans purchased from individual dealers during the nine
months ended September 30, 1998 varied significantly from a low of approximately
$6,300 to a high of  approximately  $4.7  million.  As of September 30, 1998 and
December 31, 1997, the five largest dealers  accounted for  approximately  21.1%
and  18.4%,  respectively,  of the  principal  amount  of the Land  Loans in the
Serviced  Portfolio.  No single dealer  accounted for more than 5.4% and 5.0% at
September 30, 1998 and at December 31, 1997.

    As  of  September  30,  1998  and  December  31,  1997,   37.6%  and  47.0%,
respectively,  of the Serviced  Portfolio  consisted of Land Loans.  The average
principal balance of such Land Loans was approximately $13,000 at both September
30, 1998 and December 31, 1997.  The following  table sets forth as of September
30, 1998 the distribution of Land Loans in the Company's Serviced Portfolio:
<TABLE>
<S>                   <C>              <C>        <C>         <C>

                                     Percentage of            Percentage of
Principal Balance       Principal       Principal  Number       Number of
                         Amount          Amount   of Loans       Loans
                         ------          ------    ------       ------
Less than $10,000.....$29,083,000         18.5%    5,586         46.3%
$10,000-$19,999........60,720,000         38.7     4,261         35.4
$20,000 and greater....67,288,000         42.8     2,210         18.3
                       ----------        -----     -----        -----
Total................$157,091,000        100.0%   12,057        100.0%
                       ==========        =====     =====        =====
</TABLE>

    As of  September  30,  1998  and  December  31,  1997,  the  weighted
average  interest  rate of the Land Loans  included  in the  Company's  Serviced
Portfolio was 12.1%. The weighted average  remaining  maturity was 12.0 and 12.1
years, respectively,  at September 30, 1998 and December 31, 1997. The following
table sets forth as of September  30, 1998 the  distribution  of interest  rates
payable on the Land Loans:
<TABLE>
<S>                                     <C>                  <C>
                                                            Percentage of
                                          Principal           Principal
Interest Rate                               Amount              Amount
Less than 12.0%........................$ 55,256,000            35.2%
12.0%-13.9%..............................77,018,000             49.0
14.0% and greater........................24,817,000             15.8
                                         ----------            -----
     Total.............................$157,091,000            100.0%
                                       ============            =====
</TABLE>


    As of September  30, 1998 and December 31,  1997,  the  Company's  Land Loan
borrowers  resided in 50  states,  the  District  of  Columbia  and nine and two
territories or foreign countries, respectively.


      b. VOI Loans

    The Company purchases VOI Loans from various resort developers.  The Company
generally  targets  small to medium size resorts with  completed  amenities  and
established property owners associations.  These resorts participate in programs
that  permit  purchasers  of VOIs to  exchange  their  timeshare  intervals  for
timeshare  intervals in other resorts  around the world.  During the nine months
ended September 30, 1998, the Company acquired  approximately  $1,712,000 of VOI
Loans.  As of  September  30,  1998 and  December  31,  1997,  the five  largest
developers  accounted for approximately  35.9% and 36.6%,  respectively,  of the
principal amount of the VOI Loans in the Serviced Portfolio. No single developer
accounted for more than 9.5% at September 30, 1998 or at December 31, 1997.

    As of September 30, 1998 and December 31, 1997, 5.0% and 9.6%, respectively,
of the Serviced Portfolio  consisted of VOI Loans. The average principal balance
of such VOI  Loans  was  approximately  $3,500  and  $3,600,  respectively.  The
following  table sets forth as of  September  30, 1998 the  distribution  of VOI
Loans:
<TABLE>
<S>                   <C>             <C>         <C>        <C>

                                     Percentage              Percentage
                                         of       Number of      of
Principal Balance        Principal     Principal   Loans      Number of
                           Amount       Amount                  Loans
                        ----------     -------    ------      ---------
Less than $4,000...... $ 8,026,000       38.4%    3,863         63.9%
$4,000-$5,999.........   7,190,000       34.4     1,446         23.9
$6,000 and greater....   5,668,000       27.2       737         12.2
                         ---------      -----      ----         ----
     Total............ $20,884,000      100.0%    6,046        100.0%
                       ===========      =====     =====        =====

</TABLE>




    As of  September  30, 1998 and  December  31,  1997,  the  weighted  average
interest rate of the VOI Loans included in the Company's  Serviced Portfolio was
14.6% and the weighted average  remaining  maturity was 3.7 years. The following
table sets forth as of September  30, 1998 the  distribution  of interest  rates
payable on the VOI Loans:
<TABLE>
<S>                                  <C>            <C>
                                                   Percentage of
                                       Principal     Principal
Interest Rate                            Amount       Amount
-------------                            ------     ----------
Less than 14.0%.................... $ 8,853,000       42.4%
14.0%-15.9%.......................... 5,058,000       24.2
16.0% and greater.................... 6,973,000       33.4
                                      ---------      -----
     Total......................... $20,884,000      100.0%
                                    ===========      =====
</TABLE>

      As of  September  30,  1998 and  December  31,  1997,  the  Company's  VOI
borrowers resided in 50 states, the District of Columbia and four territories or
foreign countries.


   (2) Hypothecation Loans

    The  Company  extends   Hypothecation  Loans  to  land  dealers  and  resort
developers and other businesses secured by receivables. The Company has expanded
its marketing of Hypothecation Loans to include loans to other finance companies
secured  by other  types of  collateral.  These  loans  may be  larger  than the
Company's average Hypothecation Loans and may provide the Company with an option
to take an  equity  position  in the  borrower.  During  the nine  months  ended
September  30,  1998,  the Company  extended or  acquired  approximately  $124.5
million of Hypothecation  Loans, of which $20.4 million,  or 16.4%, were secured
by Land Loans,  $62.6  million,  or 50.3%,  were  secured by VOI Loans and $41.5
million,  or 33.3%,  were secured by other types of collateral  such as tax lien
certificates, accounts receivable and mortgages.

    The Company typically extends  Hypothecation Loans based on advance rates of
75% to 90% of the eligible receivables which serve as collateral.  The Company's
Hypothecation Loans are typically made at variable rates based on the prime rate
of interest plus 2% to 4%. As of September  30, 1998 and December 31, 1997,  the
Company had $142.0 million and $81.9 million of Hypothecation Loans outstanding,
none of which were 30 days or more past due. During the three months ended March
31,  1998,  the Company  acquired a $17.0  million  participation  interest in a
Hypothecation  Loan from another financial  institution.  As planned,  in May of
1998, the Company  purchased the underlying  receivables,  which the Company has
reclassified  as Other Loans.  The proceeds of the  receivables  purchased  were
applied to pay off the Company's  participation interest. At September 30, 1998,
Hypothecation  Loans ranged in size from $4,400 to $18.2 million with an average
principal  balance of  $1,480,000.  At December  31, 1997,  Hypothecation  Loans
ranged  in  size  from  $7,800  to  $8.7  million  with an  average  balance  of
$1,204,000.  The five largest Hypothecation Loans represented 13.2% and 10.7% of
the  Serviced   Portfolio   at  September   30,  1998  and  December  31,  1997,
respectively.


  (3) A&D Loans

    The  Company  also  makes  A&D  Loans  to  dealers  and  developers  for the
acquisition and  development of rural and timeshare  resorts in order to finance
additional  receivables generated by the A&D Loans. During the nine months ended
September 30, 1998,  the Company made $31.1 million of A&D Loans to land dealers
and resort developers,  of which $12.2 million,  or 39.2%, were secured by land,
$18.9 million, or 60.8%, were secured by resorts under development.

    The Company  generally makes A&D Loans to land dealers and resort developers
based on loan to value ratios of 60% to 80% at variable rates based on the prime
rate plus 2% to 4%. As of September 30, 1998 and December 31, 1997,  the Company
had $50.3 million and $41.7  million,  respectively,  of A&D Loans  outstanding,
none of which were 30 days or more past due. At September  30, 1998 and December
31, 1997, A&D Loans were secured by timeshare resort developments and rural land
subdivisions  in 19 states and one  territory  and 18 states and one  territory,
respectively.  A&D  Loans  ranged in size from  $1,700 to $8.8  million  with an
average principal balance of $661,000 at September 30, 1998. A&D Loans ranged in
size from $7,800 to $7.3 million with an average  principal  balance of $622,000
at December 31, 1997. The five largest A&D Loans  represented  4.8% and 6.1%, of
the  Serviced   Portfolio   at  September   30,  1998  and  December  31,  1997,
respectively.

  (4) Other Loans

    At September  30, 1998,  Other Loans  consisted  primarily of consumer  home
equity,  mortgage and construction loans,  builder  construction loans and other
secured commercial loans. Historically, the Company has made or acquired certain
other secured and unsecured loans to identify  additional lending  opportunities
or lines of business for possible future  expansion as it did with VOI Loans and
Hypothecation  Loans.  In  May  of  1998,  the  Company  purchased  232  builder
construction  loans totaling  $32.7  million,  a portion of which had previously
been  collateral  for  the  Hypothecation  Loan in  which  the  Company  owned a
participation  interest.  At  September  30,  1998,  the  Company had 187 of the
builder construction loans totaling $32.2 million. The Company had $47.2 million
and $8.5 million of Other  Loans,  1.21% and 1.97% of which were 90 days or more
past due at September 30, 1998 and December 31, 1997, respectively. At September
30,  1998,  Other Loans  ranged in size from less than $500 to $868,600  with an
average principal  balance of $63,500.  At December 31, 1997, Other Loans ranged
in size from less than $500 to  $151,000  with an average  principal  balance of
$13,800.  The five largest Other Loans  represent  0.9% and 0.2% of the Serviced
Portfolio at September 30, 1998 and December 31, 1997, respectively.

Loan Underwriting

    The  Company has  established  loan  underwriting  criteria  and  procedures
designed  to  reduce  credit  losses  on  its  Serviced   Portfolio.   The  loan
underwriting  process  includes  reviewing each borrower's  credit  history.  In
addition,   the  Company's   underwriting  staff  routinely  conducts  telephone
interviews  with a sample  of  borrowers.  The  primary  focus of the  Company's
underwriting  is to assess the likelihood  that the borrower will repay the loan
as agreed by examining the borrower's  credit history  through credit  reporting
bureaus.

    The  Company's  loan policy is to purchase Land and VOI Loans from $3,000 to
$50,000. On a case by case basis, the Company will also consider purchasing such
loans in excess of $50,000.  As of September 30, 1998,  the Company had 158 Land
Loans  exceeding  $50,000  representing  0.8% of the number of such loans in the
Serviced  Portfolio,  for a total  of $11.3  million.  There  were no VOI  Loans
exceeding  $50,000  as  of  September  30,  1998.  The  Company  will  originate
Hypothecation Loans up to $15 million and A&D Loans up to $10 million. From time
to time, the Company may have an opportunity to originate  larger  Hypothecation
Loans or A&D Loans in which  case the  Company  would seek to  participate  such
loans  with  other  financial  institutions.  Construction  Loans  greater  than
$200,000  and any other  loans  greater  than  $100,000  must be approved by the
Credit  Committee which is comprised of the Chief Executive  Officer,  Executive
Vice President, Chief Financial Officer and two Senior Vice Presidents.

Collections and Delinquencies

    Management  believes  that  the  relatively  low  delinquency  rate  for the
Serviced  Portfolio  is  attributable   primarily  to  the  application  of  its
underwriting  criteria,  as well as to dealer  guarantees and reserves  withheld
from dealers and  developers.  No assurance can be given that these  delinquency
rates can be maintained in the future.

    Collection  efforts are managed and  delinquency  information is analyzed at
the Company's headquarters.  Unless circumstances otherwise dictate, collections
are  generally  made by mail and  telephone.  Collection  efforts  begin when an
account  is seven  days past due,  at which  time the  Company  sends out a late
notice.  When an account is  fifteen  days past due,  the  Company  attempts  to
contact the borrower to determine the reason for the  delinquency and to attempt
to cause the account to become current.  If the status of the account  continues
to deteriorate,  an analysis of that delinquency is undertaken by the collection
manager to determine the appropriate  action.  When the loan is 90 days past due
in  accordance  with its original  terms and it is  determined  that the amounts
cannot be collected  from the dealer or developer  guarantees  or reserves,  the
loan is  generally  placed on a  nonaccrual  status and the  collection  manager
determines  the  action  to be  taken.  The  determination  of how to work out a
delinquent  loan is based upon many factors,  including the  borrower's  payment
history and the reason for the current inability to make timely payments. When a
guaranteed loan becomes 60 days (90 days in some cases) past due, in addition to
the  Company's  collection   procedures,   the  Company  generally  obtains  the
assistance of the dealer or developer in collecting the loan.

    The  Company  extends a limited  number of its loans for reasons the Company
considers acceptable such as temporary loss of employment or serious illness. In
order to qualify  for a one to three month  extension,  the  customer  must make
three timely payments without any intervention from the Company.  For extensions
of four to six  months,  the  customer  must make four to six  timely  payments,
respectively,  without any intervention  from the Company.  The Company will not
extend a loan more than two times for an  aggregate  six months over the life of
the loan.  The  Company has  extended  approximately  1.0% of its loans  through
September 30, 1998.  The Company does not generally  modify any other loan terms
such as interest rates or payment amounts.

    Regulations  and practices  regarding the rights of the mortgagor in default
vary greatly from state to state. To the extent permitted by applicable law, the
Company collects late charges and  return-check  fees and records these items as
additional  revenue.  Only if a delinquency  cannot  otherwise be cured will the
Company decide that  foreclosure  is the  appropriate  course of action.  If the
Company  determines  that  purchasing a property  securing a mortgage  loan will
minimize the loss  associated with such defaulted loan, the Company may accept a
deed in lieu of foreclosure, take legal action to collect on the underlying note
or bid at the foreclosure sale for such property.



    Serviced Portfolio


    The following table shows the Company's delinquencies and delinquency rates,
net of dealer/developer reserves and guarantees for the Serviced Portfolio:
<TABLE>
<S>           <C>           <C>           <C>             <C>         <C>            <C>
                                                                                        Nine
                                                                                       Months
                                                                                       Ended
                            Year Ended December 31,                                   Sept. 30,
                  1997            1996         1995          1994         1993          1998
Serviced 
Portfolio......$304,102,000  $242,445,000  $176,650,000  $105,013,000  $84,360,000  $417,455,000
Delinquent
loans(1).......   3,642,000     3,255,000     3,062,000       981,000      511,000     4,373,000
Delinquency
as a
Percentage of
  Serviced
Portfolio......       1.20%          1.34%         1.73%          .93%         .61%         1.05%
----------
</TABLE>

(1)Delinquent  loans are those  which are 30 days or more past due which are not
   covered by dealer/developer  reserves or guarantees and not included in other
   real estate owned.



Land Loans


    The following table shows the Company's delinquencies and delinquency rates,
net of  dealer/developer  reserves and guarantees for Land Loans in the Serviced
Portfolio:
<TABLE>
<S>            <C>         <C>          <C>          <C>        <C>          <C> 
                                                                              Nine
                                                                             Months
                                                                              Ended
                              Year Ended December 31,                       Sept. 30,
                   1997        1996         1995       1994       1993         1998
                ---------   ---------    ----------  -------    -------       -------
Land Loans in
  Serviced
Portfolio.....$142,828,000 $119,370,000 $97,266,000 $90,502,000 $77,258,000 $157,091,000  
Delinquent Land
  Loans(1).....  2,453,000    1,920,000   1,059,000     981,000     511,000    3,056,000
Delinquency as
a
  Percentage of
  Land Loans in
  Serviced
Portfolio......      1.72%        1.61%       1.09%        1.08%       .66%         1.95% 
----------
</TABLE>

(1)Delinquent  loans are those  which are 30 days or more past due which are not
   covered by dealer/developer  reserves or guarantees and not included in other
   real estate owned.






VOI Loans

    The following table shows the Company's delinquencies and delinquency rates,
net of  dealer/developer  reserves and  guarantees for VOI Loans in the Serviced
Portfolio:
<TABLE>
<S>              <C>          <C>          <C>         <C>         <C>        <C>
                                       Nine
                                      Months
                                      Ended
                              Year Ended December 31,                         Sept. 30,
                    1997        1996         1995        1994        1993        1998
                   -----        -----        -----      -----        -----    ---------
VOI Loans in
Serviced 
  Portfolio.... $29,232,000  $43,284,000  $46,700,000  $2,851,000  $1,434,000  $20,884,000
Delinquent VOI
  Loans(1).....     739,000    1,316,000    1,958,000       --          --         394,000
Delinquency as a
  percentage of
VOI
  Loans in
Serviced
  Portfolio....       2.53%        3.04%         4.19%       --         --            1.89%
----------
</TABLE>

(1)Delinquent  loans are those  which are 30 days or more past due which are not
   covered by dealer/developer  reserves or guarantees and not included in other
   real estate owned.

   Hypothecation, A&D and Other Loans

    The Company did not have any delinquent Hypothecation Loans or A&D Loans for
the years ended  December  31, 1993  through  December  31, 1997 or for the nine
months ended Sept.  30, 1998.  The Company did not have  significant  amounts of
delinquent  Other Loans for the years ended  December 31, 1993 through  December
31, 1996. At December 31, 1997,  there were $8.5 million of Other Loans of which
$450,000   or  5.3%  were  30  days  or  more  past  due  and  not   covered  by
dealer/developer  reserves or  guarantees  and not included in other real estate
owned.  At September 30, 1998,  there were $47.2 million of Other Loans of which
$924,000   or  2.0%  were  30  days  or  more  past  due  and  not   covered  by
dealer/developer  reserves or  guarantees  and not included in other real estate
owned.

Allowance for Loan Losses, Net Charge-offs and Dealer Reserves

    The following is an analysis of the total allowances for all loan losses:
<TABLE>
<S>                 <C>         <C>        <C>         <C>         <C>       <C>
                                             Nine
                                            Months
                                            Ended
                                    Year Ended December 31,                  Sept. 30,
                      1997        1996        1995       1994        1993      1998
                     ------      ------      ------     ------      ------    ------
Allowance,
beginning of 
  year.............$4,528,000  $3,715,000  $1,264,000 $1,064,000   $ 498,000 $5,877,000
Provision for
loan losses........ 1,400,000   1,954,000     890,000    559,000     620,000  1,170,000
Net charge-offs of
  uncollectible
accounts...........(2,010,000) (1,965,000    (946,000)  (359,000)   (493,000)(1,505,000)
Allocation of
purchase 
  adjustment(1).... 1,959,000     824,000   2,507,000     ---        439,000    964,000  
Allowance, end of 
year...............$5,877,000  $4,528,000  $3,715,000  $1,264,000 $1,064,000  $6,506,000      
----------
</TABLE>

(1)Represents  allocation of purchase  adjustment related to purchase of certain
   nonguaranteed loans.

    The following is an analysis of net charge-offs by major loan and collateral
types experienced by the Company:
<TABLE>
<S>                    <C>       <C>       <C>      <C>      <C>         <C>
                                                                          Nine
                                                                         Months
                                                                         Ended
                                    Year Ended December 31,             Sept.30,
                          1997       1996     1995     1994     1993      1998
                         ------    -------  -------  -------   -------  -------
Land Loans............. $986,000 $  669,000 $546,000 $359,000 $493,000   $861,000
VOI Loans..............  939,000  1,284,000   45,000      --       --     460,000
Hypothecation Loans....       --         --       --      --       --         --
A&D Loans..............   (2,000)    (8,000) 352,000      --       --         --
Other Loans............   87,000     20,000    3,000      --       --     184,000
Total net charge-offs.$2,010,000$ 1,965,000 $946,000 $359,000 $493,000 $1,505,000
Net charge-offs as a
percentage
  of the average
Serviced Portfolio.....     .74%       .94%     .67%     .38%     .69%       .56% 
</TABLE>

    As part of the Company's  financing of Land Loans and VOI Loans, the Company
enters into arrangements  with most land dealers and resort  developers  whereby
the Company  establishes  reserves to protect the Company from potential  losses
associated with such loans.  The Company retains a portion of the amount payable
to a dealer  when  purchasing  a Land  Loan or a VOI  Loan  and uses the  amount
retained  to absorb  loan  losses.  The  Company  negotiates  the  amount of the
reserves  with the  land  dealers  and  resort  developers  based  upon  various
criteria,  two of which are the financial  strength of the land dealer or resort
developer and the credit risk associated with the loans being purchased.  Dealer
reserves for Land Loans were  $6,420,000,  $7,555,000 and $8,321,000 at December
31, 1995,  1996 and 1997,  respectively,  and  $8,269,000 at September 30, 1998.
Developer  reserves  for  VOI  Loans  amounted  to  $3,224,000,  $3,072,000  and
$2,299,000 at December 31, 1995, 1996 and 1997, respectively,  and $1,759,000 at
September  30, 1998.  Most dealers and  developers  provide  personal  and, when
relevant, corporate guarantees to further protect the Company from loss.


Loan Servicing and Sales

    The  Company  retains  the right to service  all the loans it  purchases  or
originates.  Servicing includes  collecting  payments from borrowers,  remitting
payments to investors who have purchased the loans, accounting for principal and
interest,  contacting  delinquent  borrowers  and  supervising  foreclosure  and
bankruptcies in the event of unremedied  defaults.  Substantially  all servicing
results  from the  origination  and  purchase of loans by the  Company,  and the
Company  has  not  historically   purchased  loan  servicing  rights  except  in
connection with the purchase of loans. Servicing rates generally approximate .5%
to 2% of the principal balance of a loan.

    Historically,  the Company  subcontracted  the  servicing of its loans to an
unaffiliated  third party. In July 1998, the Company  resumed  certain  customer
service and collection functions.  The unaffiliated third party will continue to
provide certain data processing and payment  processing  functions.  The Company
retains responsibility for servicing all loans as a master servicer.

    In  1990,  the  Company  began  privately  placing  issues  of  pass-through
certificates  evidencing an undivided  beneficial ownership interest in pools of
mortgage loans which have been transferred to trusts.  The principal and part of
the interest payments on the loans transferred to the trust are collected by the
Company, as the servicer of the loan pool, remitted to the trust for the benefit
of the  investors,  and then  distributed  by the trust to the  investors in the
pass-through certificates.
    As of  September  30,1998,  the Company had sold or  securitized  a total of
approximately  $451.6  million in loans.  In certain of the Company's  issues of
pass-through certificates, credit enhancement was achieved by dividing the issue
into a senior portion which was sold to the investors and a subordinated portion
which was retained by the Company.  In certain  other of the  Company's  private
placements,   credit  enhancement  was  achieved  through  cash  collateral.  If
borrowers  default  in the  payment  of  principal  or  interest  on  the  loans
underlying these issues of pass-through  certificates,  losses would be absorbed
first by the  subordinated  portion or cash collateral  account  retained by the
Company and might, therefore,  have to be charged against the allowance for loan
losses to the extent dealer guarantees and reserves are not available.

    The  Company  also has a $150.0  million  revolving  line of credit and sale
facility for its land loans as part of an asset backed commercial paper facility
with a multi-seller commercial paper conduit. The facility expires in June 2001.
As of September 30, 1998, the  outstanding  balance of the sold or pledged loans
securing  this  facility  was $131.4  million.  The  Company  has an  additional
revolving  line of  credit  and sale  facility  of $25.0  million  with  another
multi-seller commercial paper conduit. The facility expires in March 2000. As of
September 30, 1998, the  outstanding  aggregate  balance of the sold loans under
the facility was $11.0 million.

Marketing and Advertising

    The Company markets its program to rural land dealers and resort  developers
through  brokers,  referrals,  dealer and developer  solicitation,  and targeted
direct mail. The Company employs three marketing  executives  based in Lakewood,
Colorado,  five marketing executives based in Williamstown,  Massachusetts,  one
marketing  executive in Atlanta,  Georgia and two marketing  executives based in
Hoover,  Alabama.  In the last five years the Company has closed loans with over
300 different dealers and developers.

    Management  believes that the Company  benefits from name  recognition  as a
result of its referral,  advertising and other marketing efforts. Referrals have
been the  strongest  source of new business for the Company and are generated in
the states in which the  Company  operates by dealers,  brokers,  attorneys  and
financial  institutions.  Management and marketing  representatives also conduct
seminars for dealers and brokers and attend trade shows to improve awareness and
understanding of the Company's programs.

Regulation

    The Company is licensed as a lender,  mortgage  banker or mortgage broker in
22 of the states in which it operates,  and in those states its  operations  are
subject to supervision by state authorities (typically state banking or consumer
credit authorities). Expansion into other states may be dependent upon a finding
of financial  responsibility,  character  and fitness of the Company and various
other  matters.   The  Company  is  generally  subject  to  state   regulations,
examination  and reporting  requirements,  and licenses are revocable for cause.
The  Company  is  subject  to state  usury laws in all of the states in which it
operates.

    The consumer  loans  purchased or financed by the Company are subject to the
Truth-in-Lending Act. The Truth-in-Lending Act contains disclosure  requirements
designed to provide  consumers  with uniform,  understandable  information  with
respect to the terms and conditions of loans and credit transactions in order to
give them the  ability  to compare  credit  terms.  Failure  to comply  with the
requirements  of the  Truth-in-Lending  Act may give rise to a limited  right of
rescission on the part of the borrower.  The Company  believes that its purchase
or financing  activities are in substantial  compliance in all material respects
with the Truth-in-Lending Act.

    Origination  of the loans also  requires  compliance  with the Equal  Credit
Opportunity Act of 1974, as amended  ("ECOA"),  which  prohibits  creditors from
discriminating  against  applicants  on the basis of race,  color,  sex,  age or
marital  status.  Regulation B promulgated  under ECOA restricts  creditors from
obtaining  certain types of information from loan  applicants.  It also requires
certain disclosures by the lender regarding consumer rights and requires lenders
to advise  applicants of the reasons for any credit denial.  In instances  where
the  applicant  is denied  credit or the interest  rate  charged  increases as a
result of information  obtained from a consumer credit agency,  another statute,
the Fair  Credit  Reporting  Act of 1970,  as amended,  requires  the lenders to
supply the applicant with a name and address of the reporting agency.

Competition

    The  finance  business is highly  competitive,  with  competition  occurring
primarily on the basis of customer service and the term and interest rate of the
loans. Traditional competitors in the finance business include commercial banks,
credit  unions,   thrift  institutions,   industrial  banks  and  other  finance
companies,  many of which have  considerably  greater  financial,  technical and
marketing resources than the Company. There can be no assurance that the Company
will not face increased competition from existing or new financial  institutions
or finance companies.  In addition,  the Company may enter new lines of business
that may be highly  competitive and may have competitors with greater  financial
resources than the Company.

    The Company believes that it competes on the basis of providing  competitive
rates and prompt,  efficient and complete service,  and by emphasizing  customer
service  on a timely  basis to  attract  borrowers  whose  needs  are not met by
traditional financial institutions.

Employees

    As  of  September  30,  1998,  the  Company  had  103  full-time  equivalent
employees. None of the Company's employees is covered by a collective bargaining
agreement. The Company considers its relations with its employees to be good.

Facilities

    The Company owns a leasehold interest in approximately 26,000 square feet of
office  space in  Williamstown,  Massachusetts,  which is used as the  Company's
headquarters.  The  initial  ten  year  lease  term  expires  in May 2007 and is
renewable at the  Company's  option for two  additional  ten year  periods.  The
initial land lease  provides for an annual  rental of $20,000.  The Company also
occupies an  aggregate  of  approximately  5,100  square feet of office space in
Lakewood, Colorado, pursuant to a lease expiring in January 2001, with an option
to renew until 2004,  providing for an annual rental of  approximately  $56,000,
including  utilities  and exterior  maintenance  expenses.  A subsidiary  of the
Company occupies an aggregate of approximately 6,100 square feet of office space
in Hoover, Alabama, pursuant to a lease expiring in December 1999, providing for
an annual rental of approximately $60,000.

Item 6.   Exhibits

        The following exhibits are filed herewith:

               10.178   Amendment  No.  1 to  Indenture  of  Trust  dated
                     September  1,  1998,  dated  as  of  June  1,  1998,
                     between  Litchfield  Hypothecation  Corp. 1998-A and
                     The Chase Manhattan Bank.

               10.179Participation  Agreement  dated as of  September  9,  1998,
                     between the Company and The Brattleboro Savings & Loan.

               10.180Note  Purchase  Agreement  dated as of  September  17, 1998
                     among the Company, Litchfield Hypothecation Corporation and
                     BankBoston.

                10.181 Limited Guarantee dated as of September 17, 1998, between
                     the Company and BankBoston.

                11.1 Statement re: computation of earnings per share

                27.1 Financial Data Schedule




<PAGE>



                                                          FORM 10-Q




                            SIGNATURES

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


                                  LITCHFIELD FINANCIAL CORPORATION




DATE:  November 12, 1998               /s/ Richard A. Stratton
                                       -----------------------

                                  RICHARD A. STRATTON
                                  Chief Executive Officer,
                                  President and Director





DATE:  November 12, 1998               /s/ Ronald E. Rabidou
                                       ---------------------

                                  RONALD E. RABIDOU
                                  Chief Financial Officer



















                                                     Exhibit 10.178

      AMENDMENT  NO. 1 TO  INDENTURE  OF TRUST (this  "Amendment"),  dated as of
September 1, 1998,  by and between  LITCHFIELD  HYPOTHECATION  CORP.  1998-A,  a
corporation  organized  under the laws of the State of Delaware (the  "Issuer"),
and THE  CHASE  MANHATTAN  BANK,  a New York  banking  corporation,  as  trustee
(together with its permitted successors in the trusts hereunder, the "Trustee").


                        W I T N E S S E T H:


           WHEREAS,  the Issuer and the Trustee are parties to an  Indenture  of
Trust (the "Indenture"),  dated as of June 1, 1998 providing for the issuance by
the Issuer from time to time of its Hypothecation Loan  Collateralized  Notes in
an   aggregate   outstanding   principal   amount  not  to  exceed   $30,000,000
(collectively, the "Notes");

WHEREAS, pursuant to the  Indenture , the Issuer has pledged and assigned all of
       the Issuer's right,  title and interest in and to the Trust Estate to the
       Trustee as security for the Notes;

           WHEREAS,  on the Closing Date, the Issuer issued Series A Notes in an
initial aggregate  principal amount of $10,027,636.73  which Series A Notes were
authenticated and delivered by the Trustee to the Purchaser;

           WHEREAS,  the Issuer desires to issue additional Series A Notes in an
initial aggregate  principal amount of $2,121,981.93  (the "Additional  Series A
Notes") and to authorize the Trustee to authenticate  and deliver the Additional
Series A Notes to the Purchaser;

    WHEREAS,  as security for the Additional  Series A Notes and all other Notes
now or from time to time hereafter outstanding, the Issuer desires to pledge and
assign the  additional  loans  specified  on Schedule A hereto (the  "Additional
Loans") and the Loan  Collateral and related  assets (but  excluding  Unassigned
Rights)  relating to the  Additional  Loans to the Trustee as additional  assets
comprising the Trust Estate;

           WHEREAS, the Purchaser and Litchfield Financial  Corporation,  as the
Holders of 100% of the aggregate  outstanding  principal  amount of the Notes on
the date hereof have  consented to the execution and delivery of this  Amendment
by the parties hereto;

           NOW,   THEREFORE,   in  consideration  of  the  premises  and  mutual
agreements set forth herein, and for other good and valuable consideration,  the
receipt and  sufficiency  of which are hereby  acknowledged,  the Issuer and the
Trustee agree as follows:

      1.  Amendments.  (a) Schedule 1 to the Indenture is hereby
amended and restated in its entirety by the revised Schedule 1
attached hereto as Exhibit A, and all references to Schedule 1 in
the Indenture and Appendix A incorporated by reference therein
shall refer to Schedule 1 as so amended and restated.

      (b) The  Indenture  is  further  amended  to  provide  that each and every
Additional  Loan shall be deemed a "Loan" for all purposes of the  Indenture and
Appendix A incorporated by reference  therein and all references to a "Loan" and
the "Loans" in the Indenture and Appendix A  incorporated  by reference  therein
shall include each Additional Loan.

      (c)  Appendix A as incorporated by reference into the
Indenture is hereby amended by the addition of the term "Second
Closing Date" as follows: "Second Closing Date" shall mean
September 17, 1998."

      (d) Clause  (iii) of the  definition  of "List of Loans" in  Appendix A as
incorporated  by reference  into the Indenture is hereby amended by the addition
of the  following at the end thereof : "(or , with respect to Loans  contributed
to the Trust Estate after the Closing Date,  the first day of the month in which
such Loans are contributed to the Trust Estate)."

      (e) Section 2.1 of the Indenture is hereby  amended by the addition of the
following  sentence at the end  thereof:  "The Trustee is hereby  authorized  to
authenticate  and deliver to the  Purchaser on the Second  Closing Date Series A
Notes in the initial principal amount of $2,121,981.93.

      (f) Clause  (b)(i) of Section 2.9 of the  Indenture  is hereby  amended to
read as  follows:  "June 29,  1998 in the case of the Series A Notes  issued and
authenticated  on the  Closing  Date and  September  9,  1998 in the case of the
Series A Notes issued and authenticated on the Second Closing Date.

      2.  Further Agreements.  The parties each agree to execute
and deliver to the other such reasonable and appropriate
additional documents, instruments or agreements as may be
necessary or appropriate to effectuate the purposes of this
Amendment.

      3.  Costs and Expenses.  The Issuer shall reimburse the
Trustee for the reasonable costs and expenses, including costs
and expenses of counsel, incurred by Trustee in connection with
this Amendment.

      4. Indenture in Full Force and Effect. The amendments set forth herein are
limited  precisely  as  written  and shall not be deemed to (i) modify any other
term or condition of the Indenture or (ii)  prejudice any right the  Noteholders
may have  now or in the  future  under or in  connection  with  the  Notes,  the
Indenture or any related  document or  agreement.  Except as  expressly  amended
hereby, the Indenture shall remain unchanged and in full force and effect.

      5.  Effect of Headings.  The section headings herein are for
convenience only and shall not affect the construction hereof.

      6.  Successors and Assigns.  All covenants and agreements in
this Amendment by the Issuer shall bind its successors and
assigns, whether so expressed or not.

      7.  Severability.  In case any provision in this Amendment
shall be invalid, illegal or unenforceable, the validity,
legality and enforceability of the remaining provisions shall not
in any way be affected or impaired thereby.
      8.   Governing Law.  This Amendment shall be construed in
accordance  with and  governed  by the laws of the  State of New  York,  without
regard to the conflict-of-law provisions thereof.

      9.   Counterparts.  This Amendment may be executed in any
number of counterparts, each of which so executed shall be deemed
to be an original, but all such counterparts shall together
constitute but one and the same instrument.

       IN WITNESS WHEREOF, the Issuer and the Trustee have caused
                        this Amendment to be duly
executed by their duly  authorized  officers  all as of the day and
year first above written.


                               THE CHASE MANHATTAN BANK,
                               as Trustee

                               By:    Cynthia A. Kerpen
                               Title: Assistant Vice President
Title: ________________________________________

                               LITCHFIELD HYPOTHECATION CORP.
1998-A

                               By:     Heather A. Sica
                               Title:  Executive Vice President
























                                                     Exhibit 10.179
                      PARTICIPATION AGREEMENT

   THIS  PARTICIPATION  AGREEMENT  is  made  effective  as of  the  9th  day  of
September, 1998 by and between LITCHFIELD FINANCIAL CORPORATION, a Massachusetts
corporation  with a usual place of business  at 430 Main  Street,  Williamstown,
Massachusetts  01267  ("Lender")  and THE  BRATTLEBORO  SAVINGS & LOAN,  F.A., a
Vermont banking  institution  with a usual place of business at 221 Main Street,
Brattleboro, Vermont 05302 ("Participant").


                            BACKGROUND

            I.  Lender  has  originated  and now holds the  hypothecation  loans
         specified  on  Schedule A hereto  (the  "Hypothecation  Loans") and the
         acquisition and development  loans specified on Schedule B hereto ( the
         "A&D  Loans,"  and  collectively  with  the  Hypothecation  Loans,  the
         "Loans").

      II. Lender is willing to sell to Participant and Participant is willing to
purchase  from Lender a  participation  interest in the Loans,  on the terms and
conditions set forth in this Agreement.

      NOW, THEREFORE,  in consideration of the mutual covenants herein contained
and  other  good and  valuable  consideration,  the  receipt  of which is hereby
acknowledged, Lender and Participant hereby agree as follows:

      1.   Definitions.  When used in this Agreement, the
following terms shall have the following meanings:

           "Borrowers" shall mean each of the obligors under the
Loans.

           "Closing Date" shall mean September 9, 1998.

           "Collateral"  shall mean any and all real and/or  personal  property,
pledged,  assigned or delivered to Lender as security for any  obligation  under
the Loans or pursuant to any of the Loan Documents.

           "Cut-off Date" shall mean August 27, 1998.

           "Guarantors" shall mean any guarantor of any obligation
pursuant to any of the Loan Documents.

        "Interest  Period" shall mean the number of days between the due date of
the immediately preceding payment (or, in the case of the first payment received
subsequent  to the  Cut-off  Date,  the  Cut-off  Date)  and the due date of the
current payment.

           "LIBOR"  shall mean the rate  published  in The Wall  Street  Journal
under  "Money  Rates" as the  average of the  interbank  offered  rates for U.S.
Dollar deposits in the London interbank market for a term of one month, based on
quotations at 5 major banks.

           "Loan Documents" shall mean the documents evidencing or
securing the Loans.

           "Participant's  Interest  Rate"  shall  mean (i) with  respect to the
Hypothecation  Loans,  a per annum  rate equal to LIBOR plus 2.10% and (ii) with
respect to the A&D Loans a per annum rate equal to the Prime Rate plus 5.0%.

           "Participant's  Interest  Share"  shall mean (i) with  respect to the
Hypothecation  Loans,  an undivided one hundred  percent (100%) interest in each
interest  payment  collected  under or in connection with the Loan subsequent to
the Cut-off  Date and (ii) with respect to the A&D Loans,  an  undivided  eighty
percent (80%) interest in each interest payment collected under or in connection
with the Loan  subsequent  to the Cut-off  Date, in each case to the extent that
(a) such payment represents interest accrued subsequent to the Cut-off Date; and
(b) Participant's  share of such payment will not exceed interest calculated (1)
at Participant's  Interest Rate; (2) for the applicable  Interest Period; (3) on
Participant's  Principal Balance  outstanding at the beginning of the applicable
Interest Period.

           "Participant's  Principal Balance" shall mean (i) with respect to the
Hypothecation  Loans an  aggregate of  $1,402,981.68  as of the Cut-off Date and
(ii) with respect to the A&D Loans an aggregate of $472,220.86 as of the Cut-off
Date,  in each case as the same may be  reduced  from time to time by payment of
Participant's Principal Share, as hereinafter defined.

           "Participant's  Principal  Share"  shall mean (i) with respect to the
Hypothecation  Loans,  one  hundred  percent  (100%) of all  principal  payments
collected  under or in connection  with the Loan subsequent to the Cut-off Date,
until  Participant's  Principal Balance is paid in full and (ii) with respect to
the A&D Loans, eighty percent (80%) of all principal payments collected under or
in connection with the Loan subsequent to the Cut-off Date, until  Participant's
Principal Balance is paid in full.

           "Participant's Share" shall mean the sum of
Participant's  Principal Share plus  Participant's  Interest Share as such terms
are defined above.

           "Prime Rate" shall mean that rate of interest  which is reported from
time to time by the  Wall  Street  Journal,  Eastern  Edition,  as the  nation's
average  "prime  interest"  rate on corporate  loans at large U.S.  money center
commercial  banks. If more than one rate is published by the Wall Street Journal
as the "prime  rate," the highest of the published  rates shall be used.  Should
the Wall Street Journal cease  reporting  said rate of interest,  then the Prime
Rate  shall  be that  rate of  interest  designated  by  Citibank,  N.A.  or its
successors as its "prime rate" of interest.

       2.  Participation.

           2.1 Sale of Participation in Loans - Generally. Lender agrees to sell
to  Participant  and  Participant  agrees to  purchase  from  Lender on the date
hereof, Participant's Share in the Loans, the Loan Documents, and the Collateral
(singly  and  collectively,  the  "Participation")  on the terms and  conditions
provided in this Agreement.

           2.2  Purchase  Price.  As   consideration   for  the   Participation,
Participant  shall pay to Lender on the Closing  Date an amount equal to the One
Million Eight Hundred  Eighty  Thousand  Eight Hundred  Seventy Five Dollars and
ninety-one  Cents  ($1,880,875.91),  representing  the  Participant's  Principal
Balance plus accrued interest thereon to the Closing Date;

           2.3  Method  of  Payment.   The  Purchase  Price  shall  be  paid  by
Participant  to Lender by delivery of available  funds by check or wire transfer
on the Closing Date.

           2.4 NO EXTENSION OF CREDIT.  THE PARTICIPATION  CONSTITUTES A SALE TO
PARTICIPANT  OF LEGAL AND  EQUITABLE  OWNERSHIP  OF  PARTICIPANT'S  SHARE OF THE
LOANS, THE LOAN DOCUMENTS AND THE COLLATERAL AND SHALL IN NO WAY BE CONSTRUED AS
AN EXTENSION OF CREDIT BY PARTICIPANT TO LENDER.  THIS AGREEMENT IS NOT INTENDED
TO REPRESENT AND SHALL NOT CONSTITUTE A SECURITY.  THIS  AGREEMENT  SHALL NOT BE
DEEMED TO CREATE A JOINT VENTURE OR PARTNERSHIP BETWEEN LENDER AND PARTICIPANT.

           2.5 Recourse.  Lender hereby guarantees to Participant payment of (i)
100% of the  Participant's  Share in the A&D  Loans  and (ii) the  Participant's
Share in  respect  of the Hypo  Loans up to an  amount  not to  exceed 5% of the
original Participant's  Principal Balance of the Hypo Loans. Except as set forth
in the preceding sentence,  this Participation is a full-risk  participation and
Participant  agrees  to look  only to  payments  received  from  the  Borrowers,
Guarantors or from the Collateral for repayment of Participant's Share.

           3.   Absence of Priority.  Neither Lender nor
Participant shall have any priority of ownership or interest in
the Loans, the Loan Documents or any Collateral over the other
party hereto.

           4.   Collection of Payments; Transfer to Participant.

       4.1 Collection by Lender.  Lender shall collect all payments of interest,
principal and other sums due at any time on or in connection  with the Loans and
the Loan Documents.  Lender or Lender's agent will hold the Loan Documents,  and
will receive all payments made by the Borrowers,  the Guarantors or by others on
account of  principal,  interest,  and other sums due under the Loan  Documents,
holding the  Participant's  Share thereof as agent for Participant.  Participant
shall have the right to an  accounting  for all monies and property  received by
Lender in connection with the Loans.

           4.2 Transmissions to Participant. With respect to items of principal,
interest and reimbursement of expenses (for which Participant has paid its share
to Lender,  in proportion to  Participant's  Share) paid by the  Borrowers,  the
Guarantors  or by other  parties  or  otherwise  collected  by  Lender  on or in
connection with the Loans, Lender shall, not later than the 28th calendar day of
each month,  or the next  successive  business day if such day is not a business
day, pay to Participant the Participant's Share thereof.

           4.3  Receipt of  Payments.  Notwithstanding  any  contrary  provision
hereof,  Lender shall be obligated  to remit to  Participant  only if and to the
extent  Lender  actually  receives  repayments  on account of the Loans from the
Borrowers, the Collateral or any Guarantor.

           5.  Agency.  Subject  to the  other  terms  and  conditions  of  this
Agreement, Participant hereby authorizes Lender to act as Participant's agent to
the extent  provided in this  Agreement and to exercise such other powers as are
reasonably  incidental  thereto,  including  the  receipt  of  all  payments  of
principal,  interest,  fees and expense  reimbursements on or in connection with
the Loans and the Loan  Documents,  with full power and  authority  as agent and
attorney-in-fact for Participant to institute and maintain against any Borrower,
Guarantor  or other  person  or  entity  liable in  connection  with the  Loans,
actions, suits or proceedings for the protection,  collection and enforcement of
the Loan  Documents and  realization  upon any Collateral and to take such other
actions for the protection, collection and enforcement of the Loan Documents and
realization upon any Collateral as may be advisable, in Lender's discretion.  To
the  extent  practical,  Lender  shall  keep  Participant  informed  of any such
actions, suits, or proceedings instituted by Lender.  Participant shall have the
right at any time to give Lender input as to counsel  selection  and  litigation
management,  which input Lender shall, to the extent practical,  consider in its
decision making processes.

           6.  Standards  of Care  and Loan  Administration.  Lender  agrees  to
service the Loans in accordance  with Lender's  usual  practices in the ordinary
course  of its  business  and  to  exercise  the  same  diligence  and  care  in
administering  the Loans and the Collateral as Lender  customarily  exercises in
similar Loans in which no participation has been granted. Lender and Participant
may consult with legal counsel and other  experts  selected by each of them with
due care and shall not be liable  for  actions  taken or  omitted to be taken in
good faith by Lender or Participant  respectively  in accordance with the advice
of such experts.  Neither Lender nor Participant shall incur any liability under
this  Agreement  or otherwise  by acting upon any notice,  consent,  instrument,
letter,  telecopy or other  document  which such party in good faith  reasonably
believes  to be  genuine  and  signed  by the  proper  party.  Nothing  in  this
Agreement, expressed or implied, is intended or shall be construed to constitute
a fiduciary relationship between Lender and Participant.  Lender may subcontract
the servicing of the Loans.

           7.   Lender Representations and Warranties.

           7.1  Affirmative Representations and Warranties.
Lender represents and warrants to Participant that:

                     (a)  Lender has the entire unencumbered
ownership interest in the Loans and all necessary authority to
sell the Participation to Participant;

                     (b)  Lender's execution and delivery of this
Agreement have been duly authorized.

            7.2 No Further Warranties.  Lender makes no further  representations
or   warranties,   express  or  implied,   including   without   limitation  any
representation or warranty as to financial  condition or creditworthiness of any
Borrower  or  Guarantor,  the  accuracy,  sufficiency  or current  status of any
information concerning the financial condition of any Borrower or Guarantor, the
collectability  of the Loans,  enforceability  of the Loan Documents,  continued
solvency of any Borrower or Guarantor or the continued existence, sufficiency or
value of any Collateral.

            7.3 Survival of Representations and Warranties.  The representations
and  warranties  of  Lender  contained  in  this  Section  7 shall  survive  the
termination  of this  Agreement  and are binding on any  successor  or assign of
Lender.

           8.   Participant Representations and Warranties.

                (a)  Participant's  execution and delivery of this Agreement has
been duly  authorized,  and Participant has full power and authority to purchase
the Participation;

                (b)  Participant's  decision to purchase the  Participation  has
been  based  solely  upon  its own  independent  evaluation  of the  Loans,  the
Borrowers' and Guarantors' creditworthiness and the value and lien status of the
Collateral; and

                (c) Participant  shall not, without the prior written consent of
Lender, which consent shall not be unreasonably  withheld or delayed,  assign or
convey in whole or in part  Participant's  interest in the Participation or this
Agreement, or grant any sub-participation therein;

                (d)  Participant has received copies, had an
opportunity to review and approve the terms of the Loan Documents;

                The representations  and warranties of Participant  contained in
this Section 8 shall survive the  termination  of this Agreement and are binding
on any successor or assign of Participant.

                9. Books and Records. Lender will at all times keep and maintain
proper books of account and records  reflecting the interest of the  Participant
in the Loans,  which  books of  account  and  records  shall be  accessible  for
inspection by  Participant  at reasonable  times during normal  business  hours,
subject to regulatory  requirements  regarding  Lender's  obligation to maintain
information as confidential.

           10. Information to Participant.  Upon Participant's  request,  Lender
shall provide Participant with copies of all financial  information  relating to
the Borrowers or the Guarantors  which is received by Lender.  Upon request from
time to time by  Participant,  Lender shall  provide to  Participant  such other
information  in Lender's  possession  as  Participant  may  reasonably  request;
provided, however, Lender shall not be obligated to provide Participant with any
confidential information.

           11.  Notice of Event of Default; Exercise of Remedies,
Foreclosure, etc.

           11.1  Notice of Event of Default.  In the event that Lender  acquires
actual  knowledge of the  occurrence  of any Event of Default under the terms of
the Loan Documents, Lender will notify Participant thereof.  Thereafter,  Lender
shall provide  Participant  with prior written notice of any actions proposed to
be taken by Lender  with  respect  thereto  unless the giving of such  notice is
impractical for reasons of safety or preservation of Collateral.

           11.2  Exercise of  Remedies.  Upon the giving of any notice  required
under  Section  11.1 above,  Lender may take such  action or actions  (including
without  limitation,   the  institution  of  litigation,   the  commencement  of
foreclosure  proceedings or the granting of any extension of a Loan for purposes
of "working out" the Loan),  assert such rights,  exercise such remedies  and/or
waive such  Event(s) of Default or refrain from taking such actions with respect
thereto as Lender and Participant shall agree upon. In the event that Lender and
Participant  do not agree  within  five (5)  business  days after  Participant's
receipt of notice of the  occurrence  of such an Event of  Default  or  proposed
action or  omission,  Lender  shall take such  action or  actions,  assert  such
rights,  exercise such remedies and/or waive such Event(s) of Default or refrain
from taking such actions with respect  thereon as Lender  shall,  in good faith,
deem appropriate under the circumstances. In the event that Participant requests
Lender to take  particular  action or  actions,  assert  any rights or remedy or
waive or refrain  from  taking any action,  Lender  shall have no  liability  if
Lender complies with such request and Participant will indemnify and hold Lender
harmless from all loss and liability in connection therewith.

  11.3Transfer of Collateral Proceeds to Participant. If Lender shall foreclose,
sell or otherwise exercise rights with respect to any of the Collateral,  Lender
shall  render an  accounting  to  Participant  for  monies  received  and monies
expended  in regard to the sale or  foreclosure  of such  Collateral,  including
without limitation  expenses of foreclosure.  The difference between said monies
received and said monies  expended may be a positive  number (the "Excess") or a
negative number (the  "Deficiency").  If the Collateral is sold to a third party
by Lender or through a judicial sale,  then,  upon receipt from such third party
of the proceeds from such event,  Lender will remit  Participant's  Share of the
net amount received to Participant,  plus  Participant's  Share of the Excess or
less Participant's Share of the Deficiency, as the case may be.

           12. Expenses. All out-of-pocket costs and expenses incurred by Lender
in  connection  with  the  Loan  Documents,   the  Loans  or  the   transactions
contemplated thereunder (including,  without limitation, legal fees and expenses
to  preserve  and  protect  the  Collateral,  to collect  the Loans,  to enforce
remedies under the Loan Documents or to preserve and defend  Lender's rights and
remedies,  which  are  not  reimbursed  by  Borrowers  or  Guarantors  shall  be
reimbursed by Participant  according to  Participant's  Share,  upon demand from
Lender.  Lender  may  deduct  such  costs  and  expenses  from any sums to which
Participant is entitled under this Agreement.  Participant  shall have the right
to an accounting for all such costs and expenses.

           13. Defaults.

       13.1Default bv Participant.  In the event that Participant  fails to make
any payment to Lender in accordance  with this  Agreement,  Lender may elect, at
its sole  discretion,  to apply all  proceeds  and  payments  received  from the
Borrowers, Guarantors or other parties or otherwise collected by Lender on or in
connection with the Loans,  first to pay or reimburse  Lender for all sums which
Participant should have paid to Lender under this Agreement. In addition,  until
such default is cured,  Participant shall have no right to consent to or approve
any  action  or  inaction  by Lender  under  this  Agreement  or any of the Loan
Documents.

            13.2Default by Lender. In the event that Lender fails to fulfill any
of its material duties under this Agreement or fails in a material way to act in
accordance with the terms and conditions of this Agreement and fails to cure any
such failure  within thirty (30) days after written  notice of such failure from
Participant, Participant shall thereafter be entitled to have the Loans serviced
by a third party reasonably acceptable to Lender. Notwithstanding the foregoing,
Participant  shall not have such right if: (i) Lender cannot reasonably cure any
such failure  within such thirty (30) day period;  and (ii) Lender is diligently
pursuing cure of such failure.

           14. No Amendment of Terms.  Lender shall not amend the interest rate,
repayment  terms,  advance rate or any other  material  term or condition of any
Loan or the Loan Documents, in each instance,  without the prior written consent
of  Participant,  which consent shall not be  unreasonably  withheld or delayed.
Such  consent  shall be deemed  to have been  granted  if  Lender  has  notified
Participant in writing of a proposed  course of action and  Participant  has not
objected in writing to such  course of action  within  five (5)  business  days.
Nothing  contained in this Section 14 shall interfere with Lender's rights under
Section 11 above.

           15.  Excess  Recovery.  If Lender or  Participant  shall  obtain  any
payment  on the  Loans in  excess  of its  share of such  payments  as set forth
herein,  the party  obtaining  such payment  shall  thereupon  remit such excess
payments to the other party.

           16. Preferential Payments,  etc. Each party agrees that if and to the
extent  that any  amount  received  from any  Borrower,  Guarantor  or any other
obligor,  or from the  Collateral is  subsequently  invalidated,  declared to be
fraudulent or preferential,  set aside or judicially  required to be repaid to a
trustee,  receiver or any other person under any  applicable  creditors'  remedy
proceeding,  including without limitation any bankruptcy  proceeding,  the other
party hereto shall reimburse the party from which said amount was recovered.

           17.  Liability  of Lender.  Lender shall not be liable for any action
taken or omitted to be taken by it under or in connection  with this  Agreement,
or any of the Loan  Documents,  except for  willful  breach of the terms of this
Agreement or its willful misconduct or gross negligence. Any liability of Lender
to  Participant  shall  be  for  actual  damages  only  and  shall  not  include
consequential, special, punitive or other damages.

           18.  Other Loans with Borrowers/Guarantors; Application
of Payments.

           18.1 Other Loans from Lender, Subordintion of Collateral.  Lender may
in the future make new,  additional  loans to the same  Borrowers  (such  future
loans are hereinafter  referred to as "Other  Loans").  These Other Loans may in
the future be secured by  collateral  assigned  from time to time by  collateral
documents  executed and delivered to Lender in  connection  with the Other Loans
(collectively,  the "Other Loans  Collateral").  This Other Loans Collateral may
include some or all of the Collateral.

                     Lender specifically agrees that all payments
and proceeds  related to the Collateral  will be applied first to the Borrowers'
and  Guarantors'  obligations  with the  respect  to the  Loans  and will not be
applied to any  obligations  with  respect to the Other  Loans  until all of the
Borrowers' and  Guarantors'  obligations  under the Loans have been satisfied in
full.

           18.2  Application of Payments.  Participant  agrees that Lender shall
have no obligation to attempt to collect  payments under the Loans in preference
or priority over the  collection of payments  under any Other Loans by Lender to
any Borrower or Guarantor.

            18.3Other.  Lender and its  affiliates  may generally  engage in any
kind of business with any Borrower or Guarantor or any  affiliates or subsidiary
of any  Borrower  or  Guarantor,  all  without  any duty to account  therefor to
Participant.  For so long as the Loan  Documents  remain in effect,  Participant
agrees not to engage in any  business  dealings  with any  Borrower or Guarantor
except its indirect  dealings  through Lender in connection with this Agreement,
unless otherwise agreed in writing by Lender.

           19.  Miscellaneous.

       19.1 Successors and Assigns. This Agreement shall inure to the benefit of
and be binding upon the  successors  and assigns of the  parties.  No rights are
intended to be created  under this  Agreement  for the benefit of any  Borrower,
Guarantor or other third party beneficiary.

       19.2Notices. Each notice from Lender or Participant to the other shall be
deemed  sufficient  if in writing and sent by  first-class  United  States mail,
proper postage  prepaid,  properly  addressed as set forth below or addressed to
such other address as the  addressee may hereafter  designate by notice given in
accordance with this Section 19.2 to the other party hereto; provided,  however,
that  Lender  may give  Participant  notice  of the  occurrence  of any Event of
Default  under the Loan  Documents  or the  request  for  approval or consent by
Participant by private carrier,  hand delivery,  telecopy or telephone.  Notices
and demands given by first-class  United States mail and in accordance  with the
foregoing  shall be deemed  given on the  second  banking  day after the date of
mailing.  Notices  given in any other  manner  shall be deemed given upon actual
receipt.

       19.3Applicable  Law. This Agreement shall be construed in accordance with
the laws of the  Commonwealth of  Massachusetts,  without regard to its rules or
principles regarding conflicts of law or any rule or canon of construction which
interprets agreements against the draftsman.

       19.4Amendments.   This  Agreement  may  not  be  amended,   modified,  or
terminated  except in an agreement in writing  signed by Lender and  Participant
(or their permitted successors or assigns).

            19.5Captions.  The captions in this Agreement are for
convenience only and do not define, limit or describe the scope
of the provisions hereof.

            19.6Entire   Agreement.   This   Agreement  sets  forth  the  entire
understanding  of the  parties  and  supersedes  any and all  prior  agreements,
representations,  arrangements and  undertakings  relating to the subject matter
hereof.

           19.7 Severability.  In the event that any terms or provisions of this
Agreement or the application thereof to any person or circumstance shall, to any
extent, be held invalid or unenforceable, the remainder of this Agreement or the
application  of such term or  provision  to person or  circumstances  other than
those  to  which  it is held  invalid  or  unenforceable,  shall  be  valid  and
enforceable to the fullest extent permitted by law.

           19.8  Counterparts.  This  Agreement may be executed in any number of
counterparts, each of which when so executed and delivered shall be deemed to be
an original  without the  production of any other  counterpart  and all of which
taken together shall constitute but one and the same instrument.

           19.9  Facsimile  Signatures.  The parties  hereto are  authorized  to
accept and rely on as original signatures,  facsimile signatures of or on behalf
of the parties  hereto on this  Agreement  or any other  documents  delivered in
connection with this Agreement.














        IN WITNESS WHEREOF, the parties have caused this Participation Agreement
to be executed on their behalf by their duly  authorized  officers as of the day
and year first above written.


                        THE BRATTLEBORO SAVINGS & LOAN, F.A.

                        /s/ Daniel M. Fyffe
                        By:
                        Title:

                        LITCHFIELD FINANCIAL CORPORATION

                        /s/ James Shippee
                        By:
                        Title:



































                                                     Exhibit 10.180



              LITCHFIELD HYPOTHECATION CORP. 1998-A,

                 LITCHFIELD FINANCIAL CORPORATION

                                AND

                         BANKBOSTON, N.A.

                      NOTE PURCHASE AGREEMENT

                     Dated: September 17, 1998

































                          TABLE OF CONTENTS

The Notes.......................................................-1-

Purchase and Sale...............................................-1-

The Closing; Delivery of the Notes..............................-1-

Conditions of the Purchaser's Obligation........................-2-

Representations and Warranties..................................-2-

The Purchaser's Representations.................................-5-

Notices.........................................................-7-

Miscellaneous...................................................-7-

No Recourse.....................................................-8-


Schedule I  Purchaser's Remittance Instructions


<PAGE>


                                    FORM 10-Q
               LITCHFIELD HYPOTHECATION CORP. 1998-A



                       NOTE PURCHASE AGREEMENT




                                    September 17, 1998



           LITCHFIELD  HYPOTHECATION  CORP.,  a  Delaware  corporation,  and its
successors and assigns (the "Issuer"),  and LITCHFIELD FINANCIAL CORPORATION,  a
Massachusetts  corporation (the "Seller"),  hereby agree with  BANKBOSTON,  N.A.
(the "Purchaser"), as follows:

           1. The Notes. The Issuer has authorized the execution and delivery to
The Chase Manhattan Bank, as trustee (the "Trustee"),  of an Indenture of Trust,
dated as of June 1,  1998,  as  amended  by  Amendment  No 1.  thereto  dated as
September 1, 1998  (collectively,  the "Indenture"),  providing for the issuance
and sale by the Issuer of its Hypothecation Loan Collateralized Notes, in one or
more series,  secured by the Trust  Estate  granted to the Trustee by the Issuer
pursuant to the Indenture, which includes, among other assets, a pool of certain
hypothecation  Loans owned by the Issuer and  serviced by  Litchfield  Financial
Corporation,  a Massachusetts  corporation (in such capacity,  the  "Servicer").
Unless otherwise  specifically  defined herein, all capitalized terms shall have
the meanings ascribed to them in the Indenture.

           2.  Purchase  and Sale.  In  reliance  upon the  representations  and
warranties  contained  herein and subject to the terms and  conditions set forth
herein, (i) the Issuer agrees to sell to the Purchaser, and the Purchaser agrees
to purchase from the Issuer,  $2,121,981.93  principal  amount of  Hypothecation
Loan  Collateralized  Notes,  Series A and (ii) the Seller agrees to sell to the
Purchaser,  and the Purchaser agrees to purchase from the Seller,  $3,657,405.25
principal  amount of  Hypothecation  Loan  Collateralized  Notes,  Series C (the
foregoing  notes are  referred  to herein  collectively  as the  "Notes")  at an
aggregate  price  (the  "Purchase  Price")  equal to the  aggregate  outstanding
principal amount of the Notes on the Closing Date (as hereinafter defined).  The
Purchase Price shall be allocated  among the Seller and the Issuer in proportion
to the  principal  amount of Notes sold by each.  The  Purchase  Price  shall be
payable to or upon the  instructions of the Issuer and the Seller on the Closing
Date by wire transfer in immediately available Federal funds.

           3. The  Closing;  Delivery of the Notes.  The closing of the purchase
and sale of the Notes pursuant hereto (the "Closing") shall be held on September
17, 1998 (the "Closing  Date").  The Closing shall take place by mail or at such
place as the parties hereto shall designate.  At the Closing, the Issuer and the
Seller,  respectively,  will deliver to the  Purchaser,  against  payment of the
Purchase Price therefor, one Series A Note in the denomination of $ 2,121,981.93
and one Series C Note in the  denomination  of  $3,657,405.25  registered in the
Purchaser's name, or in the name of its nominee;  provided however,  that if the
Purchaser  requests  the  Issuer  or the  Seller  in  writing  not less than one
Business  Day prior to the  Closing  Date to deliver to the  Purchaser  Notes in
other  denominations  (authorized  pursuant to the Indenture)  that equal in the
aggregate the  denominations  specified  above,  the Seller and the Issuer shall
comply with such request.

           4.  Conditions of the Purchaser's  Obligation.  The obligation of the
Purchaser set forth in Section 2 to purchase the Notes on the Closing Date shall
be subject to the  accuracy as of the date hereof and as of the Closing  Date of
(i) the  representations  and  warranties  of the  Issuer set forth in Section 5
hereof,  (ii) the  representations  and warranties of the Seller in the Purchase
and Sale Agreement and in Section 5 hereof,  and (iii) the  representations  and
warranties of the Servicer in the Servicing Agreement, and shall also be subject
to the following additional conditions:

           (a) Each of this Purchase  Agreement,  the Notes, the Indenture,  the
      Servicing  Agreement,  and the Purchase and Sale Agreement  (collectively,
      the "Agreements") shall have been duly authorized,  executed and delivered
      by each of the parties thereto and be in full force and effect; and

           (b) The  Purchaser  shall have  received  copies of all documents and
      other  information  as it may  reasonably  request,  in form and substance
      reasonably  satisfactory to it, with respect to such  transactions and the
      taking of all proceedings in connection therewith.

           5.   Representations and Warranties.  (a) The Issuer
represents and warrants to the Purchaser as of the date hereof as
follows:

           (i) Each of the  Agreements  to which the  Issuer is a party has been
      duly  authorized,  executed and delivered by the Issuer and,  assuming due
      execution and delivery by the other parties thereto,  constitutes a legal,
      valid and binding agreement of the Issuer  enforceable  against the Issuer
      in accordance with its terms, subject to applicable bankruptcy, insolvency
      and similar laws affecting creditors' rights generally, and subject, as to
      enforceability,  to general  principles of equity  (regardless  of whether
      enforcement is sought in a proceeding in equity or at law). The Notes have
      been validly  issued and are entitled to the benefits of the Indenture and
      constitute  valid  instruments  enforceable in accordance with their terms
      subject to applicable  bankruptcy,  insolvency  and similar laws affecting
      creditors' rights generally, and subject, as to enforceability, to general
      principles of equity  (regardless  of whether  enforcement  is sought in a
      proceeding in equity or at law).

           (ii) Neither the issuance or sale of the Notes,  nor the consummation
      of any other of the transactions  contemplated in any of the Agreements to
      which the Issuer is a party, nor the execution, delivery or performance of
      the terms of any of the Agreements to which the Issuer is a party,  has or
      will result in the breach of any term or provision of the  certificate  of
      incorporation  or by-laws of the  Issuer,  or conflict  with,  result in a
      breach or  violation on the part of the Issuer of or the  acceleration  of
      indebtedness  under  or  constitute  a  default  under,  the  terms of any
      indenture or other  agreement or instrument to which the Issuer is a party
      or by which it is bound,  or any statute or  regulation  applicable to the
      Issuer or any order  applicable  to the  Issuer of any  court,  regulatory
      body,  administrative agency or governmental body having jurisdiction over
      the Issuer.

           (iii) No consent, approval,  authorization of, registration or filing
      with,  or notice to, any  governmental  or regulatory  authority,  agency,
      department, commission, board, bureau, body or instrumentality is required
      on the part of the Issuer for the  execution and delivery or by the Issuer
      with any of the Agreements to which the Issuer is a party or the Notes, or
      the  issuance  of the  Notes,  or the  consummation  by the  Issuer of any
      transaction  contemplated  under any of the Agreements to which the Issuer
      is a party, or such consent,  approval or authorization  has been obtained
      or such registration,  filing or notice has been made (or, with respect to
      assignments  of mortgages  and financing  statements,  will be made by the
      Issuer as contemplated by the Indenture).

           (iv) There is no action, suit or proceeding against, or investigation
      of,  the  Issuer  pending  or, to the best of its  knowledge,  threatened,
      before any court,  administrative  agency or other tribunal which,  either
      individually or in the aggregate,  (A) may result in any material  adverse
      change in the financial condition,  properties, or assets of the Issuer or
      in any  material  and  adverse  impairment  of the right or ability of the
      Issuer to perform its obligations under the Agreements, or (B) asserts the
      invalidity of any of the  Agreements to which either the Issuer is a party
      or the  Notes  or (C)  seeks to  prevent  the  consummation  of any of the
      transactions  contemplated by any of the Agreements to which the Issuer is
      a party.
           (v) Based in part on the representations and warranties  contained in
      Section 6  hereof,  the  Issuer  is not,  and the sale of the Notes in the
      manner  contemplated by this Purchase  Agreement will not cause the Issuer
      to be, subject to registration  or regulation as an investment  company or
      affiliate of any investment  company under the  Investment  Company Act of
      1940, as amended.

           (vi) Each Loan  included in the Trust  Estate  securing the Notes has
      been  delivered to the Trustee or its collateral  agent,  together with an
      assignment  thereof  by  the  Issuer,  which  immediately  prior  to  such
      assignment  will own full legal and equitable title to each Loan, free and
      clear of any lien,  charge,  encumbrance  or  participation  or  ownership
      interest in favor of any other Person.  Upon  endorsement  and delivery to
      the Trustee or its collateral  agent of the executed  original  promissory
      notes and  execution  and delivery of the  Indenture,  all of the Issuer's
      right,  title  and  interest  in and to the  Loans  will  be  validly  and
      effectively  transferred to the Indenture  Trustee as collateral  security
      for the benefit of the Holders of the Notes.

           (vii) On the  Closing  Date  after  giving  effect to the sale of the
Notes  to  the  Purchaser  hereunder,  the  aggregate  principal  amount  of all
Hypothecation Loan Collateralized Notes outstanding shall be $15,053,212.26,  of
which $11,342,594.75 aggregate principal amount shall be Series A Notes owned of
record by the Purchaser,  $ 53,212.26 aggregate principal amount shall be Series
B  Variable  Funding  Notes  owned of record  by the  Seller  and  $3,657,405.25
aggregate  principal  amount  shall be  Series C Notes  owned of  record  by the
Purchaser.

(b) The Seller represents and warrants to the Purchaser as of the
date hereof as follows:

           (i) Each of the  Agreements  to which the  Seller is a party has been
      duly  authorized,  executed and delivered by the Seller and,  assuming due
      execution and delivery by the other parties thereto,  constitutes a legal,
      valid and binding agreement of the Seller  enforceable  against the Seller
      in accordance with its terms, subject to applicable bankruptcy, insolvency
      and similar laws affecting creditors' rights generally, and subject, as to
      enforceability,  to general  principles of equity  (regardless  of whether
      enforcement is sought in a proceeding in equity or at law).

           (ii) Neither the sale of the Notes, nor the consummation of any other
      of the  transactions  contemplated  in any of the  Agreements to which the
      Seller is a party, nor the execution, delivery or performance of the terms
      of any of the  Agreements  to which  the  Seller  is a party,  has or will
      result  in the  breach  of any term or  provision  of the  certificate  of
      incorporation  or by-laws of the  Seller,  or conflict  with,  result in a
      breach or  violation on the part of the Seller of or the  acceleration  of
      indebtedness  under  or  constitute  a  default  under,  the  terms of any
      indenture or other  agreement or instrument to which the Seller is a party
      or by which it is bound,  or any statute or  regulation  applicable to the
      Seller or any order  applicable  to the  Seller of any  court,  regulatory
      body,  administrative agency or governmental body having jurisdiction over
      the Seller.

           (iii)No consent,  approval,  authorization of, registration or filing
      with,  or notice to, any  governmental  or regulatory  authority,  agency,
      department, commission, board, bureau, body or instrumentality is required
      on the part of the Seller for the  execution and delivery or by the Seller
      with any of the Agreements to which the Seller is a party,  or the sale of
      the  Notes,  or  the   consummation  by  the  Seller  of  any  transaction
      contemplated  under any of the  Agreements to which the Seller is a party,
      or such  consent,  approval  or  authorization  has been  obtained or such
      registration,  filing  or  notice  has been  made  (or,  with  respect  to
      assignments  of mortgages  and financing  statements,  will be made by the
      Seller as contemplated by the Indenture).

           (iv) There is no action, suit or proceeding against, or investigation
      of,  the  Seller  pending  or, to the best of its  knowledge,  threatened,
      before any court,  administrative  agency or other tribunal which,  either
      individually or in the aggregate,  (A) may result in any material  adverse
      change in the financial condition,  properties, or assets of the Seller or
      in any  material  and  adverse  impairment  of the right or ability of the
      Seller to perform its obligations under the Agreements, or (B) asserts the
      invalidity of any of the  Agreements to which either the Seller is a party
      or the  Notes  or (C)  seeks to  prevent  the  consummation  of any of the
      transactions  contemplated  by any of the  Agreements  to which either the
      Seller is a party.
           (v) Neither the Seller nor any Affiliate of the Seller nor any Person
      authorized or employed by the Seller will,  directly or indirectly,  offer
      or sell any Note or similar  security in a manner  which would  render the
      sale of the Notes  pursuant to this  Purchase  Agreement  a  violation  of
      Section 5 of the 1933 Act, or require registration pursuant thereto. Based
      in part on the  representations  and  warranties  contained  in  Section 6
      hereof,  the  offering and sale of the Notes by the Seller to Purchaser at
      closing are exempt from the registration  requirements of the 1933 Act and
      the  Indenture is not required to be qualified  under the Trust  Indenture
      Act of 1939, as amended.

      The Issuer and the Seller agree that the  representations  and  warranties
set forth in this Section 5 shall be fully  assignable  to the initial  party to
whom the Purchaser may sell the Notes.

           6.   The Purchaser's Representations.    The Purchaser
represents to the Issuer as follows:

           (a) The  Purchaser  is acquiring  the Notes for its own account.  The
      Purchaser  understands  that the Notes are not being  registered under the
      Securities  Act of  1933,  as  amended  (the  "1933  Act"),  or any  State
      securities  or  "Blue  Sky" law and are  being  sold to the  Purchaser  in
      reliance  upon  the  Purchaser's  representations  contained  herein  in a
      transaction that is exempt from the registration  requirements of the 1933
      Act and any applicable  State law. The Purchaser agrees that the Notes may
      not be Transferred unless  subsequently  registered under the 1933 Act and
      any  applicable  State  securities or "Blue Sky" law or unless  exemptions
      from the  registration  requirements of the 1933 Act and applicable  State
      laws are  available.  Subject to the express  provisions  of this Purchase
      Agreement and the  Indenture,  the  disposition  of the Notes shall at all
      times be within the control of the owner thereof. Notwithstanding anything
      to the contrary,  express or implied, in this Agreement,  the Indenture or
      otherwise,  the  Purchaser  understands  that none of the Trust,  the Note
      Registrar  or the  Indenture  Trustee is  obligated  to register the Notes
      under the 1933 Act or any other  securities  law and that any  Transfer in
      violation of the provisions of the Indenture shall be void ab initio.  The
      foregoing  shall in no way limit the ability or the right of the Purchaser
      to sell participation interests in any Notes owned by the Purchaser.

           (b) The Purchaser is either (i) an  "accredited  investor" as defined
      in rule 501(a) under the 1933 Act or (ii) a Qualified  Institutional Buyer
      as defined in Rule 144A under the 1933 Act.

           (c) The Purchaser is authorized to enter into this Purchase Agreement
      and  to  purchase  the  Notes.  This  Purchase  Agreement  has  been  duly
      authorized  executed and delivered by the Purchaser  and  constitutes  the
      Purchaser's  legal,  valid and binding agreement  enforceable  against the
      Purchaser in accordance with its terms, subject to applicable  bankruptcy,
      insolvency,  and similar laws affecting  creditors' rights generally,  and
      subject, as to enforceability, to general principles of equity (regardless
      of whether enforcement is sought in a proceeding in equity or at law).

           (d)  The  Purchaser  has  sufficient   knowledge  and  experience  in
      financial and business  matters as to be capable of evaluating  the merits
      and risks of an  investment in the Notes and the Purchaser is able to bear
      the economic risk of investment in the Notes.  The Purchaser  acknowledges
      that in  connection  with  the  making  of its  investment  decision,  the
      Purchaser  has been  afforded the  opportunity  to ask  questions  of, and
      receive  answers  regarding,  and to  conduct  its  investigation  of, the
      Issuer, the Loans and the Loan Collateral, the Trust Estate, the Notes and
      the Servicer as is  sufficient  and necessary for the Purchaser to make an
      informed investment decision with respect to the Notes.

           (e) No placement agent, broker,  finder or investment banker has been
      employed  by or has acted for the Seller or the  Purchaser  in  connection
      with the  transactions  with the Purchaser  contemplated  in this Purchase
      Agreement or otherwise in connection with the Notes;  and the Purchaser is
      solely  responsible  for, and the Purchaser shall indemnify the Seller for
      the fees, expenses or commissions of any placement agent,  broker,  finder
      or investment banker and any other person or entity claiming to have acted
      in such capacity for or under the authority of the Purchaser.

           (f) The Purchaser agrees to treat, and to take no action inconsistent
      with the treatment of, the Notes as debt of the Issuer for tax purposes.

           7. Notices. All notices and other  communications  hereunder shall be
in writing and shall be sent by first class registered or certified mail, return
receipt requested, or by facsimile  transmission,  provided such transmission is
confirmed by overnight  mail  delivered  by a  nationally  recognized  overnight
delivery  service,  addressed  (a)  if to  the  Purchaser,  BankBoston,  N.A.,15
Westminster Street,  Providence,  Rhode Island 02903, Attention:  Thomas Morris,
and (b) if to the Issuer or the Seller,  c/o Litchfield  Financial  Corporation,
430 Main Street,  Williamstown,  Massachusetts 01267, Attention:  Executive Vice
President,  or to such other  address  as the  Issuer or the  Seller  shall have
furnished to the  Purchaser  in writing.  Any notice so given by  registered  or
certified  mail  shall be deemed  to have  been  given  five  days  after  being
deposited in a depository of the United States mails.  Any notice given by means
of a nationally  recognized  overnight  delivery service shall be deemed to have
been given upon receipt thereof.

           8.   Miscellaneous.  (a)  This Purchase Agreement shall be
construed and enforced in accordance with and governed by the law of
the State of New York.

           (b) Any action or  proceeding  relating  in any way to this  Purchase
Agreement  may be brought and enforced in the courts of the State of New York or
of the  United  States  for the  Southern  District  of New York and each of the
Issuer, the Seller and the Purchaser  irrevocably submits to the jurisdiction of
each such court (and any  appellate  court from any  thereof)  in respect of any
such action or proceeding.

           Each of the Issuer, the Seller and the Purchaser  irrevocably waives,
to the fullest extent permitted by applicable law, any objection that it may now
or hereafter have to the laying of venue of any such action or proceeding in any
state court of the State of New York or the United States District Court for the
Southern  District of New York, and any claim that any such action or proceeding
brought in any such court has been brought in an inconvenient forum.

           (c) This Agreement supersedes all prior agreements and understandings
relating to the subject matter hereof.

           (d) The headings in this  Purchase  Agreement are for the purposes of
reference only and shall not limit or define the meaning hereof.
           (e) This  Purchase  Agreement  shall be binding  upon the  respective
successors  and assigns of the parties  hereto and shall inure to the benefit of
and be enforceable  by any  registered  owner or owners at the time of each Note
then issued, or any part thereof. This Purchase Agreement may be assigned by the
Purchaser to an eligible  purchaser of the Notes in connection  with a permitted
transfer of the Notes in accordance with the Indenture.
           (f) This  Purchase  Agreement may be amended,  waived,  discharged or
terminated  only by an instrument  in writing  signed by the party against which
enforcement of such amendment, waiver, discharge or termination is sought.

           (g) This Purchase Agreement may be executed simultaneously in several
counterparts,  or by different parties in separate  counterparts,  each of which
counterparts  shall  be an  original,  but all of  which  shall  constitute  one
instrument.

           9. No Recourse.  It is expressly understood and agreed by the parties
hereto that (a) the representations,  undertakings and agreements herein made on
the part of the Issuer are made and  intended  not as personal  representations,
undertakings  and  agreements  by the Seller but are made and  intended  for the
purpose of binding  only the  Issuer,  (b)  nothing  herein  contained  shall be
construed as creating any liability on the Seller to perform any covenant either
expressed  or  implied  contained  herein,  all such  liability,  if any,  being
expressly waived by the parties hereto, and (c) under no circumstances shall the
Seller be personally  liable for the payment of any  indebtedness or expenses of
the  Issuer  or  be  liable  for  the  breach  or  failure  of  any  obligation,
representation, warranty or covenant made or undertaken by the Issuer under this
Agreement;  it being  understood  that the  foregoing  shall in no way limit the
obligations  of the  Seller  under  the  Guarantee  or  the  Purchase  and  Sale
Agreement.






           IN WITNESS  WHEREOF,  the parties  hereto  have caused this  Purchase
Agreement to be duly executed on the date first written above.


                          LITCHFIELD HYPOTHECATION CORP. 1998-A

                          By:       Heather A. Sica
                          Name:  Heather A. Sica
                          Title:    Executive Vice President



                          LITCHFIELD FINANCIAL CORPORATION


                          By:       Heather A. Sica
                          Name:  Heather A. Sica
                          Title:    Executive Vice President


                          BANKBOSTON, N.A.

                          By:       Thomas J. Morris
                          Name:  Thomas J. Morris
                          Title:    Vice President


                             SCHEDULE I
                                                   Principal Amount
Name, Address and Payment                           Amount of Notes
Provisions of Purchaser                            To Be Purchased

BankBoston, N.A.                                    $2,121,981.93
Series A

                                               $3,657,405.25 Series C
      (a)  All  payments  on account of the Notes  shall be made in  immediately
           available  funds  at the  opening  of  business  on the  due  date by
           electronic  funds  transfer,  properly  identified,  to the following
           account:

            Bank: BankBoston, N.A.
            ABA #:011-000-390
            Account #:26815897
            Attn: Litchfield Hypothecation Corp. 1998-A
































                                                        Exhibit 10.181
                         LIMITED GUARANTEE


           LIMITED  GUARANTEE  dated  as of  September  17,  1998 by  LITCHFIELD
FINANCIAL CORPORATION,  a Massachusetts corporation (the "Guarantor"),  in favor
of  BankBoston,  N.A.,  a  national  banking  association  with an address at 15
Westminster  Street,  Providence,  Rhode  Island  02903  ("BankBoston"),   as  a
Noteholder under the Indenture hereinafter referred to.

           WHEREAS,   Litchfield   Hypothecation   Corp.   1998-A,   a  Delaware
corporation (the "Issuer") and a wholly-owned  subsidiary of the Guarantor, is a
party to an Indenture of Trust dated as of June 1, 1998, as amended by Amendment
No. 1 thereto dated as of September 1, 1998 (the "Indenture") (capitalized terms
used but not defined  herein shall have the meanings  attributed  thereto in the
Indenture  or in  Appendix  A  thereto)  with  The  Chase  Manhattan  Bank  (the
"Trustee")  pursuant  to which on the date  hereof the  Issuer has issued  those
certain Series A Notes in the original  principal  amount of  $2,121,981.93  and
(the "Guaranteed Series A Notes"); and

           WHEREAS,  the Guarantor is the owner of those certain  Series C Notes
in the original  principal  amount of  $3,657,405.25  issued by the Issuer as of
September 1, 1998 pursuant to the Indenture  (the  "Guaranteed  Series C Notes,"
and collectively  with the Guaranteed  Series A Notes, the "Guaranteed  Notes");
and

           WHEREAS,  the Issuer,  the Guarantor and  BankBoston are parties to a
Note Purchase Agreement, dated the date hereof, pursuant to which and subject to
the terms and  conditions  contained  therein,  BankBoston  shall  purchase  the
Guaranteed Series A Notes from the Issuer and the Guaranteed Series C Notes from
the Guarantor; and

           WHEREAS,  it is a  condition  to the  purchase by  BankBoston  of the
Guaranteed  Notes that the  Guarantor  issue a  guarantee  in the form hereof of
certain of the obligations of the Issuer under the Guaranteed Notes.

           NOW,  THEREFORE,  in  consideration  of the  premises and in order to
induce  BankBoston to purchase the Guaranteed Notes, the Guarantor hereby agrees
as follows:

           Section  1.   Guarantee.   The  Guarantor   hereby   irrevocably  and
unconditionally  guarantees  the punctual  payment  when due,  whether at stated
maturity,  after maturity,  by  acceleration  or otherwise,  of principal of and
interest on the Guaranteed Notes(the  "Guaranteed  Obligations") in an aggregate
amount not to exceed $288,969.40 (the "Guaranteed Amount"). The Guarantor hereby
agrees that it shall make the payment of a Guaranteed Obligation upon receipt of
written demand therefor from BankBoston (a "Demand  Notice") which Demand Notice
shall  specify  that an Event of Default has occurred  and is  continuing  under
either or both of Sections 7.1(a) and 7.1(b) of the Indenture due to the failure
of the Issuer to make the applicable  payment of principal  and/or  interest due
and owing to  BankBoston  under the  Guaranteed  Notes  and the  Indenture.  The
obligation of the Guarantor  hereunder  shall in no event exceed the  Guaranteed
Amount. The Guaranteed Amount shall be reduced by (i) the amount of any payments
made by  Guarantor  hereunder  or (ii) the amount of any  unreimbursed  Servicer
Advances pursuant to the Indenture.

           Notwithstanding  the limitation  contained in the preceding sentence,
the Guarantor shall also pay all costs and expenses,  including attorneys' fees,
costs  relating to all costs and expenses  arising out of or with respect to the
validity, enforceability, collection, defense, administration or preservation of
this Guarantee.

           GUARANTOR   ACKNOWLEDGES  AND  AGREES  THAT  ANY  REPURCHASE  OF  THE
HYPOTHECATION  LOANS BY THE GUARANTOR  PURSUANT TO THE TERMS OF THE INDENTURE OR
ANY OTHER  DOCUMENT  PROVIDING  GUARANTOR  WITH SUCH OPTION OR OBLIGATION OR THE
PAYMENT OR PERFORMANCE BY GUARANTOR OF ANY OTHER  OBLIGATION OF ISSUER UNDER THE
INDENTURE OR THE GUARANTEED  NOTES SHALL NOT REDUCE THE OBLIGATIONS OF GUARANTOR
TO BANKBOSTON UNDER THIS GUARANTEE AND  BANKBOSTON'S  CONSENT TO SUCH REPURCHASE
SHALL NOT CONSTITUTE A WAIVER OF BANKBOSTON'S RIGHTS HEREUNDER.

           Section 2. Waiver. The Guarantor hereby  absolutely,  unconditionally
and irrevocably  waives, to the fullest extent permitted by law, (i) promptness,
diligence,  notice of  acceptance  and any other  notice  with  respect  to this
Guarantee,(ii)  any requirement  that  BankBoston  protect,  secure,  perfect or
insure any security  interest or lien or any property subject thereto or exhaust
any right or take any  action  against  the  Issuer  or any other  person or any
collateral, (iii) any and all right to assert any defense, set-off, counterclaim
or  cross-claim of any nature  whatsoever  with respect to this  Guarantee,  the
obligations of the Guarantor hereunder or the obligations of any other person or
party (including,  without limitation, the Issuer) relating to this Guarantee or
the  obligations  of the  Guarantor  hereunder or otherwise  with respect to the
Guaranteed  Obligations  in any action or  proceeding  brought by  BankBoston to
collect the  Guaranteed  Obligations  or any  portion  thereof or to enforce the
obligations of the Guarantor  under this  Guarantee,  and (iv) any other action,
event or precondition to the enforcement of this Guarantee or the performance by
the Guarantor of the obligations hereunder.

           Section 3. Guarantee Absolute.  (a) The Guarantor guarantees that, to
the fullest extent permitted by law, the Guaranteed  Obligations will be paid or
performed  strictly  in  accordance  with their  terms,  regardless  of any law,
regulation or order now or hereafter in effect in any jurisdiction affecting any
of such terms or the rights of BankBoston with respect thereto.

               (b)  No  invalidity,   irregularity,   voidability,  voidness  or
unenforceability  of the Indenture or the Guaranteed Notes or of all or any part
of the Guaranteed Obligations or of any security therefor,  shall affect, impair
or be a defense to this Guarantee.

               (c) The liability of the Guarantor  under this Guarantee shall be
absolute and unconditional irrespective of:

   (i)any  change  in the  manner,  place or terms of  payment  or  performance,
      and/or any change or extension of the time of payment or  performance  of,
      renewal  or  alteration  of,  any  Guaranteed  Obligation,   any  security
      therefor,  or any  liability  incurred  directly or  indirectly in respect
      thereof,  or any other  amendment or waiver of or any consent to departure
      from the Indenture or the Guaranteed Notes,  including any increase in the
      Guaranteed  Obligations  resulting from the extension of additional credit
      to the Issuer;

   (ii) any sale, exchange, release, surrender, realization upon any property by
      whomsoever  at any time  pledged  or  mortgaged  to secure,  or  howsoever
      securing,  all or any of the  Guaranteed  Obligations,  and/or  any offset
      thereagainst,  or failure to perfect,  or continue the  perfection of, any
      lien in any such property, or delay in the perfection of any such lien, or
      any  amendment  or  waiver  of or  consent  to  departure  from any  other
      guarantee for all or any of the Guaranteed Obligations;

   (iii) any exercise or failure to exercise any rights against the Issuer
      or others (including the Guarantor);

   (iv) any settlement or compromise of any Guaranteed Obligation,  any security
      therefor or any  liability  (including  any of those  hereunder)  incurred
      directly or indirectly in respect thereof or hereof, and any subordination
      of the payment of all or any part thereof to the payment of any Guaranteed
      Obligations  (whether due or not) of the Issuer to creditors of the Issuer
      other than the Guarantor;

                (v) any manner of  application  of any  collateral,  or proceeds
      thereof,  to all or any of the  Guaranteed  Obligations,  or any manner of
      sale  or  other  disposition  of  any  collateral  for  all  or any of the
      Guaranteed  Obligations  or any other  assets of the  Issuer or any of its
      subsidiaries; or

   (vi) any change, restructuring or termination of the existence of the
      Issuer.

               (d)  BankBoston may at any time and from time to time (whether or
not after  revocation or termination of this Guarantee)  without the consent of,
or notice  (except as shall be  required  by  applicable  statute  and cannot be
waived) to, the Guarantor, and without incurring responsibility to the Guarantor
or impairing or releasing the obligations of the Guarantor hereunder,  apply any
sums by  whomsoever  paid or  howsoever  realized to any  Guaranteed  Obligation
regardless of what Guaranteed Obligations remain unpaid.

               (e)  This  Guarantee   shall  continue  to  be  effective  or  be
reinstated,  as the case  may be,  if claim is ever  made  upon  BankBoston  for
repayment or recovery of any amount or amounts received by BankBoston in payment
or on account of any of the Guaranteed  Obligations and BankBoston repays all or
part of said amount by reason of any  judgment,  decree or order of any court or
administrative  body having  jurisdiction over BankBoston,  or any settlement or
compromise  of any such claim  effected  by  BankBoston  with any such  claimant
(including  the Issuer),  then and in such event the  Guarantor  agrees that any
such judgment, decree, order, settlement or compromise shall be binding upon the
Guarantor,  notwithstanding  any revocation  hereof or the  cancellation  of the
Guaranteed  Notes,  and the  Guarantor  shall be and remain liable to BankBoston
hereunder  for the amount so repaid or  recovered  to the same extent as if such
amount had never originally been received by BankBoston.

           Section 4. Continuing  Guarantee.  This Guarantee is a continuing one
and shall (i) remain in full force and effect until the indefeasible payment and
satisfaction  in full of the  Guaranteed  Obligations,  (ii) be binding upon the
Guarantor, its successors and assigns, and (iii) inure to the benefit of, and be
enforceable  by,  BankBoston and its successors,  transferees  and assigns.  All
obligations to which this Guarantee  applies or may apply under the terms hereof
shall be conclusively presumed to have been created in reliance hereon.

           Section 5.  Representations, Warranties and Covenants.
The Guarantor hereby represents, warrants and covenants to and with
BankBoston that:

               (a) The Guarantor has the corporate power to execute
      and deliver this Guarantee and to incur
and perform its obligations hereunder;

               (b) The Guarantor has duly taken all necessary
      corporate action to authorize the execution,
delivery and performance of this Guarantee and to incur and perform
its obligations hereunder;

               (c) No consent, approval, authorization or other
      action by, and no notice to or of, or declaration
or filing with, any  governmental or other public body, or any other person,  is
required for the due authorization,  execution,  delivery and performance by the
Guarantor of this Guarantee or the consummation of the transactions contemplated
hereby; and

               (d) The Guarantor  shall provide to BankBoston (i) within 60 days
of the end of each fiscal quarter,  the report on form 10-Q of the Guarantor and
(ii) within 135 days of the end of each fiscal year of the Guarantor, the report
on form 10-K of the Guarantor.


           Section 6.  Terms.  (a) The words "include," "includes"
and "including" shall be deemed to be followed by the phrase
"without limitation".

               (b) All references  herein to Sections and  subsections  shall be
deemed to be references to Sections and subsections of this Guarantee unless the
context shall otherwise require.

           Section 7. Amendments and Modification.  No provision hereof shall be
modified, altered or limited except by written instrument expressly referring to
this Guarantee and to such provision, and executed by the party to be charged.

           Section 8. Waiver of  Subrogation  Rights.  Guarantor  hereby  waives
until  the  Guaranteed  Obligations  are  paid in full any  right of  indemnity,
reimbursement,  contribution,  or subrogation  arising as a result of payment by
Guarantor hereunder, and will not prove any claim in competition with BankBoston
in respect of any payment  hereunder in bankruptcy or insolvency  proceedings of
any nature.  Guarantor will not claim any set-off or counterclaim against Issuer
in respect of any liability of Guarantor to Issuer. Guarantor waives any benefit
of and  any  right  to  participate  in any  collateral  which  may be  held  by
BankBoston .

           Section 9. Statute of Limitations. Any acknowledgment or new promise,
whether by payment of  principal  or  interest or  otherwise  and whether by the
Issuer  or  others  (including  the  Guarantor),  with  respect  to  any  of the
Guaranteed  Obligations  shall,  if the statute of  limitations  in favor of the
Guarantor  against  BankBoston  shall have commenced to run, toll the running of
such statute of  limitations  and, if the period of such statute of  limitations
shall have expired, prevent the operation of such statute of limitations.

           Section 10. Rights and Remedies Not Waived. No act, omission or delay
by BankBoston shall constitute a waiver of its rights and remedies  hereunder or
otherwise. No single or partial waiver by BankBoston of any default hereunder or
right or  remedy  which it may  have  shall  operate  as a waiver  of any  other
default,  right or  remedy or of the same  default,  right or remedy on a future
occasion.

           Section 11. Admissibility of Guarantee. The Guarantor agrees that any
copy of this Guarantee signed by the Guarantor and transmitted by telecopier for
delivery to BankBoston shall be admissible in evidence as the original itself in
any  judicial or  administrative  proceeding,  whether or not the original is in
existence.

           Section 12.  Notices.  All  notices,  requests and demands to or upon
BankBoston or the Guarantor  under this Agreement  shall be in writing and given
as provided in the Indenture  (with respect to the Guarantor,  to the address of
the Issuer as set forth in the Indenture and with respect to BankBoston,  at its
address set forth above).


<PAGE>



           Section  13.  Counterparts.  This  Guarantee  may be  executed in any
number  of  counterparts  and  by  the  different  parties  hereto  on  separate
counterparts,  each of which when so executed and delivered shall be an original
and all of which shall together constitute one and the same agreement.

           Section 14. CONSENT TO JURISDICTION;  WAIVER OF JURY TRIAL;  ETC. (a)
ANY LEGAL ACTION OR PROCEEDING  WITH RESPECT TO THIS GUARANTEE MAY BE BROUGHT IN
THE COURTS OF THE STATE OF NEW YORK OR OF THE UNITED  STATES OF AMERICA  FOR THE
SOUTHERN  DISTRICT OF NEW YORK AND, BY EXECUTION AND DELIVERY OF THIS GUARANTEE,
THE  GUARANTOR  HEREBY  ACCEPTS  FOR  ITSELF  AND IN  RESPECT  OF ITS  PROPERTY,
GENERALLY AND  UNCONDITIONALLY,  THE NONEXCLUSIVE  JURISDICTION OF THE AFORESAID
COURTS.  THE GUARANTOR HEREBY  IRREVOCABLY  WAIVES,  IN CONNECTION WITH ANY SUCH
ACTION OR PROCEEDING,  (i) TRIAL BY JURY,  (ii) TO THE EXTENT IT MAY EFFECTIVELY
DO SO UNDER APPLICABLE LAW, ANY OBJECTION, INCLUDING ANY OBJECTION TO THE LAYING
OF VENUE OR BASED ON THE  GROUNDS OF FORUM NON  CONVENIENS,  WHICH IT MAY NOW OR
HEREAFTER  HAVE  TO THE  BRINGING  OF ANY  SUCH  ACTION  OR  PROCEEDING  IN SUCH
RESPECTIVE   JURISDICTIONS  AND  (iii)  THE  RIGHT  TO  INTERPOSE  ANY  SET-OFF,
COUNTERCLAIM  OR CROSS-CLAIM  (UNLESS SUCH SET-OFF,  COUNTERCLAIM OR CROSS-CLAIM
COULD NOT, BY REASON OF ANY  APPLICABLE  FEDERAL OR STATE  PROCEDURAL  LAWS,  BE
INTERPOSED, PLEADED OR ALLEGED IN ANY OTHER ACTION).

           GUARANTOR  ACKNOWLEDGES  THAT THE TRANSACTION OF WHICH THIS GUARANTEE
IS A PART IS A COMMERCIAL TRANSACTION, AND HEREBY VOLUNTARILY WAIVES GUARANTOR'S
RIGHTS TO NOTICE AND  HEARING  UNDER ANY  APPLICABLE  STATE OR FEDERAL  LAW WITH
RESPECT TO ANY PREJUDGMENT REMEDY WHICH BANKBOSTON MAY DESIRE TO USE.

               (b) The Guarantor  irrevocably consents to the service of process
of any of the  aforementioned  courts in any such  action or  proceeding  by the
mailing of copies thereof by certified mail,  postage prepaid,  to the Guarantor
at its address determined pursuant to Section 12 hereof.

               (c) Nothing  herein shall affect the right of BankBoston to serve
process in any other manner permitted by law or to commence legal proceedings or
otherwise proceed against the Guarantor in any other jurisdiction.

               (d) The Guarantor hereby waives  presentment,  notice of dishonor
and protests of all instruments  included in or evidencing any of the Guaranteed
Obligations,  and any and all other  notices and demands  whatsoever  (except as
expressly provided herein).

           Section 15.  GOVERNING LAW.  THIS GUARANTEE AND THE
GUARANTEED OBLIGATIONS SHALL BE GOVERNED IN ALL RESPECTS BY THE LAWS
OF THE STATE OF NEW YORK APPLICABLE TO CONTRACTS EXECUTED AND TO BE
PERFORMED IN SUCH STATE, WITHOUT GIVING EFFECT TO THE CONFLICT OF
LAW PRINCIPLES THEREOF.



<PAGE>



           Section 16.  Captions; Separability.  (a)  The captions of
the Sections and subsections of this Guarantee have been inserted
for convenience only and shall not in any way affect the meaning or
construction of any provision of this Guarantee.

                (b) If any term of this  Guarantee  shall be held to be invalid,
illegal or unenforceable, the validity of all other terms hereof shall in no way
be affected thereby.

           Section 17.  Acknowledgment of Receipt.  The Guarantor
acknowledges receipt of a copy of this Guarantee.
           Section  18.  This  Guarantee  shall  inure to the  benefit of and be
enforceable  by BankBoston , its  successors,  transferees  and assigns,  and it
shall be binding upon Guarantor and the successors and assigns of Guarantor.

           IN WITNESS  WHEREOF,  the  Guarantor has duly executed or caused this
Guarantee to be duly executed as of the date first above set forth.

                               LITCHFIELD FINANCIAL CORPORATION



                               By:  Heather A. Sica
                                   Name: Heather A. Sica
                                   Title: Executive Vice President


























                             Exhibit 11.1
                   Litchfield Financial Corporation
                  Computation of Earnings Per Share

                                 Three Months Ended  Nine Months Ended
                                    September 30,      September 30,
                                    1998        1997   1998      1997
Basic:
  Weighted average number of
    common shares outstanding....... 6,835,775  5,629,644  6,083,183  5,545,497

  Income before                         
    extraordinary item..............$2,767,000 $2,161,000 $6,626,000 $5,186,000
  Extraordinary item (net of
    applicable tax benefit of $48,000).(77,000)      ---     (77,000)      ---
                                     ---------  --------- ---------- ----------
  Net income........................$2,690,000 $2,161,000 $6,549,000 $5,186,000
                                    ========== ========== ========== ==========
  Income before extraordinary
item per common share.........      $      .40  $     .38 $     1.09 $      .94
  Extraordinary item (net of
applicable tax benefit of $48,000)..      (.01)       ---       (.01)       ---
                                     ---------  ---------  ------------ --------
Net income per common share.........$      .39  $     .38 $     1.08 $      .94
                                     =========  =========  ============ ========

Diluted:
     Weighted average number of
common shares outstanding.......    6,835,775   5,629,644  6,083,183  5,545,497
     Weighted average number of
common stock equivalents
outstanding:
        Stock options............     323,106     351,054    349,238    331,154
                                     --------   ----------  --------   --------
                                            
Weighted average common and
        common equivalent shares
        outstanding..............   7,158,882   5,980,698  6,432,422  5,876,651
                                   ==========  ==========  =========  =========
Income before                         
extraordinary item...............  $2,767,000  $2,161,000 $6,626,000 $5,186,000
     Extraordinary item (net of
applicable tax benefit of $48,000)..  (77,000)        ---    (77,000)      ---
                                   ----------  ----------  ---------  ---------
     Net income..................  $2,690,000  $2,161,000 $6,549,000 $5,186,000
                                   ==========  ==========  =========  =========
Income before
extraordinary item
        per common share.......... $     .39   $     .36  $     1.03 $      .88
     Extraordinary item (net of
applicable tax benefit of $48,000)..    (.01)        ---        (.01)       ---
                                   ----------  ----------  ----------  --------
Net income per common share......  $     .38   $     .36  $     1.02 $      .88
                                  ===========  ==========  ==========  =========