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, 1997
                                               ------------------

                         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
             of incorporation or organization)        Identification No.)
                 

                        789 MAIN ROAD, STAMFORD, VT            05352
               -----------------------------------------------------
               Address of principal executive  offices)   (Zip Code)


         Registrant's telephone number, including area code: (802) 694-1200
                                                             --------------
 
                -------------------------------------------------------
                (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 October 29, 1997, 5,651,609 shares of common stock of Litchfield Financial
Corporation were outstanding.

                                       1

<PAGE>


                        LITCHFIELD FINANCIAL CORPORATION
                                    FORM 10-Q

                        QUARTER ENDED SEPTEMBER 30, 1997

                                      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                  13


PART II - OTHER INFORMATION

     Item 1.   Legal Proceedings                                              19
     Item 2.   Changes in Securities                                          19

     Item 3.   Defaults Upon Senior Securities                                19

     Item 4.   Submission of Matters to a Vote of Security Holders            19

     Item 5.   Other Information                                              19

     Item 6.   Exhibits and Reports on Form 8-K                               19


SIGNATURES                                                                    20





                                       2

<PAGE>


                                                                       FORM 10-Q

                       
                          PART I - FINANCIAL STATEMENTS
                          Item 1. Financial Statements

                        LITCHFIELD FINANCIAL CORPORATION
                           Consolidated Balance Sheets
                         (in 000's except share amounts)

<TABLE>

                                                            September 30, December 31,
                                                                 1997        1996
                                                            ------------- ------------
                                                              (unaudited)
<S>                                                              <C>        <C>
                                     ASSETS
Cash and cash equivalents................................. $    5,909   $    5,557
Restricted cash ..........................................     20,848       18,923
Loans held for sale, net of allowance for loan losses of
   $1,594 in 1997 and $817 in 1996........................     24,585       12,260
Other loans, net of allowance for loan losses of
   $1,306 in 1997 and $1,200 in 1996......................     76,931       79,996
Retained interests in loan sales..........................     30,076       28,912
Other.....................................................      7,116        7,041
                                                             --------     --------
      Total assets........................................   $165,465     $152,689
                                                             ========     ========

                      LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
   Lines of credit........................................  $  20,472    $  36,299
   Term note payable......................................      5,797        7,428
   Accounts payable and accrued liabilities...............      4,754        3,811
   Dealer/developer reserves..............................     10,890       10,628
   Deferred income taxes..................................      6,860        5,080
                                                            ---------     --------
                                                               48,773       63,246
                                                            ---------     --------

   9.3% Notes .............................................    20,000          ---
   10% Notes due 2002......................................    12,785       12,785
   8 7/8 % Notes due 2003..................................    15,317       15,930
   10% Notes due 2004......................................    18,280       18,280
                                                            ---------     --------
                                                               66,382       46,995
                                                            ---------     --------
Stockholders' equity:
   Preferred stock, $.01 par value; authorized 1,000,000 
      shares, none issued and outstanding..................       ---          ---
   Common stock, $.01 par value; authorized 8,000,000 
      shares, 5,651,609 shares issued and outstanding
      in 1997 and 5,444,399 shares issued and outstanding
      in 1996..............................................        56           54
   Additional paid in capital.............................     36,625       34,633
   Net unrealized gain on retained interests in loan sales        682          ---
   Retained earnings .....................................     12,947        7,761
                                                            ---------     --------
      Total stockholders' equity..........................     50,310       42,448
                                                            ---------     --------
      Total liabilities and stockholders' equity..........   $165,465     $152,689
                                                            =========     ========

</TABLE>



       See accompanying notes to unaudited consolidated financial statements.



                                       3
<PAGE>
                                                                       FORM 10-Q

                        LITCHFIELD FINANCIAL CORPORATION
                        Consolidated Statements of Income
                  (in 000's except share and per share amounts)
                                    Unaudited
<TABLE>

                                                         Three Months Ended September 30,
                                                         -------------------------------
                                                              1997           1996 
                                                            ------          ------
<S>                                                            <C>            <C>
 Revenues:
   Interest and fees on loans..........................     $5,025          $3,823
   Gain on sale of loans...............................      2,684           2,811
   Servicing and other fee income......................        554             343
                                                           -------         -------
                                                             8,263           6,977
                                                           -------         -------

Expenses:
   Interest expense....................................      2,733           1,843
   Salaries and employee benefits......................        883             672
   Other operating expenses............................        889             873
   Provision for loan losses...........................        244             420
                                                           -------         -------
                                                             4,749           3,808
                                                           -------         -------

Income before income taxes.............................      3,514           3,169
Provision for income taxes.............................      1,353           1,223
                                                           -------         -------
Net income.............................................     $2,161          $1,946
                                                           =======         =======



Primary per common share amounts:
   Net income per common share ........................   $    .36        $    .34
                                                          ========        ========

   Weighted average number of shares...................  5,980,230       5,697,127



Fully-diluted per common share amounts:
   Net income per common share.........................   $    .36        $    .34
                                                          ========        ========

   Weighted average number of shares...................  6,044,528       5,720,924



</TABLE>





       See accompanying notes to unaudited consolidated financial statements.
                                       4
<PAGE>

                                                                       FORM 10-Q
                        LITCHFIELD FINANCIAL CORPORATION
                        Consolidated Statements of Income
                  (in 000's except share and per share amounts)
                                    Unaudited

<TABLE>
                                                 Nine Months Ended September 30,
                                                 -------------------------------
                                                             1997           1996
                                                           -------         -------
<S>                                                         <C>             <C>
Revenues:
   Interest and fees on loans..........................    $14,354         $10,463
   Gain on sale of loans...............................      6,751           6,165
   Servicing and other fee income......................      1,256           1,100
                                                           -------         -------
                                                            22,361          17,728
                                                           -------         -------
Expenses:
   Interest expense....................................      7,775           5,140
   Salaries and employee benefits......................      2,529           2,054
   Other operating expenses............................      2,645           2,155
   Provision for loan losses...........................        979           1,374
                                                           -------         -------
                                                            13,928          10,723
                                                           -------         -------

Income before income taxes.............................      8,433           7,005
Provision for income taxes.............................      3,247           2,697
                                                           -------         -------
Net income.............................................     $5,186          $4,308
                                                           =======         =======



Primary per common share amounts:
   Net income per common share ........................   $    .88        $    .76
                                                          ========        ========

   Weighted average number of shares...................  5,874,768       5,681,431


Fully-diluted per common share amounts:
   Net income per common share.........................   $    .87        $    .75
                                                          ========        ========

   Weighted average number of shares...................  5,986,379       5,715,391





</TABLE>







       See accompanying notes to unaudited consolidated financial statements.
                                       5

<PAGE>
                                                                       FORM 10-Q
                        LITCHFIELD FINANCIAL CORPORATION
                 Consolidated Statement of Stockholders' Equity
                                   (in 000's)
                                    Unaudited










<TABLE>

                                                                         Net unrealized
                                                                           Gain on
                                                              Additional   Retained
                                                      Common     Paid In  Interests in    Retained
                                                       Stock     Capital  Loan Sales      Earnings      Total
                                                     
<S>                                                      <C>       <C>       <C>           <C>         <C>
Balance, December 31, 1996..........................     $54     $34,633    $  ---         $ 7,761     $42,448

   Issuance of  207,210 shares of common
     stock .........................................       2       1,992       ---             ---       1,994

   Net unrealized gain on retained
     interests in loan sales........................     ---         ---       682             ---         682

   Net income.......................................     ---         ---       ---           5,186       5,186
                                                       -----     -------      ----         -------     -------

Balance, September 30, 1997.........................     $56     $36,625      $682         $12,947     $50,310
                                                       =====     =======      ====         =======     =======








</TABLE>







       See accompanying notes to unaudited consolidated financial statements.

                                       6
<PAGE>

                                                                       FORM 10-Q
                        LITCHFIELD FINANCIAL CORPORATION
                      Consolidated Statements of Cash Flows
                                   (in 000's)
                                    Unaudited

<TABLE>

                                                           Nine Months Ended September 30,
                                                           -------------------------------
                                                                1997         1996
                                                                ----         ----
<S>                                                             <C>          <C>
Cash flows from operating activities:
    Net income...........................................    $5,186        $4,308
    Adjustments to reconcile net income to net cash 
    provided by (used in) operating activities:
       Gain on sale of loans.............................    (6,751)       (6,165)
       Amortization and depreciation.....................       412           462
       Amortization of retained interests in loan sales..     3,441         2,359
       Provision for loan losses.........................       979         1,374
       Deferred income taxes.............................     1,780         1,040
       Net changes in operating assets and liabilities:
          Restricted cash................................    (1,925)       (1,697)
          Loans held for sale............................   (12,530)        7,726
          Retained interests in loan sales...............    (1,588)       (3,959)
          Dealer/developer reserves......................       262           307
          Net change in other assets and liabilities.....     1,185        (3,226)
                                                            -------       -------
       Net cash provided by (used in) operating activities  (9,549)         2,529
                                                            -------       -------

Cash flows from investing activities:
    Redemption of investments held to maturity...........        46           101
    Net originations and principal payments on other loans  (37,831)      (30,276)
    Other loans sold.....................................    40,790           ---
    Collections on retained interests in loan sales......     3,567           359
    Capital expenditures and other assets................     ( 594)          (90)
                                                           --------       -------
      Net cash provided by (used in) investing activities     5,978       (29,906)
                                                           --------       -------

Cash flows from financing activities:
    Net borrowings (payments) on lines of credit.........   (15,827)       21,600
    Proceeds from issuance of 9.3% Notes.................    20,000           ---
    Retirement of long-term Notes........................      (613)         (303)
    Payments on term note................................    (1,631)       (1,970)
    Net proceeds from issuance of common stock...........     1,994            52
                                                            -------       -------
       Net cash provided by financing activities.........     3,923        19,379
                                                            -------       -------

Net increase (decrease) in cash and cash equivalents.....       352        (7,998)
Cash and cash equivalents, beginning of period...........     5,557        18,508
                                                            -------       -------
Cash and cash equivalents, end of period.................    $5,909       $10,510
                                                            =======       =======

Supplemental Schedule of Noncash Financing and 
    Investing Activities:
    Exchange of loans for retained interests in loan sales  $  577        $ 3,540
                                                            ======        =======
    Transfers from loans to real estate acquired 
    through foreclosure...................................  $  815        $   498
                                                            ======        =======

Supplemental Cash Flow Information:
    Interest paid........................................    $7,556       $ 4,806
                                                             ======       =======
    Income taxes paid....................................    $1,455       $ 1,154
                                                             ======       =======

</TABLE>


       See accompanying notes to unaudited consolidated financial statements.
                                       7

<PAGE>
                                                                       FORM 10-Q
                                                                      
                        LITCHFIELD FINANCIAL CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                 
A. Basis of Presentation


      The accompanying unaudited consolidated interim financial statements as of
September 30, 1997 and for the three and nine month periods ended  September 30,
1997  and  1996  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, 1997, are not  necessarily  indicative of
the  results  expected  for the  year  ended  December  31,  1997.  For  further
information,  refer  to the  consolidated  financial  statements  and  footnotes
thereto  included in Litchfield  Financial  Corporation's  annual report on Form
10-K for the year ended December 31, 1996.

      In  February  1997,  the  Financial   Accounting  Standards  Board  issued
Statement of Financial Accounting Standards No. 128, "Earnings Per Share," which
is required to be adopted for financial statements on December 31, 1997. At that
time,  the  Company  will be  required  to change the method  currently  used to
compute  earnings per share and to restate all prior periods.  Primary  earnings
per share will be replaced by basic earnings per share.  Fully-diluted  earnings
per  share  will be  replaced  by  diluted  earnings  per  share.  Under the new
requirements  for calculating  basic earnings per share,  the dilutive effect of
stock options will be excluded. Under the new standard, basic earnings per share
would have been $.02 per share higher for each of the quarters  ended  September
30, 1997 and 1996 and $.06 and $.03 per share  higher for the nine months  ended
September  30,  1997 and  1996,  respectively.  Under the new  requirements  for
calculating  diluted earnings per share, the average market price for the period
will be used rather than the greater of the average  market price for the period
or the  ending  market  price for the  period.  There  would be no impact on the
calculation  of  diluted  earnings  per share for either of the  quarters  ended
September  30, 1997 and 1996.  Diluted  earnings  per share would have been $.01
higher for the nine months ended September 30, 1997 and 1996.



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


     As of January 1, 1997, the Company adopted the requirements of Statement of
Financial  Accounting  Standards No. 125 "Accounting for Transfers and Servicing
of  Financial  Assets and  Extinguishments  of  Liabilities"  for  transfers  of
receivables.  This standard did not have a material effect on net income for the
three or nine months  ended  September  30, 1997.  The Company has  reclassified
certain  subordinated  pass-through  certificates,   interest  only  strips  and
recourse  obligations  as retained  interests in loan sales to conform with this
standard.

      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

                                       8
<PAGE>

                                                                       FORM 10-Q
                        LITCHFIELD FINANCIAL CORPORATION
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)


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.

      The Company  estimates  fair value  using  discounted  cash flow  analysis
(using a discount rate  commensurate  with the risks  involved),  because quoted
market prices are not 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 interest,  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
because such assets are subject to prepayment.

      There is  generally no  servicing  asset or liability  because the Company
estimates  that the benefits of servicing are just adequate to compensate it for
its servicing responsibilities.

      Since its inception,  the Company has sold  $327,646,000  of loans at face
value  ($249,451,000  through December 31, 1996). The principal amount remaining
on the loans sold was  $174,009,000  at September 30, 1997 and  $129,619,000  at
December 31,  1996.  In June and August 1997,  the Company  completed  its first
securitizations of $15,325,000 and $25,465,000 of Hypothecation Loans in private
placements.  In  connection  with  certain loan sales,  the Company  guarantees,
through replacement or repayment,  loans in 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  undiscounted  exposure to loss on loans sold in the event of
nonperformance  by  the  borrower,   default  by  the  dealer/developer  on  its
guarantee,  and  the  determination  that  the  collateral  is of no  value  was
$9,675,000 at September 30, 1997  ($8,780,000 at December 31, 1996). The Company
repurchased $104,000 and $264,000 of loans under the recourse provisions of loan
sales  during  the  three  months  ended  September  30,  1997 and  1996.  Loans
repurchased  during  the nine  months  ended  September  30,  1997 and 1996 were
$558,000 and $778,000, respectively, and $991,000 during the year ended December
31,  1996.  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, 1997,  $19,875,000  of the  Company's  cash was  restricted as
credit enhancements in connection with certain securitization programs.

      The  Company's  Serviced  Portfolio  is  geographically  diversified  with
collateral and consumers located in 43 and 50 states, respectively. The Serviced
Portfolio  consists of the principal amount of loans serviced by or on behalf of
the  Company.  At  September  30, 1997,  19.0% of the  portfolio  by  collateral
location was located in Texas,  and 18.6% and 12.0% of the portfolio by borrower
location  was  located  in Texas  and  Florida,  respectively.  No  other  state
accounted  for more  than 9.0% of the total by  either  collateral  or  borrower
location.




                                       9
<PAGE>

                                                                       FORM 10-Q

                        LITCHFIELD FINANCIAL CORPORATION
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

C. Allowance for loan losses


The total allowance for loan losses consists of the following:

<TABLE>

                                                     September 30,     December 31,
                                                              1997            1996
                                                     -------------     -----------
      <S>                                                   <C>            <C>
     Allowance for losses on loans held for sale...     $1,594,000     $   817,000
     Allowance for losses on other loans...........      1,306,000       1,200,000
     Recourse obligation on retained interests
       in loan sales ..............................      2,830,000       2,511,000
                                                        ----------      ----------
                                                        $5,730,000      $4,528,000
                                                        ==========      ==========

</TABLE>

D.  Debt


      In January 1997, an additional  secured line of credit was increased  from
$5,000,000 to  $8,000,000.  This line of credit  matures in January 1998.  There
were no outstanding  borrowings on this line of credit at September 30, 1997 and
December 31, 1996.  This line of credit is secured by consumer  receivables  and
other secured loans.

      In January 1997, an additional  secured line of credit was increased  from
$15,000,000  to  $20,000,000.  Outstanding  borrowings  under this facility were
$7,050,000  and  $8,300,000  at  September  30,  1997  and  December  31,  1996,
respectively.  This  facility is secured by certain  retained  interests in loan
sales, cash collateral accounts and certain other loans and matures in September
1999.

      On March 5, 1997,  the  Company  entered  into an  additional  $25,000,000
secured line of credit.  The  outstanding  borrowings at September 30, 1997 were
$6,152,000.  The facility is secured by loans to  developers  of VOI 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.

      On March 21, 1997, the Company  entered into a $3,000,000  secured line of
credit with an additional financial institution.  This line of credit is secured
by consumer receivables and other secured loans and matures in March 1998. There
were no outstanding borrowings at September 30, 1997.

      In May 1997,  a secured  line of credit was renewed and amended to include
an increase in the amount of the line from  $30,000,000  to  $50,000,000  and an
extension of the maturity to April 2000.  Outstanding  borrowings under the line
of credit were $6,950,000 and $26,200,000 at September 30, 1997 and December 31,
1996,  respectively.  This line of credit is secured by consumer receivables and
other secured loans.

      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.

                                       10
<PAGE>

                                                                       FORM 10-Q
                        LITCHFIELD FINANCIAL CORPORATION
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

      The Company also 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 October 1996 the Company amended the facility to
increase the facility from $75,000,000 to $100,000,000, subject to certain terms
and  conditions,  reduce  certain  credit  enhancement  requirements  and expand
certain loan  eligibility  criteria.  The outstanding  aggregate  balance of the
loans   pledged  and  sold  under  the  facility  at  any  time  cannot   exceed
$100,000,000. The facility expires in June 1998.

      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, 1997,  the  outstanding  balance of eligible  loans sold under the
facility was  $95,625,000.  Outstanding  borrowings  under the line of credit at
September  30,  1997  and  December  31,  1996  were  $320,000  and  $1,799,000,
respectively.  Interest  is  payable on the line of credit at an  interest  rate
based on certain commercial paper rates.

      On March 21, 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 1995 ("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, 1997,
the outstanding balance of the eligible loans previously sold under the facility
was $13,710,000.  There were no outstanding  borrowings under the line of credit
as of  September  30,  1997.  Interest  is  payable  on the line of credit at an
interest rate based on certain commercial paper rates.

      The 10.43%  promissory  note is payable monthly based on collection of the
underlying  collateral.  The note is  redeemable  only with the  approval of the
noteholder.  The note is  collateralized  by certain of the  Company's  retained
interests  in loan  sales  and cash.  The  balance  outstanding  on the note was
$5,797,000  and  $7,428,000  at  September  30,  1997  and  December  31,  1996,
respectively.

      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.

                                       11
<PAGE>
                                                                       FORM 10-Q
                        LITCHFIELD FINANCIAL CORPORATION
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

E. Derivative financial instruments held for purposes other than trading


      The  Company  enters  into  interest  rate swap  agreements  to modify the
interest  characteristics  of its outstanding debt. There are currently two swap
agreements in effect which  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 expense on outstanding debt,
(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 Company's  objective in managing  interest rate exposure is to match
its proportion of fixed versus  variable rate assets,  liabilities and loan sale
facilities.  The  interest  rate cap  entitles the company to receive an amount,
based on an amortizing notional amount, when commercial paper rates exceed 8%.

       Payments to be received as a result of the cap agreement are accrued as a
reduction  of  interest  expense.  The  Company is exposed to credit loss in the
event of non-performance by the cap provider.












                                       12

<PAGE>


                                                                       FORM 10-Q
   


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

      Litchfield  Financial  Corporation  is a specialty  finance  company which
provides  financing to creditworthy  borrowers for assets not typically financed
by banks. The Company  provides such financing by purchasing  consumer loans, by
making loans to businesses  secured by consumer  receivables and by making other
secured loans to businesses.

      Currently,  the Company  provides  financing for the purchase of rural and
vacation  properties  and  vacation  ownership  interests,  popularly  known  as
timeshare interests  ("Purchased Loans"). The Company also provides financing to
rural  land  dealers,   timeshare  resort   developers  and  others  secured  by
receivables   ("Hypothecation   Loans"),  to  dealers  and  developers  for  the
acquisition  and  development of rural land and timeshare  resorts ("A&D Loans")
and for other secured loans ("Other Loans").

      The principal sources of the Company's  revenues are (i) interest and fees
on loans,  (ii) gain  from the sale 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.

                                           Three months ended  Nine months ended
                                              September  30,      September 30,
                                           ------------------  -----------------
                                           1997        1996      1997     1996
                                           -----      -------   ------   ------
     Revenues:
         Interest and fees on loans.       60.8%       54.8%    64.2%      59.0%
         Gain on sale of  loans.....       32.5        40.3     30.2       34.8
         Servicing and other fee income     6.7         4.9      5.6        6.2
                                          -----       -----    -----      ------
                                          100.0       100.0    100.0      100.0
                                          -----       -----    -----      ------
     Expenses:
         Interest expense...........       33.1        26.4     34.8       29.0
         Salaries and employee benefits    10.7         9.7     11.3       11.6
         Other operating expenses...       10.8        12.5     11.8       12.2
         Provision for loan losses..        2.9         6.0      4.4        7.7
                                         ------       -----    -----      ------
                                           57.5        54.6     62.3       60.5
                                         ------       -----     ----      ------

     Income before income taxes  ...       42.5        45.4     37.7       39.5
     Provision for income taxes.....       16.3        17.5     14.5       15.2
                                         ------       -----    -----     -------
     Net income.....................       26.2%       27.9%    23.2%      24.3%
                                         ======       =====    =====     =======




                                       13
<PAGE>


                                                                       FORM 10-Q

      Revenues increased 18.4% and 26.1% to  $8,263,000  and $22,361,000 for the
three and nine months ended  September 30, 1997, from $6,977,000 and $17,728,000
for the same  periods in 1996.  Net income for the three and nine  months  ended
September  30,  1997  increased  11.0% and 20.4% to  $2,161,000  and  $5,186,000
compared  to  $1,946,000  and  $4,308,000  for the same  periods  in 1996.  Loan
originations  grew 31.9% and 37.6% to $51,235,000 and $134,546,000 for the three
and nine months ended  September 30, 1997 from  $38,837,000  and $97,789,000 for
the same periods in 1996. The Serviced Portfolio increased 34.7% to $297,098,000
at September 30, 1997 from $220,507,000 at September 30, 1996.

      Interest and fees on loans  increased  31.4% and 37.2% to  $5,025,000  and
$14,354,000  for the  three  and nine  months  ended  September  30,  1997  from
$3,823,000 and $10,463,000 for the same periods in 1996, primarily as the result
of the higher average  balance of loans held for sale and other loans during the
1997 periods.  The average rate earned on loans owned and retained  interests in
loan sales  decreased to 12.3% at September 30, 1997 from 12.7% at September 30,
1996,  primarily  due to the  effect of the growth in  Hypothecation  Loans as a
percentage of the Serviced Portfolio. Hypothecation Loan yields are usually less
than Land Loan or VOI Loan yields,  but Hypothecation  Loans servicing costs and
loan losses are generally less as well.

      Gain on the sale of  loans  decreased  4.5% to  $2,684,000  for the  three
months ended September 30, 1997 from $2,811,000 in the same period in 1996. Gain
on the sale of loans  increased  9.5% to  $6,751,000  for the nine months  ended
September  30, 1997 from  $6,165,000  in the same period in 1996.  The volume of
loans sold increased  79.3% and 72.1% to  $38,694,000  and  $78,195,000  for the
three and nine months ended September 30, 1997 from  $21,582,000 and $45,430,000
during  the  corresponding  periods  in 1996.  Gain on sale of  loans  decreased
despite  the  increase  in the volume of loans sold for the three  months  ended
September 30, 1997 and increased less than the volume of loans sold for the nine
months ended  September 30, 1997 primarily due to the lower yield on the sale of
Hypothecation  Loans in the second and third  quarters and, to a lesser  extent,
the lower  amount of discount  relating to loans sold.  The yield on the sale of
Hypothecation  Loans is  significantly  less than the typical  yield on sales of
consumer receivables primarily due to shorter average maturities.

      Servicing and other fee income  increased  61.5% and 14.2% to $554,000 and
$1,256,000 for the three and nine months ended September 30, 1997, from $343,000
and  $1,100,000 for the same periods in 1996 mostly due to the increase in other
fee income  resulting  from the collection of a significant  prepayment  penalty
from a  Hypothecation  Loan during the three  months ended  September  30, 1997.
Although  loans  serviced  for  others  increased  38.3% to  $174,009,000  as of
September 30, 1997 from  $125,793,000  at September 30, 1996,  servicing  income
remained  relatively constant due to a decrease in the average servicing fee per
loan.

      Interest  expense  increased  48.3% and 51.3% to $2,733,000 and $7,775,000
during the three and nine months ended  September 30, 1997 from  $1,843,000  and
$5,140,000  for the same  periods in 1996.  The  increase  in  interest  expense
primarily  reflects an increase in average  borrowings  which was only partially
offset by a slight  decrease in average rates.  During the three and nine months
ended September 30, 1997,  borrowings averaged  $112,159,000 and $105,688,000 at
an average rate of 9.0% and 9.1%,  respectively,  as compared to $72,379,000 and
$66,972,000, at an average rate of 9.3% and 9.2%, respectively,  during the same
periods in 1996.  Interest  expense  includes the  amortization of deferred debt
issuance costs.

                                       14
<PAGE>
                                                                       FORM 10-Q

      Salaries and employee  benefits  increased 31.4% and 23.1% to $883,000 and
$2,529,000 for the three and nine months ended  September 30, 1997 from $672,000
and $2,054,000 for the same periods in 1996 because of an increase in the number
of  employees  in 1997 and, to a lesser  extent,  an increase in  salaries.  The
number of full time  equivalents  increased to 67 at September 30, 1997 compared
to 56 at  September  30,  1996.  Personnel  costs as a  percentage  of  revenues
increased  to 10.7% for the three months ended  September  30, 1997  compared to
9.7% for the same period in 1996.  Personnel  costs as a percentage  of revenues
decreased  slightly to 11.3% for the nine months ended  September  30, 1997 from
11.6% for the same period in 1996  primarily  as a result of  subcontracting  of
additional  servicing to a third party in April,  1996.  As a percentage  of the
Serviced  Portfolio,  personnel costs decreased to 1.19% and 1.14% for the three
and nine  months  ended  September  30,  1997 from  1.22% and 1.24% for the same
periods in 1996.

      Other operating  expenses  increased 1.8% to $889,000 for the three months
ended  September  30,  1997 from  $873,000  for the same  period in 1996.  Other
operating  expenses  increased  22.7% to  $2,645,000  for the nine months  ended
September 30, 1997 from  $2,155,000 for the same period in 1996 primarily as the
result  of  subcontracting  of  servicing  to a third  party  and  growth in the
Serviced  Portfolio.  As a percentage  of  revenues,  other  operating  expenses
decreased to 10.8% and 11.8% for the three and nine months ended  September  30,
1997  compared to 12.5% and 12.2% for the  corresponding  periods in 1996.  As a
percentage of the Serviced  Portfolio,  other  operating  expenses  decreased to
1.20% and 1.19% for the three and nine  months  ended  September  30,  1997 from
1.58% and 1.30% for the same periods in 1996.

      During the three and nine months ended  September  30,  1997,  the Company
decreased its provision for loan losses 41.9% and 28.7% to $244,000 and $979,000
from  $420,000 and  $1,374,000  for the same periods in 1996.  The provision for
loan  losses  increased  less than the  increase  in loans  owned  and  retained
interests  in loan  sales  because  of the  growth in  Hypothecation  Loans as a
percentage  of the  Serviced  Portfolio.  Hypothecation  Loans have  experienced
significantly lower delinquency and default rates than Purchased Loans.


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  $327,646,000  of loans at face
value  ($249,451,000  through December 31, 1996). The principal amount remaining
on the loans sold was  $174,009,000  at September 30, 1997 and  $129,619,000  at
December 31,  1996.  In June and August 1997,  the Company  completed  its first
securitizations of $15,325,000 and $25,465,000 of Hypothecation Loans in private
placements.  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 $9,675,000 of loans at September 30, 1997
which the  Company  could be required to  repurchase  in the future  should such
loans  become 90 days or more past due.  The Company  repurchased  $104,000  and
$558,000 as compared to $264,000  and  $778,000 of such loans under the recourse
provisions  of loan sales during the three and nine months ended  September  30,
1997 and 1996,  respectively.  As of  September  30,  1997,  $19,875,000  of the
Company's cash was restricted as credit  enhancement for certain  securitization
programs.
                                       15
<PAGE>


      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.  In January 1997, an
additional  secured line of credit was increased from  $5,000,000 to $8,000,000.
This  line of  credit  matures  in  January  1998.  There  were  no  outstanding
borrowings  on this line of credit at September  30, 1997 and December 31, 1996.
This line of credit is secured by consumer receivables and other secured loans.

      In January 1997, an additional  secured line of credit was increased  from
$15,000,000  to  $20,000,000.  Outstanding  borrowings  under this facility were
$7,050,000  and  $8,300,000  at  September  30,  1997  and  December  31,  1996,
respectively.  This  facility is secured by certain  retained  interests in loan
sales, cash collateral accounts and certain other loans and matures in September
1999.

      On March 5, 1997,  the  Company  entered  into an  additional  $25,000,000
secured line of credit.  The  outstanding  borrowings at September 30, 1997 were
$6,152,000.  The facility is secured by loans to  developers  of VOI 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.

      On March 21, 1997, the Company  entered into a $3,000,000  secured line of
credit with an additional financial institution.  This line of credit is secured
by consumer receivables and other secured loans and matures in March 1998. There
were no outstanding borrowings at September 30, 1997.

      In May 1997,  a secured  line of credit was renewed and amended to include
an increase in the amount of the line from  $30,000,000  to  $50,000,000  and an
extension of the maturity to April 2000.  Outstanding  borrowings under the line
of credit were $6,950,000 and $26,200,000 at September 30, 1997 and December 31,
1996,  respectively.  This line of credit is secured by consumer receivables and
other secured loans.

      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.

      The Company also 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 October 1996 the Company amended the facility to
increase the facility from $75,000,000 to $100,000,000, subject to certain terms
and  conditions,  reduce  certain  credit  enhancement  requirements  and expand
certain loan  eligibility  criteria.  The outstanding  aggregate  balance of the
loans   pledged  and  sold  under  the  facility  at  any  time  cannot   exceed
$100,000,000. The facility expires in June 1998.

      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, 1997,  the  outstanding  balance of eligible  loans sold under the
facility was  $95,625,000.  Outstanding  borrowings  under the line of credit at
September  30,  1997  and  December  31,  1996  were  $320,000  and  $1,799,000,

                                       16
<PAGE>
                                                                       FORM 10-Q

respectively.  Interest  is  payable on the line of credit at an  interest  rate
based on certain commercial paper rates.

      On March 21, 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 1995 ("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, 1997,
the outstanding balance of the eligible loans previously sold under the facility
was $13,710,000.  There were no outstanding  borrowings under the line of credit
as of  September  30,  1997.  Interest  is  payable  on the line of credit at an
interest rate based on certain commercial paper rates.

      The 10.43%  promissory  note is payable monthly based on collection of the
underlying  collateral.  The note is  redeemable  only with the  approval of the
noteholder.  The note is  collateralized  by certain of the  Company's  retained
interests  in loan  sales  and cash.  The  balance  outstanding  on the note was
$5,797,000  and  $7,428,000  at  September  30,  1997  and  December  31,  1996,
respectively.

      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 June 1997,  the Company  entered  into  interest  rate swap  agreements
whereby it pays the counterparty interest at the prime rate on a notional amount
of $110,000,000 and it receives from the counterparty interest at the commercial
paper rate plus a spread on a notional amount of $80,000,000 and interest at the
LIBOR  rate  plus a  spread  on a  notional  amount  of  $30,000,000.  The  swap
agreements expire in June 2000.

      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 possible  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  were 1.31% as of September  30, 1997  compared with 1.34% at December
31, 1996 and 1.43% at September 30, 1996.  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

                                       17
<PAGE>
                                                                       FORM 10-Q

which  dealer/developer  reserves and  guarantees can be expected to absorb loan
losses.  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 $5,730,000 at September 30, 1997 compared to $4,528,000 at December
31, 1996.  The allowance  ratio (the  allowances  for loan losses divided by the
amount of the Serviced  Portfolio) at September 30, 1997  increased  slightly to
1.93% from 1.87% at December 31, 1996.

      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
$10,890,000  and  $10,628,000  at  September  30, 1997 and  December  31,  1996,
respectively.   The  Company  generally  returns  any  excess  reserves  to  the
dealer/developer  on a  quarterly  basis as the  related  loans  are  repaid  by
borrowers.

Inflation

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



                                       18


<PAGE>
                                                                       FORM 10-Q

PART II - OTHER INFORMATION

Item 1.  Legal Proceedings

            None

Item 2.  Changes in Securities

            None

Item 3.  Defaults Upon Senior Securities

            None

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

            None

Item 5.  Other Information

          None

Item 6.     (a) Exhibits

            The following exhibits are filed herewith:

         10.157  Employment agreement, dated as of March 17,1997, between the
                 Company and Joseph S. Weingarten.

         10.158  Asset  Purchase  Agreement,  dated  March  21,  1997  among the
                 Company,  Litchfield Capital Corporation,  Eaglefunding Capital
                 Corporation  and The First  National  Bank of  Boston,  as deal
                 agent.

         11.1    Statement re: computation of earnings per share

         27.1    Financial Data Schedule

         (b) Reports on Form 8-K

         Form 8-K filed on July 8, 1997  listing the press release dated July 7,
         1997   relating   to  the  announcement  of  the  1997  second  quarter
         originations.

         Form 8-K filed on July 22, 1997  listing the press  release  dated July
         22,  1997  relating  to the  announcement  of the 1997  second  quarter
         earnings.



                                       19

<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: October 29, 1997                 /s/ Richard A. Stratton
                                       -----------------------
                                       RICHARD A. STRATTON
                                       Chief Executive Officer,
                                       President and Director





DATE: October 29, 1997                /s/ Ronald E. Rabidou
                                      ---------------------
                                      RONALD E. RABIDOU
                                      Chief Financial Officer







<PAGE>