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, 1996
                                           __________________

                    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)


                    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  November   12,  1996,   5,444,399   shares  of  common  stock  of
Litchfield Financial Corporation were outstanding.

                                       1
<PAGE>



                    LITCHFIELD FINANCIAL CORPORATION
                                FORM 10-Q

                    QUARTER ENDED SEPTEMBER 30, 1996

                                  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         11


PART II - OTHER INFORMATION

     Item 1. Legal Proceedings                                     17

     Item 2. Changes in Securities                                 17

     Item 3. Defaults Upon Senior Securities                       17

     Item 4. Submission of Matters to a Vote of Security Holders   17

     Item 5. Other Information                                     17

     Item 6. Exhibits and Reports on Form 8-K                      17


SIGNATURES                                                         18










                                       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)

                                                            September   December
                                                            30, 1996    31, 1995
                                                           __________    _______
                                                           (unaudited)
                                 ASSETS
Cash and cash equivalents                                    $ 10,510   $ 18,508
Restricted cash and cash equivalents                           18,042     16,345
Loans held for sale, net of allowance for loan
   losses of $580 in 1996 and $1,100 in 1995                    8,699     14,380
Loans held for investment, net of allowance for
   loan losses of $938 in 1996 and $413 in 1995                63,889     33,613
Subordinated pass-through certificates held to
   maturity, net of allowance for loan losses 
   of $1,500 in 1996 and $1,270 in 1995                        17,648     13,468
Excess servicing asset                                         11,810     10,058
Deferred debt issuance costs                                    1,917      2,211
Other assets                                                    4,743      4,808
                                                             --------   --------
   Total assets                                              $137,258   $113,391
                                                             ========   ========

                  LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
   Lines of credit                                           $ 21,600   $    ---
   Term note payable                                            7,866      9,836
   Accounts payable and accrued liabilities                     2,907      4,442
   Dealer/developer reserves                                    9,951      9,644
   Allowance for loans sold                                     1,300        932
   Deferred income taxes                                        4,780      3,740
                                                               ------     ------
                                                               48,404     28,594
                                                               ------     ------

   10% Notes due 2002                                          12,888     12,888
   8 7/8 % Notes due 2003                                      15,930     16,113
   10% Notes 2004                                              18,280     18,400
                                                               ------     ------
                                                               47,098     47,401
                                                               ======     ======

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, 5,493,389 shares issued and 5,444,399 shares
   outstanding in 1996; 5,223,715 shares issued and
   5,174,715 shares outstanding in 1995                            55         52
Additional paid in capital                                     35,226     31,873
Retained earnings                                               7,069      6,065
Less 48,990 common shares held in treasury, at cost,            (594)      (594)
Total stockholders' equity                                     41,756     37,396
                                                             --------   --------
Total liabilities and stockholders' equity                   $137,258   $113,391
                                                             ========   ========


 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


                                                Three Months Ended September 30,
                                                ________________________________

                                                                 1996       1995
                                                                ______    ______
Revenues:
   Interest income                                             $3,747     $2,814
   Gain on sale of loans                                        2,811      2,149
   Loan origination and fee income                                315        227
   Servicing income                                               263        274
                                                                -----      -----
                                                                7,136      5,464
                                                                -----      -----
                     

Expenses:
   Interest expense                                             1,843      1,639
   Salaries and employee benefits                                 806        640
   Other operating expenses                                       898        663
   Provision for loan losses                                      420        195
                                                                -----      -----
                                                                3,967      3,137
                                                                -----      -----


Income before income taxes                                      3,169      2,327
Provision for income taxes                                      1,223        873
                                                               ------     ------
Net income                                                     $1,946     $1,454
                                                               ======     ======

Primary and fully-diluted net income per common share           $ .34      $ .33
                                                                =====      =====

Weighted average number of shares                           5,720,924  4,412,366




















 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


                                                 Nine Months Ended September 30,
                                                 _______________________________
                                                                1996        1995
                                                             ________   ________
Revenues:
   Interest income                                            $10,260     $7,786
   Gain on sale of loans                                        6,165      3,920
   Loan origination and fee income                                904        550
   Servicing income                                               783        532
                                                               ------     ------
                                                               18,112     12,788
                                                               ------     ------

Expenses:
   Interest expense                                             5,140      4,593
   Salaries and employee benefits                               2,372      1,616
   Other operating expenses                                     2,219      1,580
   Provision for loan losses                                    1,374        518
                                                               ------      -----
                                                               11,105      8,307
                                                               ------      -----

Income before income taxes                                      7,007      4,481
Provision for income taxes                                      2,699      1,682
                                                               ------     ------
Net income                                                     $4,308     $2,799
                                                               ======     ======


Primary and fully-diluted net income per common share            $.75       $.64
                                                                 ====       ====

Weighted average number of shares                           5,715,391  4,398,797



















 See accompanying notes to unaudited consolidated financial statements.

                                       5

<PAGE>

                                                                       FORM 10-Q

                        LITCHFIELD FINANCIAL CORPORATION
                 Consolidated Statements of Stockholders' Equity
                                   (in 000's)
                                    Unaudited















                                     Additional
                             Common    Paid In  Retained    Treasury
                              Stock    Capital  Earnings       Stock       Total
                             ______  _________  ________    ________       _____

Balance, December 31, 1995      $52    $31,873   $ 6,065      $(594)     $37,396

  Issuance of 10,560 shares 
    of common stock 
    (including reissuance 
     of 10 shares held in
     treasury)                  ---         52       ---        ---           52

  5% Stock dividend               3      3,301    (3,304)       ---          ---

  Net income                    ---        ---     4,308        ---        4,308
                                ---    -------    ------       -----     -------
Balance, September 30, 1996     $55    $35,226    $7,069       $(594)    $41,756
                                ===    =======    ======       =====     =======

















 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

                                                 Nine Months Ended September 30,
                                                 _______________________________
                                                              1996        1995
                                                             ______      ______

Cash flows from operating activities:
    Net income                                                $4,308     $2,799
    Adjustments to reconcile net income to net cash
      used in operating activities:
      Gain on sale of loans                                   (6,165)    (3,920)
      Amortization and depreciation                              462        357
      Provision for loan losses                                1,374        518
      Deferred income taxes                                    1,040        592
      Net changes in operating assets and liabilities:
         Restricted cash and cash equivalents                 (1,697)    (4,686)
         Loans held for sale                                   5,681     (6,812)
         Excess servicing asset                                1,841       (800)
         Dealer/developer reserves                               307      2,976
         Net change in other assets and liabilities           (4,263)      (969)
                                                              ------     -------
      Net cash provided by (used in) operating activities      2,888     (9,945)
                                                              ------     -------

Cash flows from investing activities:
   Purchase of investments held to maturity                      ---     (5,595)
   Redemption of investments held to maturity                    101      9,196
   Net originations and principal payments
      on loans held for investment                           (30,276)   (19,554)
   Repayments of loans held for investments                      ---     11,364
   Capital expenditures and other assets                         (90)    (2,107)
                                                             --------    -------
      Net cash used in investing activities                  (30,265)    (6,696)
                                                             ========    =======

Cash flows from financing activities:
Net borrowings (repayments) on lines of credit                21,600     (5,823)
Retirement of long-term Notes                                   (303)      (875)
Proceeds from issuance of long-term Notes                        ---     18,400
Proceeds from term note                                          ---     12,500
Payments on term note                                         (1,970)    (1,981)
Net proceeds from issuance of common stock                        52        215
                                                              ------     -------
Net cash provided by financing activities                     19,379     22,436
                                                              ------     -------


Net increase (decrease) in cash and
   cash equivalents                                           (7,998)      5,795
Cash and cash equivalents, beginning of period                18,508       5,534
                                                              -------    -------
Cash and cash equivalents, end of period                      $10,510    $11,329
                                                              =======    =======


Supplemental Schedule of Noncash Financing and 
Investing Activities:
   Exchange of mortgage loans for subordinated
   pass-through certificates                                   $3,540     $8,842
                                                               ======     ======
   Exchange of mortgage loans for investments held
   to maturity                                                 $  ---     $  358
                                                               ======     ======
Transfers from loans to real estate acquired
   through foreclosure                                         $  498     $  824
                                                               ======     ======

Supplemental Cash Flow Information:
   Interest paid                                               $4,806     $4,315
                                                               ======     ======
   Income taxes paid                                           $1,154     $1,090
                                                               ======     ======


 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, 1996 and for the three and nine month periods ended  September 30,
1996  and  1995  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, 1996, are not  necessarily  indicative of
the  results  expected  for the  year  ended  December  31,  1996.  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, 1995.

     In May, 1995, the Financial  Accounting  Standards Board issued  Accounting
Standard No. 122,  "Accounting for Mortgage  Servicing  Rights;  an Amendment of
FASB Statement No. 65." The provisions of this standard are effective for fiscal
years beginning after December 15, 1995. Adoption of this standard as of January
1, 1996 did not have a significant impact on the Company.

     In October 1995, the Financial  Accounting Standards Board issued Statement
of  Financial   Accounting   Standards  No.  123   "Accounting  for  Stock-Based
Compensation."  The  Company  intends  to  continue  to  account  for its  stock
compensation  arrangements  under the provisions of APB No. 25  "Accounting  for
Stock Issued to Employees" with adoption of the new standard for the fiscal year
ending December 31, 1996.

     In June 1996, the Financial  Accounting Standards Board issued Statement of
Financial  Accounting  Standards No. 125 "Accounting for Transfers and Servicing
of  Financial  Assets and  Extinguishments  of  Liabilities."  In  general,  the
provisions of this standard are effective for financial statements for transfers
and servicing of financial assets and  extinguishments of liabilities  occurring
after December 31, 1996, and shall be applied  prospectively.  Due to the recent
issuance of the  standard,  the Company has not fully  evaluated the impact that
the  adoption of the standard is expected to have on its  financial  statements.
However,  our  preliminary  evaluation  is that  adoption of the standard is not
expected to have a significant impact on the Company.

     On July 23,  1996,  the Board of Directors  declared a five  percent  stock
dividend on the Company's Common Stock payable August 9, 1996 to stockholders of
record on July 23, 1996.  Accordingly,  all per share amounts have been restated
to reflect the stock dividend.

B.  Sale of  Notes

     Since its  inception,  the Company has sold  $239,945,000  of loans at face
value  ($194,515,000  through December 31, 1995). The principal amount remaining

                                       8

<PAGE>

                                                                       FORM 10-Q
                        LITCHFIELD FINANCIAL CORPORATION

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

on the loans sold was  $125,793,000  at September 30, 1996 and  $111,117,000  at
December 31, 1995.  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  consumer,   default  by  the  dealer/developer  on  its
guarantee,  and  the  determination  that  the  collateral  is of no  value  was
$8,839,000 at September 30, 1996 ($10,259,000 at December 31, 1995). The Company
repurchased $264,000 and $110,000 of loans under the recourse provisions of loan
sales during the three months ended  September 30, 1996 and 1995,  respectively.
Loans repurchased  during the nine months ended September 30, 1996 and 1995 were
$778,000 and $329,000, respectively, and $448,000 during the year ended December
31,  1995.  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.
Also, in connection with certain  securitization  programs,  $17,734,000 of cash
and cash  equivalents  are  restricted as credit  enhancements  at September 30,
1996.

     The  Company's  Serviced  Portfolio  is  geographically   diversified  with
collateral and consumers located in 41 and 50 states, respectively. At September
30, 1996,  14.1% and 9.9% of the collateral by property  balance were located in
Texas and California,  respectively,  and 13.4%, 10.2% and 9.9% of the borrowers
by  collateral   location   were  located  in  Texas,   Florida  and  New  York,
respectively.

C.  Debt

     At September 30, 1996,  the Company had a secured  warehouse line of credit
of  $20,000,000  with an over line of  $5,000,000  from the Bank of Boston.  The
Company can elect to borrow all or part of the  outstanding  balance on the line
of credit  and the over line at either  the Bank's  prime  interest  rate or the
Eurodollar rate plus 2%. Outstanding borrowings under the line of credit and the
over line at  September  30,  1996 were  $21,600,000.  On October  2, 1996,  the
warehouse line of credit was amended to include a $10,000,000  syndication  with
Fleet  Bank - NH. The  borrowings  on the over line were  incorporated  into the
amended facility and the over line expired. Bank of Boston is the agent bank for
the facility.  The warehouse line of credit matures in April 1997,  with renewal
at the lender's  discretion.  At December 31, 1995 the secured warehouse line of
credit was  $15,000,000 at the Bank's prime interest rate plus 1%. There were no
outstanding  borrowings  at December  31, 1995.  On July 23,  1996,  the Company
entered into an  additional  secured line of credit of  $5,000,000  with another
financial  institution at that institution's  prime rate of interest plus 1.25%.
This warehouse  line of credit  matures in July 1997.  There were no outstanding
borrowings on this line of credit at September 30, 1996. The lines of credit are
secured by consumer  receivables and other secured loans. On September 13, 1996,
the Company  entered into a $15,000,000  revolving line of credit  facility with
the  Bank  of  Scotland.   The  facility  is  secured  by  certain  subordinated
pass-through  certificates  and excess servicing assets and matures in September
1999. Interest is payable quarterly in arrears at the Bank's prime interest rate
plus 1%. There were no outstanding  borrowings  under this facility at September
30,  1996.  The Company is not  required to  maintain  compensating  balances or
forward sales commitments under the terms of these lines of credit.

                                       9

<PAGE>

                                                                       FORM 10-Q

                        LITCHFIELD FINANCIAL CORPORATION

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

     The Company also has a revolving  line of credit as part of an asset backed
commercial  paper facility with Holland Limited  Securitization,  Inc. ("HLS") a
multi-seller  commercial  paper issuer sponsored by  Internationale  Nederlanden
(U.S.) Capital Markets,  Inc. ("ING").  In October 1996, the Company amended the
facility to increase the facility to $100 million,  subject to certain terms and
conditions,  reduce certain credit  enhancement  requirements and expand certain
loan eligibility criteria. The facility expires in June 1998.

     In  connection  with the HLS  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 HLS or sells the loans to HLS. HLS issues  commercial  paper
or other  indebtedness to fund the purchase or pledge of loans from LMSC. HLS is
not affiliated with the Company or its affiliates. As of September 30, 1996, the
outstanding  balance of loans sold under the facility was  $69,133,000 and there
were no outstanding borrowings under the line of credit.  Interest is payable on
the line of credit based on certain commercial paper rates.

     During  the first  quarter  of 1995,  the  Company  entered  into a 10.43%,
$12,500,000  debt  placement  with an  insurance  company.  Principal 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 investments in Class B subordinated pass-through  certificates,
excess  servicing  assets,  and cash.  At  September  30,  1996,  the  remaining
principal balance was $7,866,000 and the value of the underlying  collateral was
approximately $14,014,000.

     On March 15, 1995, the Company  completed a public  offering of $18,400,000
of 10% Notes due 2004.  The Company  repaid  $120,000 of these notes pursuant to
the noteholders'  annual  redemption  rights on April 1, 1996. On August 1, 1996
and June 1, 1996 the Company  repaid $20,000 and $163,000,  respectively  of the
1993 Notes due 2003 pursuant to the noteholders' annual redemption rights.











                                       10

<PAGE>

                                                                       FORM 10-Q

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


     Litchfield  Financial  Corporation (the "Company") is a specialty  consumer
finance company which provides  financing for the purchase of rural and vacation
properties  ("Land Loans") and financing of vacation  ownership  interests ("VOI
Loans"),  popularly known as timeshare interests. In addition, the Company makes
loans to rural land dealers and resort developers of vacation properties secured
by consumer  receivables  and other  secured loans  (collectively  "Dealer/Other
Loans").

     The principal  sources of the Company's  revenues are (i) interest  income,
(ii) gain from the sale of loans, (iii) loan origination and fee income and (iv)
servicing income. Gains on sales of loans are based principally upon the present
value of the  difference  between the interest to be collected from the borrower
and the  interest  to be  passed  on to the  purchaser  of the loan  during  the
estimated average life of the loans, less a normal servicing fee (referred to as
"excess servicing asset"). In addition,  the Company realizes gains from selling
loans  which  were  purchased  at a  discount.  The  excess  servicing  asset is
amortized  over the estimated  term of the loans using the interest  method.  If
prepayment or default  assumptions prove inaccurate,  then in subsequent periods
the excess  servicing asset may be adjusted for unfavorable  changes.  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,
                                     ___________________       _________________
                                         1996     1995           1996    1995
                                         ____     ____           ____    ____

Revenues:
    Interest income                      52.5%    51.5%          56.7%    60.9%
    Gain on sale of  loans               39.4     39.3           34.0     30.6
    Loan origination and fee income       4.4      4.2            5.0      4.3
    Servicing income                      3.7      5.0            4.3      4.2
                                        -----    -----          -----    -----
                                        100.0    100.0          100.0    100.0
                                        -----    -----          -----    -----
Expenses:
    Interest expense                     25.8     30.0           28.4     35.9
    Salaries and employee benefits       11.3     11.7           13.1     12.6
    Other operating expenses             12.6     12.1           12.2     12.4
    Provision for loan losses             5.9      3.6            7.6      4.1
                                         ----     ----           ----     ----
                                         55.6     57.4           61.3     65.0
                                         ----     ----           ----     ----

Income before income taxes               44.4     42.6           38.7     35.0
Provision for income taxes               17.1     16.0           14.9     13.1
                                         ----     ----           ----     ----
Net income                               27.3%    26.6%          23.8%    21.9%
                                         ====     ====           ====     ====



                                       11

<PAGE>

                                                                       FORM 10-Q

     Revenues  increased  30.6% and 41.6% to $7,136,000 and  $18,112,000 for the
three and nine months ended  September 30, 1996, from $5,464,000 and $12,788,000
for the same  periods in 1995.  Net income for the three and nine  months  ended
September  30,  1996  increased  33.8% and 53.9% to  $1,946,000  and  $4,308,000
compared to $1,454,000  and  $2,799,000 for the same periods in 1995. Net income
as a percentage of revenues  increased to 27.3% and 23.8% for the three and nine
months ended  September  30, 1996  compared to 26.6% and 21.9% for the three and
nine months ended September 30, 1995.

     Interest income increased 33.2% and 31.8% to $3,747,000 and $10,260,000 for
the  three  and nine  months  ended  September  30,  1996  from  $2,814,000  and
$7,786,000 for the same periods in 1995, primarily as the result of the increase
in  loans  held  for  investment  and  subordinated  pass-through  certificates.
Interest  on  loans  and  subordinated  pass-through   certificates,   cash  and
investments,  and excess servicing revenue  comprised 80.3%,  6.3%, and 13.4% of
interest  income for the three months ended  September  30, 1996,  compared with
82.5% 9.3%, and 8.2% in the same period in the prior year. Interest on loans and
subordinated  pass-through  certificates,   cash  and  investments,  and  excess
servicing  revenue  comprised  82.7%,  7.9%, and 9.4% of interest income for the
nine months ended September 30, 1996,  compared with 80.7%,  10.4%,  and 8.9% in
the same period in the prior  year.  Interest  earned on loans and  subordinated
pass through certificates increased 29.7% and excess servicing revenue increased
115.9%,  while interest earned on cash and  investments  decreased 9.9%, for the
three months ended  September  30, 1996 compared to the same period in the prior
year.  Interest  earned  on loans  and  subordinated  pass-through  certificates
increased 34.9% and excess servicing  revenue  increased  40.1%,  while interest
earned on cash and  investments  remained  constant  for the nine  months  ended
September  30, 1996  compared to the same period in the prior year.  The average
rate earned on loans owned and subordinated  pass-through certificates decreased
to 12.7% for the three and the nine month periods ended  September 30, 1996 from
13.4% and 13.1% for the three and nine month periods ended September 30, 1995.

     Gain on the sale of loans  increased  30.8%  and  57.3% to  $2,811,000  and
$6,165,000  for the  three  and  nine  months  ended  September  30,  1996  from
$2,149,000 and $3,920,000 for the same periods in 1995. The volume of loans sold
increased  42.7% to  $21,582,000  for the three months ended  September 30, 1996
from $15,128,000 for the same period in 1995. The volume of loans sold decreased
17.4%  to  $45,430,000  for the  nine  months  ended  September  30,  1996  from
$54,967,000   for  the  same  period  in  1995.   The  primary  reason  for  the
disproportionate  increase in the gain on sale of loans  despite the decrease in
the loan sales was that the  Company did not  recognize  any gain on the sale of
$27,155,000  of VOI Loans  purchased  from GEFCO in the second  quarter of 1995.
This was consistent with the purchase method of accounting.

     Loan  origination and fee income  increased 38.8% and 64.4% to $315,000 and
$904,000 for the three and nine months ended  September  30, 1996 from  $227,000
and $550,000 for the same periods in 1995. This increase in fee income primarily
reflected an increase in Dealer/Other Loan originations during 1996.

     Loans serviced for others  increased  17.8% to $125,793,000 as of September
30, 1996 from  $106,819,000 at September 30, 1995.  Servicing  income  increased
47.2% to $783,000 for the nine months ended  September  30, 1996,  from $532,000
for the same period in 1995  because of the higher  average  Serviced  Portfolio
during the 1996 period,  primarily as the result of the acquisition of the GEFCO
portfolio in April 1995.  Servicing  income  decreased 4.0%, to $263,000 for the

                                       12
<PAGE>

                                                                       FORM 10-Q

three months ended September  30,1996 from $274,000 for the same period in 1995,
due to the decrease in the average  servicing fee per loan.  In connection  with
the Company's continued growth, the Company decided to subcontract its servicing
rights in order to avoid incurring  additional  fixed overhead costs  associated
with such servicing.  Accordingly, the Company subcontracted, to an unaffiliated
third party, the servicing of VOI Loans in 1995 and the remaining loans in April
1996.

     Interest  expense  increased  12.4% and 11.9% to $1,843,000  and $5,140,000
during the three and nine months ended  September 30 , 1996 from  $1,639,000 and
$4,593,000 for the same periods in 1995.  During the three and nine months ended
September   30,  1996,   borrowings   averaged   $72,379,000   and   $66,972,000
respectively,  at an average  rate of 9.3% and 9.2%,  respectively,  compared to
$59,697,000  and  $54,628,000  at average rates of 9.8% and 9.7% during the same
periods in 1995. Average borrowings increased proportionately more than interest
expense because of the Company's  ability to secure  financing at more favorable
interest rates in 1996.  Interest  expense includes the amortization of deferred
debt issuance costs.

     Salaries and employee  benefits  increased  25.9% to $806,000 for the three
months  ended  September  30,  1996 from  $640,000  for the same period in 1995,
Salaries and employee  benefits  increased  46.8%,  to  $2,372,000  for the nine
months ended  September  30, 1996 from  $1,616,000  for the same period in 1995,
because of an increase in certain  incentive  based  compensation  due to higher
originations  and an increase in the average number of employees during the 1996
period.  The total full time equivalent  employees  increased to 56 in September
1996 from 55 in September  1995. The average number of employees  working during
the 1996 periods  increased due to hiring additional staff to support the growth
in the Serviced Portfolio. Personnel costs as a percentage of revenues decreased
slightly to 11.3% for the three months ended  September  30, 1996 from 11.7% for
the same period in 1995.  Personnel costs as a percentage of revenues  increased
slightly to 13.1% for nine months  ended  September  30, 1996 from 12.6% for the
same period in 1995.

     Other  operating  expenses  increased  35.4%  and  40.4%  to  $898,000  and
$2,219,000 for the three and nine months ended  September 30, 1996 from $663,000
and $1,580,000 for the same periods in 1995,  primarily due to the growth in the
Serviced Portfolio.  Other operating expenses increased to 12.6% as a percentage
of revenue for the three months ended  September  30, 1996 compared to 12.1% for
the same period in 1995.  Other  operating  expenses as a percentage  of revenue
remained  relatively  constant at 12.2% for the nine months ended  September 30,
1996 compared to 12.4% for the same period in 1995.

     During the three and nine months  ended  September  30,  1996,  the Company
increased  its  provision  for loan losses  115.4% and 165.2%,  to $420,000  and
$1,374,000 from $195,000 and $518,000 for the same periods in 1995, primarily as
the result of the overall  increase  in the  Serviced  Portfolio  as well as the
proportionate increase in the percentage of non-guaranteed loans in the Serviced
Portfolio.  Historically,  the loan loss rate for non-guaranteed  loans has been
higher than the rate for guaranteed 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 cash  requirements

                                       13

<PAGE>

                                                                       FORM 10-Q

arise from loan  originations  and  purchases,  repayment of debt upon maturity,
payments of operating and interest expenses and loan repurchases.  The Company's
primary  sources of liquidity are sales into  secondary  markets of the loans it
originates and purchases, short-term borrowings under warehouse lines secured by
pledges  of its loans (in most cases  until such loans are sold and the  lenders
can be  repaid),  long-term  debt and  equity  offerings,  and cash  flows  from
operations.

     In  connection  with the  Company's  practice of selling the loans which it
originates and purchases,  the Company in some cases commits to repurchase  from
investors any such 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.  Based
on the Company's  repurchase  obligations  contained in certain of its loan sale
contracts,  there were  approximately  $8,839,000 of loans at September 30, 1996
which the  Company  could be required to  repurchase  in the future  should such
loans  become 90 days or more past due.  The Company  repurchased  $264,000  and
$778,000 of such loans under the  recourse  provisions  of loan sales during the
three and nine months ended September 30, 1996. Also, in connection with certain
securitization programs, $17,734,000 of cash and cash equivalents are restricted
as credit enhancements at September 30, 1996.

     The Company funds its loan purchases in part with borrowings  under various
bank warehouse  lines of credit.  Warehouse lines are paid down when the Company
receives  the  proceeds  from the sale of the  loans or when  cash is  otherwise
available.  At September 30, 1996,  the Company had a secured  warehouse line of
credit of $20,000,000  with an over line of $5,000,000  from the Bank of Boston.
The  Company can elect to borrow all or part of the  outstanding  balance on the
line of credit and the over line at either the Bank's prime interest rate or the
Eurodollar rate plus 2%. Outstanding borrowings under the line of credit and the
over line at  September  30,  1996 were  $21,600,000.  On October  2, 1996,  the
warehouse line of credit was amended to include a $10,000,000  syndication  with
Fleet  Bank - NH. The  borrowings  on the over line were  incorporated  into the
amended facility and the over line expired. Bank of Boston is the agent bank for
the facility.  The warehouse line of credit matures in April 1997,  with renewal
at the lender's  discretion.  At December 31, 1995 the secured warehouse line of
credit was  $15,000,000 at the Bank's prime interest rate plus 1%. There were no
outstanding  borrowings  at December  31, 1995.  On July 23,  1996,  the Company
entered into an  additional  secured line of credit of  $5,000,000  with another
financial  institution at that institution's  prime rate of interest plus 1.25%.
This warehouse  line of credit  matures in July 1997.  There were no outstanding
borrowings on this line of credit at September 30, 1996. The lines of credit are
secured by consumer  receivables and other secured loans. On September 13, 1996,
the Company  entered into a $15,000,000  revolving line of credit  facility with
the  Bank  of  Scotland.   The  facility  is  secured  by  certain  subordinated
pass-through  certificates  and excess servicing assets and matures in September
1999. Interest is payable quarterly in arrears at the Bank's prime interest rate
plus 1%. There were no outstanding  borrowings  under this facility at September
30,  1996.  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, 1996 and December 31, 1995, the Company had no unsecured  lines of
credit.

     The Company also has a revolving  line of credit as part of an asset backed
commercial  paper facility with Holland Limited  Securitization,  Inc. ("HLS") a
multi-seller  commercial  paper issuer sponsored by  Internationale  Nederlanden
(U.S.) Capital Markets,  Inc. ("ING").  In October 1996, the Company amended the
facility to increase the facility to $100 million,  subject to certain terms and
conditions,  reduce certain credit  enhancement  requirements and expand certain
loan eligibility criteria. The facility expires in June 1998.

                                       14

<PAGE>

                                                                       FORM 10-Q

     In  connection  with the HLS  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 HLS or sells the loans to HLS. HLS issues  commercial  paper
or other  indebtedness to fund the purchase or pledge of loans from LMSC. HLS is
not affiliated with the Company or its affiliates. As of September 30, 1996, the
outstanding  balance of loans sold under the facility was  $69,133,000 and there
were no outstanding borrowings under the line of credit.  Interest is payable on
the line of credit based on certain commercial paper rates.

     During  the first  quarter  of 1995,  the  Company  entered  into a 10.43%,
$12,500,000  debt  placement  with an  insurance  company.  Principal 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 investments in Class B subordinated pass-through  certificates,
excess  servicing  assets,   and  cash.  At  September  30,  1996,  the  balance
outstanding  on the  note  was  $7,866,000  and  the  value  of  the  underlying
collateral was approximately $14,014,000.

     On March 15, 1995, the Company  completed a public  offering of $18,400,000
of 10% Notes due 2004 ("1995 Notes").  The 1995 Notes allow for a maximum annual
redemption of $920,000 and contain certain restrictions regarding the payment of
dividends and require the maintenance of certain  financial  ratios. On April 1,
1996 the noteholders redeemed,  and the Company paid $120,000 of the 1995 Notes.
On October 31, 1995, the Company completed a public offering of 1,250,000 shares
of common  stock at a price of $15 per share.  The net  proceeds  to the Company
were approximately $17,325,000 after deducting expenses related to the offering.

     Previously,  the Company significantly increased its capital base through a
$9,500,000  initial public offering in February,  1992 and public debt offerings
of  $15,065,000  in November  1992 ("1992  Notes") and  $17,570,000  in May 1993
("1993  Notes").  The 1992 Notes and the 1993 Notes bear  interest  at 10% and 8
7/8%, respectively,  and are due 2002 and 2003, respectively. The 1992 Notes and
the 1993 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.  On August 1, 1996 and June 1, 1996 the Company repaid
$20,000 and  $163,000,  respectively  of the 1993 Notes due 2003 pursuant to the
noteholders' annual redemption rights.

     The Company manages its exposure to changes in interest rates by attempting
to match its proportion of fixed versus  variable rate assets,  liabilities  and
loan sale  facilities.  The Company has mitigated its interest rate exposure due
to interest rate declines by instituting  interest rate floors on its adjustable
rate loans.

     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 at levels which,  in the
opinion of management, provide adequately for current and possible future losses
on loans, loans sold and subordinated pass-through certificates.  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 1.43% as
of September 30, 1996.  Management evaluates the adequacy of the allowances on a

                                       15
<PAGE>

                                                                       FORM 10-Q
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.
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 loans sold  increased  to  $4,318,000  at  September  30,  1996
compared to $3,715,000 at December 31, 1995. The allowance ratio (the allowances
for loan losses  divided by the amount of the Serviced  Portfolio)  at September
30, 1996 decreased slightly to 1.96% from 2.10% at December 31, 1995.

     As  part  of  the  Company's   financing  of  Land  Loans  and  VOI  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 Land Loan or a VOI 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
$9,951,000  and  $9,644,000  at  September  30,  1996  and  December  31,  1995,
respectively.

Inflation

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















                                       16

<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:

                11.1   --   Statement re: computation of earnings per share

                27.1   --   Financial Data Schedule
   
        (b) Reports on Form 8-K

              None








                                       17

<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, 1996           /s/ Richard A. Stratton
                                  RICHARD A. STRATTON
                                  Chief Executive Officer,
                                  President and Director





DATE: November 12, 1996           /s/ Ronald E. Rabidou
                                  RONALD E. RABIDOU
                                  Chief Financial Officer






                                       18