LITCHFIELD FINANCIAL CORP /MA, 424B4, 1997-11-04

LITCHFIELD FINANCIAL CORP /MA
424B4, 1997-11-04
MORTGAGE BANKERS & LOAN CORRESPONDENTS

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<PAGE> 1

Filed persuant to Rule 424(B)(4)
Registration No. 333-37963

PROSPECTUS

$51,750,000

[LITCHFIELD LOGO]

8.45% NOTES DUE 2002

------------------------

The 8.45% Notes due November 1, 2002 (the "Notes") offered hereby are
unsecured general obligations of Litchfield Financial Corporation ("Litchfield"
or the "Company"). Interest on the Notes is payable monthly in arrears
commencing December 1, 1997.

The Company will redeem, at any time, at par plus accrued interest, Notes
tendered by the personal representative or surviving joint tenant, tenant in
common or tenant by the entirety of a deceased holder within 60 days of
presentation of the necessary documents, up to an annual maximum of $25,000 per
holder and up to an annual aggregate maximum of 5% of the original aggregate
principal amount of the Notes. The Company will redeem Notes tendered by other
beneficial holders commencing December 1, 1998 and on each anniversary thereof
subject to the per holder and aggregate limitations. The Notes are redeemable at
the option of the Company, in whole or in part, at any time on or after November
1, 1999, at the redemption prices set forth herein, plus accrued interest.

The Notes will be issued in integral multiples of $1,000 and will be in
fully registered form. No sinking fund will be established for the Notes. See
"Description of the Notes." The minimum principal amount of Notes which may be
purchased is $2,000. The Company has been advised by the Underwriters that each
Underwriter intends to make a market in the Notes; however, the Notes will not
be listed for trading on the Nasdaq stock market or any exchange, and no
assurance can be given that an active trading market for the Notes will develop.

------------------------

SEE "RISK FACTORS" BEGINNING ON PAGE 10 FOR MATTERS WHICH SHOULD BE CAREFULLY
CONSIDERED BY INVESTORS.

------------------------

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.

<TABLE>
<CAPTION>
======================================================================================================================
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT(1) COMPANY(2)
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Note............................. 100.00% 3.35% 96.65%
- ----------------------------------------------------------------------------------------------------------------------
Total................................ $51,750,000 $1,733,625 $50,016,375
======================================================================================================================
</TABLE>

(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting."
(2) Before deducting expenses payable by the Company estimated to be $340,000.

------------------------

The Notes are offered by the Underwriters, subject to receipt and acceptance
of such Notes by the Underwriters and subject to their rights to reject any
order in whole or in part and to withdraw, cancel or modify the offer without
notice. The Notes will bear interest from the date of delivery to the
Underwriters. It is expected that the Notes will be ready for delivery on or
about November 6, 1997.

MCDONALD & COMPANY
SECURITIES, INC.
J.C. BRADFORD & CO.

TUCKER ANTHONY
INCORPORATED

NOVEMBER 3, 1997
<PAGE> 2

[Graphic to Come]

This map shows the percentage distribution by state of the principal amount
of the Serviced Portfolio as of June 30, 1997 based on the location of the
collateral securing the loans. In addition to the locations shown on the map,
approximately 1.4% of the principal amount of the Serviced Portfolio is secured
by collateral located in the Caribbean Islands.

THE UNDERWRITERS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT
STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE NOTES. SPECIFICALLY,
THE UNDERWRITERS MAY OVER-ALLOT IN CONNECTION WITH THE OFFERING AND MAY BID FOR
AND PURCHASE NOTES IN THE OPEN MARKET. FOR A DESCRIPTION OF THESE ACTIVITIES,
SEE "UNDERWRITING."

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<PAGE> 3

PROSPECTUS SUMMARY

The following summary is qualified in its entirety by the more detailed
information and consolidated financial statements, including the notes thereto,
appearing elsewhere in this Prospectus or incorporated herein by reference.

THE COMPANY

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 consumer
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").

Purchased Loans consist of "Land Loans" and "VOI Loans." Land Loans are
typically secured by three to twenty acre rural parcels. Land Loans are secured
by property located in 34 states, predominantly in the southern United States.
VOI Loans finance the purchase of ownership interests in fully furnished
vacation properties. VOI Loans are secured by property located in 17 states,
predominantly in California, Florida and Pennsylvania. The Company requires most
dealers or developers from whom it buys loans to guarantee repayment or
replacement of any loan in default. Ordinarily, the Company retains a percentage
of the purchase price as a reserve until the loan is repaid.

The Company makes Hypothecation Loans to rural land dealers, resort
developers and others secured by consumer receivables consisting primarily of
Land Loans and VOI Loans. Hypothecation Loans typically have advance rates of
75% to 85% of the current balance of the pledged consumer receivables and
variable interest rates based on the prime rate plus 2% to 4%. Hypothecation
Loans are secured by receivables from timeshare resorts and rural land in 25
states.

The Company also makes A&D Loans to rural land dealers with whom it has
ongoing relationships for the acquisition and subdivision of rural land and to
resort developers for the acquisition and development of timeshare resorts. At
the time the Company makes A&D Loans, it receives a right of first refusal to
purchase or finance the related consumer receivables generated by the sale of
the subdivided land or timeshare interests. A&D Loans typically have loan to
value ratios of 60% to 80% and variable interest rates based on the prime rate
plus 2% to 4%. A&D Loans are secured by timeshare resort developments and rural
land subdivisions in 19 states.

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, 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 revenue 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. As of June 30, 1997,
the Company had sold $222.2 million, $51.5 million and $15.3 million of Land
Loans, VOI Loans and Hypothecation Loans, respectively, since its inception.

3
<PAGE> 4

mately 79.7% of such loans had fixed rates of interest. The average principal
balance of the VOI Loans in the Serviced Portfolio was $3,800 with a weighted
average remaining maturity of 3.9 years and a weighted average interest rate of
14.6%. Approximately 96.9% of such loans had fixed rates of interest. The
average principal balance of the Hypothecation Loans in the Serviced Portfolio
was $1,004,000 with a weighted average interest rate of 12.1% and an average
advance rate of 74.0%. Approximately 6.5% of such loans had a fixed rate of
interest. The average principal balance of the A&D Loans in the Serviced
Portfolio was $742,000 with a weighted average interest rate of 11.9% and an
average loan to value ratio of 64%. Approximately 19.1% of such loans had fixed
rates of interest. As of June 30, 1997, loans 30 days or more past due were .99%
of the Serviced Portfolio. For the six months ended June 30, 1997, annualized
net charge-offs were .69% of the average Serviced Portfolio.

THE OFFERING

Securities Offered......... $51,750,000 principal amount of 8.45% Notes due
2002. The Notes are unsecured, general obligations
of the Company. See "Description of the Notes" for
a more detailed description of the Notes offered
hereby.

Maturity................... November 1, 2002

Interest Payment Dates..... Interest is payable monthly in arrears commencing
December 1, 1997.

Redemption at Noteholder's
Options.................. UPON THE DEATH OF A NOTEHOLDER: Notes tendered by
the personal representative or surviving joint
tenant or tenant in common of a deceased beneficial
owner shall be redeemed within 60 days of tender,
at par plus accrued interest, subject to the amount
limitations set forth below.

BY OTHER NOTEHOLDERS: Notes tendered by the last
day of September each year shall be redeemed at par
plus accrued interest, subject to the amount
limitations set forth below, on December 1 each
year, commencing in 1998.

AMOUNT LIMITATIONS: Of the Notes tendered, the
Company is only required to redeem, for the period
from date of issue until December 1, 1998 and for
each twelve month period ending December 1
thereafter, an aggregate maximum of 5% of the
original aggregate principal amount of the Notes
issued under the Indenture, subject to a maximum of
$25,000 per beneficial owner, per period. Notes
tendered by representatives of deceased beneficial
owners will be redeemed prior to Notes tendered by
other Noteholders.

Redemption Upon Occurrence
of Certain Events.......... In the event of a Fundamental Structural Change or
a Significant Subsidiary Disposition (as those
terms are defined herein), each holder of Notes
will have the right to require the Company to
purchase the holder's Notes at a price equal to the
principal amount thereof plus accrued interest;
provided that such right shall not be exercisable
if within 40 days after the occurrence of such
event the Notes have received a specified rating
from a nationally recognized statistical rating
organization. See "Description of the
Notes -- Noteholders' Right to Prepayment After
Fundamental Structural Change or Significant
Subsidiary Disposition."

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<PAGE> 5

- --------------------------------------------------------------------------------

Redemption at Company's
Option................... The Notes may be redeemed at the Company's option
on or after November 1, 1999, at the redemption
prices set forth herein.

Sinking Fund............... None.

Certain Covenants of the
Company.................. In the Indenture, the Company agrees to certain
limitations on dividends and additional
indebtedness, to maintain certain levels of cash or
marketable investment securities, and, unless
certain conditions are met, to redeem Notes
tendered by Noteholders in the event of certain
transactions relating to the Company.

Use of Proceeds............ The net proceeds from the sale of the Notes will be
used to redeem the Company's outstanding 10% Notes
due 2002 (the "1992 Notes"), repay other
indebtedness of the Company and for general
corporate purposes.

Investment
Considerations............. Certain factors should be considered in connection
with the purchase of the Notes. See "Risk Factors."

Trustee.................... The Bank of New York, New York, New York.

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SUMMARY CONSOLIDATED FINANCIAL INFORMATION
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
-------------------------------------------------------------- -----------------------
STATEMENT OF INCOME DATA(1): 1992 1993 1994 1995 1996 1996 1997
---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Interest and fees on loans.......... $ 2,305 $ 4,330 $ 5,669 $ 11,392 $ 15,396 $ 6,640 $ 9,329
Gain on sale of loans............... 2,501 4,550 4,847 5,161 7,331 3,354 4,067
Servicing and other fee income...... 368 501 459 908 1,456 757 702
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total revenues.................... 5,174 9,381 10,975 17,461 24,183 10,751 14,098
---------- ---------- ---------- ---------- ---------- ---------- ----------
Expenses:
Interest expense.................... 629 2,717 3,158 6,138 7,197 3,297 5,042
Salaries and employee benefits...... 1,017 1,350 1,776 2,798 3,233 1,382 1,646
Other operating expenses............ 810 1,017 1,164 2,120 3,225 1,282 1,756
Provision for loan losses........... 270 620 559 890 1,954 954 735
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total expenses.................... 2,726 5,704 6,657 11,946 15,609 6,915 9,179
---------- ---------- ---------- ---------- ---------- ---------- ----------
Income before income taxes and
extraordinary item.................. 2,448 3,677 4,318 5,515 8,574 3,836 4,919
Provision for income taxes............ 942 1,426 1,619 2,066 3,301 1,474 1,894
---------- ---------- ---------- ---------- ---------- ---------- ----------
Income before extraordinary item...... 1,506 2,251 2,699 3,449 5,273 2,362 3,025
Extraordinary item(2)................. -- -- (126) -- -- -- --
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net income........................ $ 1,506 $ 2,251 $ 2,573 $ 3,449 $ 5,273 $ 2,362 $ 3,025
========== ========== ========== ========== ========== ========== ==========
Primary per common share amounts:
Income before extraordinary item.... $ .42 $ .53 $ .63 $ .76 $ .93 $ .41 $ .52
Extraordinary item.................. -- -- (.03) -- -- -- --
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net income per share.............. $ .42 $ .53 $ .60 $ .76 $ .93 $ .41 $ .52
========== ========== ========== ========== ========== ========== ==========
Primary weighted average number of
shares outstanding.................. 3,572,289 4,224,402 4,280,006 4,522,983 5,674,264 5,672,999 5,840,526
Fully-diluted per common share
amounts:
Income before extraordinary item.... $ .42 $ .53 $ .63 $ .76 $ .92 $ .41 $ .52
Extraordinary item.................. -- -- (.03) -- -- -- --
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net income per share.............. $ .42 $ .53 $ .60 $ .76 $ .92 $ .41 $ .52
========== ========== ========== ========== ========== ========== ==========
Fully-diluted weighted average number
of shares outstanding............... 3,589,264 4,246,945 4,280,006 4,543,009 5,736,467 5,698,866 5,861,180
Cash dividends declared per common
share............................... $ -- $ .02 $ .03 $ .04 $ .05 $ -- $ --

OTHER STATEMENT OF INCOME DATA:
Net income as a percentage of
revenues............................ 29.1% 24.0% 23.4% 19.8% 21.8% 22.0% 21.5%
Ratio of EBITDA to interest
expense(3).......................... 5.45 2.81 3.31 2.44 2.90 2.24 2.88
Ratio of earnings to fixed
charges(4).......................... 4.89 2.35 2.37 1.90 2.19 2.16 1.98
Return on average assets(5)........... 6.2% 5.0% 4.3% 3.7% 4.0% 4.0% 3.7%
Return on average equity(5)........... 20.3% 17.0% 16.4% 16.6% 13.3% 12.2% 13.4%
</TABLE>

- ---------------

(1) Certain amounts in the 1992 through 1996 financial information have been
restated to conform to the 1997 presentation.

(2) Reflects loss on early extinguishment of a portion of the 1992 Notes net of
applicable tax benefit of $76,000.

(3) The ratio of EBITDA to interest expense is required to be calculated for
the twelve month period immediately preceding each calculation date,
pursuant to the terms of the indentures to which the Company is subject.
EBITDA is defined as earnings before deduction of taxes, depreciation,
amortization and interest expense (but after deduction for any
extraordinary item).

(4) For purposes of calculating the ratio of earnings to fixed charges,
earnings consist of income before income taxes and extraordinary item and
fixed charges. Fixed charges consist of interest charges and the
amortization of debt expense.

(5) The return on average assets and average equity for the six month periods
are calculated on an annualized basis.

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SUMMARY CONSOLIDATED FINANCIAL INFORMATION - (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------------------ JUNE 30,
BALANCE SHEET DATA(6): 1992 1993 1994 1995 1996 1997
------- ------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Total assets............................. $33,980 $54,444 $ 63,487 $112,459 $152,689 $175,310
Loans held for sale(7)................... 5,086 5,931 11,094 14,380 12,260 20,475
Other loans(7)........................... 3,501 10,306 15,790 33,613 79,996 91,750
Retained interests in loan sales(7)...... 9,652 11,764 11,996 22,594 28,912 27,759
Secured debt............................. -- -- 5,823 9,836 43,727 40,683
Unsecured debt........................... 16,210 32,302 29,896 47,401 46,995 66,382
Stockholders' equity..................... 11,813 14,722 16,610 37,396 42,448 47,603
</TABLE>

<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------------------- JUNE 30,
OTHER FINANCIAL DATA: 1992 1993 1994 1995 1996 1997
-------- -------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Loans purchased and originated(8)........ $ 32,214 $ 42,410 $ 59,798 $ 121,046 $ 133,750 $ 83,311
Loans sold(8)............................ 24,632 28,099 40,116 65,115 54,936 39,501
Serviced Portfolio(9).................... 58,968 84,360 105,013 176,650 242,445 281,965
Loans serviced for others................ 43,623 59,720 72,731 111,117 129,619 138,771
Dealer/developer reserves................ 3,512 4,926 6,575 9,644 10,628 10,626
Allowance for loan losses(10)............ 498 1,064 1,264 3,715 4,528 5,541
Allowance ratio(11)...................... .84% 1.26% 1.20% 2.10% 1.87% 1.97%
Delinquency ratio(12).................... .94% .61% .93% 1.92% 1.34% .99%
Net charge-off ratio(8)(13).............. .37% .69% .38% .67% .94% .69%
Non-performing asset ratio(14)........... 1.09% 1.48% 1.02% 1.35% 1.57% .98%
</TABLE>

(7) Amount indicated is net of allowance for losses and recourse obligation on
retained interests in loan sales.

(8) During the relevant period.

(9) The Serviced Portfolio consists of the principal amount of loans serviced
by or on behalf of the Company.

(10) The allowance for loan losses includes allowance for losses under the
recourse provisions of loans sold. See Note 4 to financial statements.

(11) The allowance ratio is the allowances for loan losses divided by the amount
of the Serviced Portfolio.

(12) The Delinquency ratio is the amount of delinquent loans divided by the
amount of the Serviced Portfolio. Delinquent loans are those which are 30
days or more past due which are not covered by dealer/developer reserves or
guarantees and not included in other real estate owned.

(13) The net charge-off ratio is determined by dividing the amount of net
charge-offs for the period by the average Serviced Portfolio for the
period. The June 30, 1997 amount is calculated on an annualized basis.

(14) The non-performing asset ratio is determined by dividing the sum of the
amount of those loans which are 90 days or more past due and other real
estate owned by the amount of the Serviced Portfolio.

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RECENT DEVELOPMENTS

Net income for the nine months ended September 30, 1997 increased 20% to
$5,186,000 from $4,308,000 for the same period in 1996. Net income per share for
the nine months ended September 30, 1997 increased 16% to $.87 from $.75 for the
same period in 1996. For the third quarter of 1997 net income increased 11% to
$2,161,000 from $1,946,000 for the third quarter of 1996. For the third quarter
of 1997 net income per share increased 6% to $.36 from $.34 for the third
quarter of 1996.

The Company's revenues increased 18.4% and 26.1% to $8,263,000 and
$22,361,000 for the three and nine month periods ending September 30, 1997,
respectively, from $6,977,000 and $17,728,000 for the same periods in 1996.

Originations increased 31.9% and 37.6% to $51,235,000 and $134,546,000 for
the three and nine month periods ending September 30, 1997, respectively, from
$38,837,000 and $97,789,000 for the same periods in 1996. Originations consisted
of $13,619,000 or 26.6% Purchased Loans, $16,690,000 or 32.6% Hypothecation
Loans, $16,129,000 or 31.4% A&D Loans and $4,797,000 or 9.4% Other Loans for the
three month period ending September 30, 1997. Originations consisted of
$46,276,000 or 34.4% Purchased Loans, $46,551,000 or 34.6% Hypothecation Loans,
$30,463,000 or 22.6% A&D Loans and $11,256,000 or 8.4% Other Loans for the nine
month period ending September 30, 1997.

The Serviced Portfolio increased to $297,098,000 at September 30, 1997,
consisting of $174,815,000 or 58.9% Purchased Loans, $71,374,000 or 24.0%
Hypothecation Loans, $39,253,000 or 13.2% A&D Loans and $11,656,000 or 3.9%
Other Loans. The overall delinquency ratio of the Serviced Portfolio was 1.31%
at September 30, 1997 compared to 0.99% at June 30, 1997 and 1.43% at September
30, 1996. The delinquency ratio (calculated on an end of period basis) at June
30, 1997 was lower than usual because the Company acquired two large pools of
Purchased Loans at the end of the second quarter of 1997 which increased the
amount of the Serviced Portfolio without a corresponding increase in
delinquencies. The overall net charge-off ratio of the Serviced Portfolio was
0.70% at September 30, 1997 compared to 0.69% at June 30, 1997 and 1.01% at
September 30, 1996.

The Company sold $38,694,000 and $78,195,000 of loans in the three and nine
months ended September 30, 1997 compared to $21,582,000 and $45,430,000 in the
same periods in 1996. The Company sold $13,229,000 of Purchased Loans and
$25,465,000 of Hypothecation Loans in the three months ended September 30, 1997,
and $37,405,000 of Purchased Loans and $40,790,000 of Hypothecation Loans in the
nine months ended September 30, 1997.

The Company's borrowings under its line of credit were $20,472,000 at
September 30, 1997 compared to $34,287,000 at June 30, 1997. There was no change
in the Company's long-term debt during the third quarter of 1997.

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THE COMPANY

As of June 30, 1997, the Company serviced loans with a principal balance of
$282.0 million (the "Serviced Portfolio"), of which the Company owned $143.2
million. As of June 30, 1997, the Serviced Portfolio was comprised of 60.8%
Purchased Loans, 24.2% Hypothecation Loans, 11.8% A&D Loans and 3.2% Other
Loans. The average principal balance of the Land Loans in the Serviced Portfolio
was $12,600 with a weighted average remaining maturity of 12.0 years and a
weighted average interest rate of 12.2%. Approximately 79.7% of such loans had
fixed rates of interest. The average principal balance of the VOI Loans in the
Serviced Portfolio was $3,800 with a weighted average remaining maturity of 3.9
years and a weighted average interest rate of 14.6%. Approximately 96.9% of such
loans had fixed rates of interest. The average principal balance of the
Hypothecation Loans in the Serviced Portfolio was $1,004,000 with a weighted
average interest rate of 12.1% and an average advance rate of 74.0%.
Approximately 6.5% of such loans had a fixed rate of interest. The average
principal balance of the A&D Loans in the Serviced Portfolio was $742,000 with a
weighted average interest rate of 11.9% and an average loan to value ratio of
64%. Approximately 19.1% of such loans had fixed rates of interest. As of June
30, 1997, loans 30 days or more past due were .99% of the

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<PAGE> 10

Serviced Portfolio. For the six months ended June 30, 1997, annualized net
charge-offs were .69% of the average Serviced Portfolio.

The Company was founded in November 1988. The Company's strategy has been
to build its Serviced Portfolio by acquiring loan portfolios from rural land
dealers, resort developers and financial institutions, and by providing loans to
such dealers, developers and other businesses secured by consumer receivables.
The Company also provides financing to such dealers and developers for the
acquisition and development of rural land and timeshare resorts in order to
finance additional receivables generated by these A&D loans. As part of its
business and financing strategy, the Company seeks niche markets where its
underwriting expertise and ability to provide value-added services enable it to
distinguish itself from its competitors and earn an attractive rate of return on
its invested capital. Initially, the Company pursued this strategy by financing
consumer Land Loans through a land dealer network and portfolio acquisitions.
Subsequently, the Company extended its strategy to financing consumer VOI Loans
and providing Hypothecation Loans to land dealers and resort developers. In
1995, the Company significantly expanded its financing of VOIs when it acquired
approximately $41.5 million of VOI related loans and assets as part of its
purchase of the Government Employees Financial Corporation ("GEFCO") portfolio.

RISK FACTORS

In addition to the other information in this Prospectus, the following
factors should be considered carefully in evaluating an investment in the Notes
offered hereby:

General Business Risks. The Company's business is subject to various
business risks. The level of the Company's revenues is dependent upon demand for
the type of loans purchased, sold and serviced by the Company from both
potential borrowers and investors. Future declines in real estate values,
changes in prevailing interest rates and changes in the availability of
attractive returns on alternative investments each could make loans of the type
originated and purchased by the Company less attractive to borrowers and
investors.

Funding and Liquidity. The Company has a constant need for working capital
to fund its lending, purchasing and securitization activities and, as a result,
generally has experienced negative cash flows from operations. Historically, the
Company has funded any negative cash flows from operations by borrowing under
secured lines of credit and issuing long-term debt and equity securities. The
Company's lines of credit are renewable on one to three year bases. The Company
had secured lines of credit totaling $106.0 million with five financial
institutions as of June 30, 1997. To date, the Company has issued $71.0 million
of long-term debt and has publicly issued $25.6 million of equity securities.

The Company also has a $100.0 million revolving line of credit and sale
facility as part of an asset backed commercial paper facility with a
multi-seller commercial paper conduit. The facility expires in June 1998. As of
June 30, 1997, the outstanding balance of the sold or pledged loans securing
this facility was $83.4 million. The Company has an additional revolving line of
credit and sale facility of $25.0 million with another multi-seller commercial
paper conduit. The facility expires in March 2000. As of June 30, 1997, the
outstanding aggregate balance of the sold or pledged loans under the facility
was $13.8 million.

There can be no assurance that the Company will continue to be able to
obtain financing or raise capital on terms satisfactory to the Company. To the
extent the Company cannot raise additional funds, it could have a material
adverse impact on its operations and its ability to repay the Notes. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."

Impact of Economic Cycles. The business risks associated with the
Company's business become more acute in an economic slowdown. Such an
environment is generally characterized by decreased demand for rural and
vacation real estate and VOIs and declining real estate values in many areas of
the country. Delinquencies, foreclosures and loan losses generally increase
during economic slowdowns or recessions, and any such future slowdowns could
adversely affect future operations of the Company. See "Business -- Collections
and Delinquencies."

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<PAGE> 11

Interest Rate Risk. The Company's interest and fees on loans, gain on sale
of loans and interest expense are affected by changes in interest rates. The
Company could be adversely affected by interest rate increases if its variable
rate liabilities exceed its variable rate assets or if the rates on its variable
rate liabilities increase sooner or to a greater extent than the rates on its
variable rate assets.

The Company seeks to mitigate a portion of its interest rate risk by
attempting to match fixed and variable rate assets and liabilities, instituting
interest rate floors and by entering into interest rate swaps on certain of its
variable rate assets, and purchasing interest rate caps on certain of its
variable rate liabilities.

There can be no assurance that the Company's attempts to mitigate its
interest rate risk will be effective.

Competition. The financing of VOIs is highly competitive and many of the
Company's competitors have greater financial resources. The Company's strategy
will be to service and finance VOIs primarily at small to medium size resorts.
The Company believes that financing of such VOIs is less competitive.
Nonetheless, there can be no assurance that the Company's strategy will be
successful. In addition, the Company may enter new lines of business that may be
highly competitive and may have competitors with greater financial resources
than the Company.

Credit Risks. The Company's loans are subject to delinquency and default
risk. General downturns in the economy and other factors beyond the Company's
control may have an adverse effect on the Company's delinquency and default
rates. The Company's A&D Loans and, to a lesser extent, its Hypothecation Loans
have a greater concentration of credit risk due to their larger size and, in the
case of A&D Loans their development and marketing risk.

The Company's VOI business is subject to certain risks associated with VOI
ownership. Although individual VOI owners are obligated to make payments under
their notes irrespective of any defect in, damage to, or change in conditions of
the vacation resort (such as erosion, construction of adjacent or nearby
properties, or environmental problems) or of any breach of contract by the
property owners association to provide certain services to the VOI borrowers
(including any such breach resulting from a destruction of the resort) or of any
other loss of benefits of ownership of their unit week(s) (including cessation
of the ability of the borrowers to exchange their time intervals in the resort
for time intervals in other unaffiliated resorts), any such material defect,
damage, change, breach of contract, or loss of benefits is likely to result in a
delay in payment or default by a substantial number of the borrowers whose VOIs
are affected. The costs of foreclosure and resale of unit weeks securing
defaulted loans are likely to be substantially higher than such costs for
traditional mortgage loans, and this may materially affect the amounts realized
by the Company on defaulted loans.

Estimates of Future Prepayment and Default Rates. A significant portion of
the Company's revenues historically has been comprised of gains on sales of
loans. The gains are recorded in the Company's revenues and on its balance sheet
(as retained interests on loan sales) at the time of sale, and the amount of
gains recorded is based in part on management's estimates of future prepayment
and default rates and other considerations in light of then-current conditions.
If actual prepayments with respect to loans occur more quickly than was
projected at the time such loans were sold, as can occur when interest rates
decline, interest would be less than expected and earnings would be charged in
the current period. If actual defaults with respect to loans sold are greater
than estimated, charge-offs would exceed previously estimated amounts and
earnings would be charged in the current period.

Expansion of Business. The Company has increased the number and average
principal amount of its Hypothecation and A&D Loans. A&D Loans are larger
commercial loans to land dealers and resort developers and, consequently, have a
greater concentration of credit risk than the Company's Purchased Loans. A&D
Loans for timeshare resorts are also subject to greater risk because their
repayment depends on the successful completion of the development of the resort
and the subsequent successful sale of a substantial portion of the resort's
timeshare interests. The Company may seek to limit its exposure to any one
developer by participating a portion of an A&D Loan with another lender.

The Company has historically made Hypothecation Loans to land dealers and
resort developers secured by Land Loans and VOI Loans, respectively.
Hypothecation Loans are commercial loans that have

11
<PAGE> 12

significantly larger balances than the Company's Purchased Loans and,
consequently, have a greater concentration of credit risk which is only
partially offset by the lesser concentration of credit risk of the underlying
collateral.

In addition, the Company has recently expanded its marketing of
Hypothecation Loans to include loans to other finance companies secured by other
types of collateral. These loans may be subject to additional risk because the
Company has relatively less experience with these other types of collateral than
with Land Loans or VOI Loans. In addition, these loans may be larger than the
Company's average Hypothecation Loans and may provide the Company with an option
to take an equity position in the borrower.

Fluctuations in Quarterly Results of Operations. Since gains on sales of
loans are a significant portion of the Company's revenues, the timing of loan
sales has a significant effect on the Company's quarterly results of operations,
and the results of one quarter are not necessarily indicative of results for the
next quarter. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations."

Contingent Repurchase Obligations. In connection with certain of the
Company's whole loan sales to investors, the Company has committed to repurchase
such loans that become 90 days past due. These contingent obligations are
subject to various terms and conditions, including limitations on the amounts of
loans which must be repurchased. The Company has also guaranteed payment of
mortgage loans included in certain of its mortgage securitization programs. As
of June 30, 1997, Litchfield had outstanding contingent repurchase obligations
in the aggregate amount of approximately $8.9 million. In addition, when the
Company sells mortgage loans through mortgage securitization programs, the
Company commits to replace any loans that do not conform to certain
representations and warranties included in the operative loan sale documents.

Third Party Servicer. The Company uses a third party servicer to service
its loans. The third party servicer's systems and controls support the
servicing, collecting and monitoring of the Serviced Portfolio as well as
certain accounting and management functions of the Company. There can be no
assurance that the third party servicer will continue to provide these services
in the future or that its systems and controls will continue to be adequate to
support the Company's growth. A failure of the third party servicer's automated
systems or its controls over data integrity or accuracy could have a material
adverse effect on the Company's operations and financial condition.

Regulation. The operations of the Company are subject to extensive
regulation by federal, state and local government authorities and are subject to
various laws and judicial and administrative decisions imposing various
requirements and restrictions, including among other things, regulating credit
granting activities establishing maximum interest rates and finance charges,
requiring disclosures to customers, governing secured transactions and setting
collection, repossession and claims handling procedures and other trade
practices. In addition, certain states have enacted legislation which restricts
the subdivision of rural land and numerous states have enacted regulations in
connection with VOIs. Although the Company believes that it is in compliance in
all material respects with applicable federal, state and local laws, rules and
regulations, there can be no assurance that more restrictive laws, rules and
regulations or interpretations thereof will not be adopted in the future which
could make compliance much more difficult or expensive, restrict the Company's
ability to originate or sell loans, further limit or restrict the amount of
interest and other charges earned under loans originated or purchased by the
Company, or otherwise adversely affect the business or prospects of the Company.
See "Business -- Regulation."

Environmental Liabilities. In the course of its business, the Company has
acquired, and may in the future acquire, properties securing defaulted loans.
Although substantially all of the Company's Land Loans are secured by mortgages
on rural land, there is a risk that hazardous substances or waste could be
discovered on such properties after foreclosure by the Company. In such event,
the Company might be required to remove such substances from the affected
properties at its sole cost and expense. There can be no assurances that the
cost of such removal would not substantially exceed the value of the affected
properties or the loans secured by the properties or that the Company would have
adequate remedies against the prior owner or other responsible parties, or that
the Company would not find it difficult or impossible to sell the affected
properties either prior to or following any such removal.

12
<PAGE> 13

Dependence on Senior Management. The Company's success depends upon the
continued contributions of its senior management. The loss of services of
certain of the Company's executive officers could have an adverse effect upon
the Company's business. The Company maintains key man insurance on the life of
one member of its senior management, Chief Executive Officer and President,
Richard A. Stratton.

Limited Market for Notes. The Company has no present intention to have the
Notes authorized for quotation on the Nasdaq stock market or any other quotation
system or listed on any securities exchange. Although the Company has been
advised that the Underwriters currently intend to make a market in the Notes,
the Underwriters are under no obligation to do so or to continue any market
making activities if commenced. No assurance can be given that an active trading
market for the Notes will develop.

Leverage. The issuance of the Notes will increase the Company's leverage
to the extent that the proceeds of the Offering are not used to satisfy
indebtedness of the Company and/or over time to the extent the Company reborrows
on any indebtedness paid down with such proceeds. The consequences of increased
leverage include: (i) the Company's increased vulnerability to changes in
economic conditions and competition; (ii) the potential limitations on the
Company's access to capital markets and ability to refinance its secured
financing facilities; and (iii) the dedication of a substantial portion of the
Company's available cash to debt service, thereby reducing cash available to
fund expanding business operations and future business opportunities.

Limited Covenants in the Indenture; Absence of Sinking Fund. The Indenture
pursuant to which the Notes will be issued contains financial and operating
covenants including, among others, limitations on the Company's ability to pay
dividends, incur additional indebtedness and engage in certain transactions.
This includes limitations on certain consolidations, mergers or transfers of all
or substantially all of its assets. The covenants in the Indenture are limited
and are not designed to protect the Noteholders in the event of a material
adverse change in the Company's financial condition or results of operations.
Further, the Notes do not have the benefit of any sinking fund payments by the
Company. See "Description of the Notes."

13
<PAGE> 14

INCORPORATION OF DOCUMENTS BY REFERENCE

The following documents filed by the Company with the Commission pursuant
to the Exchange Act, are incorporated in and made a part of this Prospectus by
reference:

(a) The Company's Annual Report on Form 10-K for the year ended
December 31, 1996.

(b) The Company's Quarterly Report on Form 10-Q for the quarters ended
March 31, 1997, June 30, 1997, and September 30, 1997.

(c) The definitive Proxy Statement dated March 27, 1997 for the
Special Meeting in Lieu of the Annual Meeting of the Company's stockholders
held on April 25, 1997.

All reports and any definitive proxy or information statements filed by the
Company with the Commission pursuant to Sections 13, 14 and 15(d) of the
Exchange Act subsequent to the date of this Prospectus and prior to the
termination of the offering of the shares offered hereby shall be deemed to be
incorporated by reference in this Prospectus and to be a part hereof from the
date of filing of such documents.

Any statement contained in a document incorporated or deemed to be
incorporated herein by reference shall be deemed to be modified or superseded
for purposes of this Prospectus to the extent that a statement contained herein
or in any other subsequently filed document which also is or is deemed to be
incorporated herein by reference modifies or supersedes such statement. Any
statement so modified or superseded shall not be deemed, except as so modified
or superseded, to constitute a part of this Prospectus.

The Company will provide without charge to each person, including any
beneficial owner, to whom a copy of this Prospectus is delivered, on the written
or oral request of any such person, a copy of any or all of the documents
incorporated herein by reference (other than exhibits not specifically
incorporated in such documents). Requests for such copies should be directed to
Ronald E. Rabidou, Litchfield Financial Corporation, 789 Main Road, Stamford, VT
(telephone number: 802-694-1200).

FORWARD-LOOKING STATEMENTS

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

14
<PAGE> 15

USE OF PROCEEDS

The net proceeds to the Company from the sale of the Notes offered hereby
are estimated to be $49,676,375, after deducting the underwriting discount and
estimated offering expenses payable by the Company. It is expected that the net
proceeds of this Offering will be used to redeem the Company's outstanding 10%
Notes due 2002 (the "1992 Notes"), repay other indebtedness of the Company and
for general corporate purposes. The Company anticipates such redemption will
occur in the quarter ending December 31, 1997 and will result in an
extraordinary charge to earnings of approximately $230,000, net of an applicable
tax benefit of approximately $145,000. Until used for the purposes indicated,
the Company will invest the net proceeds of this Offering in short-term
investment-grade interest-bearing securities.

CAPITALIZATION

The following table sets forth the capitalization of the Company as of June
30, 1997, and as adjusted to reflect the sale by the Company of $51,750,000 of
Notes and the application of the net proceeds as set forth under "Use of
Proceeds."

<TABLE>
<CAPTION>
JUNE 30, 1997
-------------------------------
ACTUAL AS ADJUSTED(1)
------------ --------------
<S> <C> <C>
Long-term debt:
1992 Notes(2)................................................. $ 12,785,000 $ --
1993, 1995 and April 1997 Notes(2)............................ 53,597,000 53,597,000
Notes......................................................... -- 51,750,000
------------ -------------
Total long-term debt.................................. 66,382,000 105,347,000
------------ -------------
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,
5,616,372 shares issued and outstanding(3)................. 56,000 56,000
Additional paid in capital.................................... 36,238,000 36,238,000
Net unrealized gain on retained interests in loan sales....... 523,000 523,000
Retained earnings............................................. 10,786,000 10,786,000
------------ -------------
Total stockholders' equity............................ 47,603,000 47,603,000
------------ -------------
Total capitalization(4)............................... $113,985,000 $ 152,950,000
============ =============
</TABLE>

- ---------------
(1) The As Adjusted amounts do not reflect an extraordinary charge to earnings
of approximately $230,000, net of an applicable tax benefit of approximately
$145,000, resulting from the anticipated redemption of the 1992 Notes.

(2) The 1992 Notes, 1993 Notes, 1995 Notes and April 1997 Notes were issued in
November 1992, May 1993, March 1995 and April 1997, respectively, and rank
on a parity with the Notes.

(3) Does not include 1,188,469 shares reserved for issuance under the Company's
stock option plans, of which 786,782 are issuable upon exercise of options
outstanding as of June 30, 1997.

(4) Total capitalization includes total stockholders' equity and total long-term
debt.

15
<PAGE> 16

SUMMARY CONSOLIDATED FINANCIAL INFORMATION
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------------------------------------- ----------------------
STATEMENT OF INCOME DATA(1): 1992 1993 1994 1995 1996 1996 1997
--------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Interest and fees on loans.......... $ 2,305 $ 4,330 $ 5,669 $ 11,392 $ 15,396 $ 6,640 $ 9,329
Gain on sale of loans............... 2,501 4,550 4,847 5,161 7,331 3,354 4,067
Servicing and other fee income...... 368 501 459 908 1,456 757 702
--------- --------- --------- --------- --------- --------- ---------
Total revenues.................... 5,174 9,381 10,975 17,461 24,183 10,751 14,098
--------- --------- --------- --------- --------- --------- ---------
Expenses:
Interest expense.................... 629 2,717 3,158 6,138 7,197 3,297 5,042
Salaries and employee benefits...... 1,017 1,350 1,776 2,798 3,233 1,382 1,646
Other operating expenses............ 810 1,017 1,164 2,120 3,225 1,282 1,756
Provision for loan losses........... 270 620 559 890 1,954 954 735
--------- --------- --------- --------- --------- --------- ---------
Total expenses.................... 2,726 5,704 6,657 11,946 15,609 6,915 9,179
--------- --------- --------- --------- --------- --------- ---------
Income before income taxes and
extraordinary item.................. 2,448 3,677 4,318 5,515 8,574 3,836 4,919
Provision for income taxes............ 942 1,426 1,619 2,066 3,301 1,474 1,894
--------- --------- --------- --------- --------- --------- ---------
Income before extraordinary item...... 1,506 2,251 2,699 3,449 5,273 2,362 3,025
Extraordinary item(2)................. -- -- (126) -- -- -- --
--------- --------- --------- --------- --------- --------- ---------
Net income........................ $ 1,506 $ 2,251 $ 2,573 $ 3,449 $ 5,273 $ 2,362 $ 3,025
========= ========= ========= ========= ========= ========= =========
Primary per common share amounts:
Income before extraordinary item.... $ .42 $ .53 $ .63 $ .76 $ .93 $ .41 $ .52
Extraordinary item.................. -- -- (.03) -- -- -- --
--------- --------- --------- --------- --------- --------- ---------
Net income per share.............. $ .42 $ .53 $ .60 $ .76 $ .93 $ .41 $ .52
========= ========= ========= ========= ========= ========= =========
Primary weighted average number of
shares outstanding.................. 3,572,289 4,224,402 4,280,006 4,522,983 5,674,264 5,672,999 5,840,526
Fully-diluted per common share
amounts:
Income before extraordinary item.... $ .42 $ .53 $ .63 $ .76 $ .92 $ .41 $ .52
Extraordinary item.................. -- -- (.03) -- -- -- --
--------- --------- --------- --------- --------- --------- ---------
Net income per share.............. $ .42 $ .53 $ .60 $ .76 $ .92 $ .41 $ .52
========= ========= ========= ========= ========= ========= =========
Fully-diluted weighted average number
of shares outstanding............... 3,589,264 4,246,945 4,280,006 4,543,009 5,736,467 5,698,866 5,861,180
Cash dividends declared per common
share............................... $ -- $ .02 $ .03 $ .04 $ .05 $ -- $ --

- ---------------

(1) Certain amounts in the 1992 through 1996 financial information have been
restated to conform to the 1997 presentation.

(2) Reflects loss on early extinguishment of a portion of the 1992 Notes net of
applicable tax benefit of $76,000.

(5) The return on average assets and average equity for the six month periods
are calculated on an annualized basis.

16
<PAGE> 17

SELECTED CONSOLIDATED FINANCIAL INFORMATION -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------------------- JUNE 30,
1992 1993 1994 1995 1996 1997
------- ------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA(6):
Total assets...................... $33,980 $54,444 $ 63,487 $112,459 $152,689 $175,310
Loans held for sale(7)............ 5,086 5,931 11,094 14,380 12,260 20,475
Other loans(7).................... 3,501 10,306 15,790 33,613 79,996 91,750
Retained interests in loan
sales(7)........................ 9,652 11,764 11,996 22,594 28,912 27,759
Secured debt...................... -- -- 5,823 9,836 43,727 40,683
Unsecured debt.................... 16,210 32,302 29,896 47,401 46,995 66,382
Stockholders' equity.............. 11,813 14,722 16,610 37,396 42,448 47,603
</TABLE>

<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------------------- JUNE 30,
1992 1993 1994 1995 1996 1997
------- ------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
OTHER FINANCIAL DATA:
Loans purchased and
originated(8)................... $32,214 $42,410 $ 59,798 $121,046 $133,750 $ 83,311
Loans sold(8)..................... 24,632 28,099 40,116 65,115 54,936 39,501
Serviced Portfolio(9)............. 58,968 84,360 105,013 176,650 242,445 281,965
Loans serviced for others......... 43,623 59,720 72,731 111,117 129,619 138,771
Dealer/developer reserves......... 3,512 4,926 6,575 9,644 10,628 10,626
Allowance for loan losses(10)..... 498 1,064 1,264 3,715 4,528 5,541
Allowance ratio(11)............... .84% 1.26% 1.20% 2.10% 1.87% 1.97%
Delinquency ratio(12)............. .94% .61% .93% 1.92% 1.34% .99%
Net charge-off ratio(8)(13)....... .37% .69% .38% .67% .94% .69%
Non-performing asset ratio(14).... 1.09% 1.48% 1.02% 1.35% 1.57% .98%
</TABLE>

- ---------------
(6) In 1997 the Company adopted Statement of Financial Accounting Standards No.
125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities." Consequently, certain amounts included in
the 1992 through 1996 financial statements have been reclassified to
conform with the 1997 presentation: "Subordinated pass through certificates
held to maturity," "Excess servicing asset" and "Allowance for loans sold"
have been reclassified as "Retained interests in loan sales." In addition,
"Loans held for investment" have been reclassified as "Other loans."
(7) Amount indicated is net of allowance for losses and recourse obligation on
retained interests in loan sales.
(8) During the relevant period.
(9) The Serviced Portfolio consists of the principal amount of loans serviced
by or on behalf of the Company.
(10) The allowance for loan losses includes allowance for losses under the
recourse provisions of loans sold. See Note 4 to financial statements.
(11) The allowance ratio is the allowances for loan losses divided by the amount
of the Serviced Portfolio.
(12) The Delinquency ratio is the amount of delinquent loans divided by the
amount of the Serviced Portfolio. Delinquent loans are those which are 30
days or more past due which are not covered by dealer/developer reserves or
guarantees and not included in other real estate owned.
(13) The net charge-off ratio is determined by dividing the amount of net
charge-offs for the period by the average Service Portfolio for the period.
The June 30, 1997 amount is calculated on an annualized basis.
(14) The non-performing asset ratio is determined by dividing the sum of the
amount of those loans which are 90 days or more past due and other real
estate owned by the amount of the Serviced Portfolio.

17
<PAGE> 18

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

OVERVIEW

Currently, the Company provides financing for the purchase of rural and
vacation properties and vacation ownership interests, popularly known as
timeshare interests. The Company also provides financing to rural land dealers,
timeshare resort developers and others secured by consumer receivables, to
dealers and developers for the acquisition and development of rural land and
timeshare resorts and for other secured 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 of
certain items included in the Company's statements of income.

<TABLE>
<CAPTION>
SIX MONTHS
ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------- ---------------
1994 1995 1996 1996 1997
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Revenues:
Interest and fees on loans....................... 51.6% 65.2% 63.7% 61.8% 66.2%
Gain on sale of loans............................ 44.2 29.6 30.3 31.2 28.8
Servicing and other fee income................... 4.2 5.2 6.0 7.0 5.0
----- ----- ----- ----- -----
100.0 100.0 100.0 100.0 100.0
----- ----- ----- ----- -----
Expenses:
Interest expense................................. 28.8 35.2 29.7 30.7 35.8
Salaries and employee benefits................... 16.2 16.0 13.4 12.8 11.7
Other operating expenses......................... 10.6 12.1 13.3 11.9 12.4
Provision for loan losses........................ 5.1 5.1 8.1 8.9 5.2
----- ----- ----- ----- -----
60.7 68.4 64.5 64.3 65.1
----- ----- ----- ----- -----
Income before income taxes and extraordinary
item............................................. 39.3 31.6 35.5 35.7 34.9
Provision for income taxes......................... 14.7 11.8 13.7 13.7 13.4
Income before extraordinary item................... 24.6 19.8 21.8 22.0 21.5
Extraordinary item................................. (1.2) -- -- -- --
----- ----- ----- ----- -----
Net income......................................... 23.4% 19.8% 21.8% 22.0% 21.5%
===== ===== ===== ===== =====
</TABLE>

SIX MONTHS ENDED JUNE 30, 1997 COMPARED TO SIX MONTHS ENDED JUNE 30, 1996

Revenues increased 31.1% to $14,098,000 for the six months ended June 30,
1997, from $10,751,000 for the same period in 1996. Net income for the six
months ended June 30, 1997 increased 28.1% to $3,025,000 compared to $2,362,000
for the same period in 1996. Loan originations grew 41.3% to $83,311,000 for the
six

18
<PAGE> 19

months ended June 30, 1997 from $58,902,000 for the same period in 1996. The
Serviced Portfolio increased 39.7% to $281,965,000 at June 30, 1997 from
$201,797,000 at June 30, 1996.

Interest and fees on loans increased 40.5% to $9,329,000 for the six months
ended June 30, 1997 from $6,640,000 for the same period in 1996, primarily as
the result of the increase in other loans and retained interests in loan sales.
The average rate earned on loans owned and retained interests in loan sales
decreased to 12.4% at June 30, 1997 from 13.0% at June 30, 1996, primarily due
to the effect of the growth in Dealer/Other Loans as a percentage of the
Serviced Portfolio. Hypothecation Loan yields are usually less than Land Loan or
VOI Loan yields, but Hypothecation Loan servicing costs and loan losses are
generally less as well.

Gain on the sale of loans increased 21.3% to $4,067,000 for the six months
ended June 30, 1997 from $3,354,000 in the same period in 1996. The volume of
loans sold increased 65.6% to $39,501,000 for the six months ended June 30, 1997
from $23,848,000 during the corresponding period in 1996. Gain on sale of loans
increased less than the volume of loans sold primarily due to the lower amount
of discount relating to loans sold and, to a lesser extent, the lower spread
between the coupon rate of the loans sold and the pass-through rate. In
addition, the yield on the securitization of Hypothecation Loans in the second
quarter was significantly less than the typical yield on sales of consumer
receivables, primarily due to shorter average maturities.

Loans serviced for others increased 22.8% to $138,771,000 as of June 30,
1997 from $113,037,000 at June 30, 1996. Servicing and other fee income
decreased 7.3% to $702,000 for the six months ended June 30, 1997, from $757,000
for the same period in 1996. For the six months ended June 30, 1997, servicing
income decreased despite the increase in loans serviced for others due to a
decrease in the average servicing fee per loan.

Interest expense increased 52.9% to $5,042,000 during the six months ended
June 30, 1997 from $3,297,000 for the same period 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 six
months ended June 30, 1997, borrowings averaged $103,551,000 at an average rate
of 9.1% compared to $63,733,000 at an average rate of 9.3% during the same
period in 1996. Interest expense includes the amortization of deferred debt
issuance costs.

Salaries and employee benefits increased 19.1% to $1,646,000 for the six
months ended June 30, 1997 from $1,382,000 for the same period 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 66 at
June 30, 1997 compared to 53 at June 30, 1996. Personnel costs as a percentage
of revenues decreased to 11.7% for the six months ended June 30, 1997 from 12.8%
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 0.58% for the six months ended
June 30, 1997 from 0.68% for the same period in 1996.

Other operating expenses increased 37.0% to $1,756,000 for the six months
ended June 30, 1997 from $1,282,000 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
increased slightly to 12.4% for the six months ended June 30, 1997 compared to
11.9% for the corresponding period in 1996. As a percentage of the Serviced
Portfolio, other operating expenses decreased to 0.62% for the six months ended
June 30, 1997 from 0.64% for the same period in 1996.

During the six months ended June 30, 1997, the Company decreased its
provision for loan losses 23.0% to $735,000 from $954,000 for the same period 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
Land Loans and VOI Loans.

YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995

Revenues increased 38.5% to $24,183,000 for the year ended December 31,
1996, from $17,461,000 for the year ended December 31, 1995. Net income for the
year ended December 31, 1996 increased 52.9% to $5,273,000 compared to
$3,449,000 in 1995. Net income as a percentage of revenues was 21.8% for the
year

19
<PAGE> 20

ended December 31, 1996 compared to 19.8% for the year ended December 31, 1995.
Loan originations grew 10.5% to $133,750,000 in 1996 from $121,046,000 in 1995.
Excluding the 1995 purchase of $41,500,000 of loans from the Government
Employees Financial Corporation ("GEFCO"), originations increased 68.1%. The
Serviced Portfolio increased 37.2% to $242,445,000 at December 31, 1996 from
$176,650,000 at December 31, 1995.

Interest and fees on loans increased 35.2% to $15,396,000 in 1996 from
$11,392,000 in 1995, primarily as the result of increases in loans held for
investment, subordinated pass-through certificates and fees related to
Hypothecation Loan originations. The average rate earned on loans owned and
subordinated pass-through certificates decreased to 12.5% for the year ended
December 31, 1996 from 13.2% in 1995, primarily due to the effect of the growth
in Hypothecation Loans as a percentage of the loan portfolio. Hypothecation Loan
yields are usually less than Land Loan or VOI Loan yields, but Hypothecation
Loan servicing costs and loan losses are generally less as well. Fees on loans
representing an adjustment of yield comprised 7.2% of interest and fees on loans
in 1996 compared to 6.5% in 1995. Such fees increased 48.4% in 1996 compared to
1995 primarily as the result of the increase in Hypothecation Loans.

Gain on the sale of loans increased 42.0% to $7,331,000 in 1996 from
$5,161,000 in 1995. The volume of loans sold decreased 15.6% to $54,936,000 for
the year ended 1996 from $65,115,000 in 1995. The primary reason for the
increase in the gain on sale of loans despite the decrease in the volume of
loans sold 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.

Loans serviced for others increased 16.7% to $129,619,000 at December 31,
1996 from $111,117,000 at December 31, 1995. Servicing and other fee income
increased 60.4% to $1,456,000 for the year ended December 31, 1996, from
$908,000 in 1995 because of the higher average Serviced Portfolio in 1996. 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 17.3% to $7,197,000 for the year ended December
31, 1996, from $6,138,000 in 1995. The increase in interest expense primarily
reflects an increase in average borrowings which was only partially offset by a
decrease in average rates. During the year ended December 31, 1996, borrowings
averaged $71,800,000 at an average rate of 9.3% as compared to $60,500,000 and
9.7%, respectively, during 1995. Interest expense includes the amortization of
deferred debt issuance costs.

Salaries and employee benefits increased 15.6% to $3,233,000 for the year
ended December 31, 1996 from $2,798,000 in 1995 because of increases in
incentive compensation, salaries and the average number of employees in 1996.
The average number of employees increased to 56 in 1996 from 45 in 1995,
primarily as the result of the GEFCO acquisition. The number of full time
equivalents increased to 57 at December 31, 1996 compared to 55 at December 31,
1995. The small increase in the number of full-time equivalents despite the
significant growth in originations and the Serviced Portfolio described above is
partially the result of subcontracting servicing to a third party. As a result,
personnel costs as a percentage of revenues decreased to 13.4% for the year
ended December 31, 1996 compared to 16.0% in 1995.

Other operating expenses increased 52.1% to $3,225,000 for the year ended
December 31, 1996 from $2,120,000 for the same period in 1995 primarily as the
result of the subcontracting of servicing to a third party. As a percentage of
revenues, other operating expenses increased to 13.3% in 1996 compared to 12.1%
in 1995.

During 1996, the Company increased its provision for loan losses 119.6% to
$1,954,000 from $890,000 in 1995, primarily as the result of the overall
increase in the Serviced Portfolio as well as the proportionate increase in the
percentage of nonguaranteed loans in the Serviced Portfolio. Historically, the
loan loss rate for nonguaranteed loans has been higher than the rate for
guaranteed loans.

20
<PAGE> 21

YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994

Revenues increased 59.1% to $17,461,000 for the year ended December 31,
1995, from $10,975,000 for the year ended December 31, 1994. Net income for the
year ended December 31, 1995 increased 34.0% to $3,449,000 compared to
$2,573,000 in 1994. Net income as a percentage of revenues was 19.8% for the
year ended December 31, 1995 compared to 23.4% for the year ended December 31,
1994. This decrease was primarily due to the Company's strategy of retaining
more of its loans and the increased interest costs associated with long-term
debt incurred to support this strategy.

Interest and fees on loans increased 101.0% to $11,392,000 in 1995 from
$5,669,000 in 1994, primarily as the result of increases in loans and
subordinated pass-through certificates. The average rate earned on loans owned
and subordinated pass-through certificates increased to 13.2% for the year ended
December 31, 1995 from 12.6% in 1994, primarily due to the effect of the higher
yield of the VOI Loans. Fees on loans comprised 6.5% of interest and fees on
loans in 1995 compared to 11.0% in 1994. Such fees increased 18.8% in 1995
compared to 1994.

Gain on the sale of loans increased 6.5% to $5,161,000 in 1995 from
$4,847,000 in 1994. The volume of loans sold increased 62.3% to $65,115,000 for
the year ended 1995 from $40,116,000 in 1994. The primary reason the gain on
sale of loans increased less than the volume of loans sold was that the Company
did not recognize any gain on the sale of $27,155,000 of VOI Loans purchased
from GEFCO consistent with the purchase method of accounting.

Loans serviced for others increased 52.8% to $111,117,000 as of December
31, 1995 from $72,731,000 at December 31, 1994. This growth resulted in a 97.8%
increase in servicing and other fee income to $908,000 for the year ended
December 31, 1995, from $459,000 in 1994. In connection with the Company's
continued growth, the Company made a strategic decision to subcontract a portion
of its servicing rights in order to avoid incurring additional fixed overhead
costs associated with such servicing. Accordingly, the Company subcontracted the
servicing of VOI Loans to an unaffiliated third party in 1995 and its remaining
loans in April 1996.

Interest expense increased to $6,138,000 for the year ended December 31,
1995, from $3,158,000 in 1994. The increase in interest expense primarily
reflects an increase in borrowings. During the year ended December 31, 1995,
borrowings averaged $60,500,000 at an average rate of 9.7% as compared to
$32,000,000 and 9.3%, respectively, during 1994. Interest expense includes the
amortization of deferred debt issuance costs.

Salaries and employee benefits increased 57.5% to $2,798,000 for the year
ended December 31, 1995 from $1,776,000 in 1994 due to hiring additional staff
to support an increase in the Serviced Portfolio and an increase in certain
incentive based compensation. As a result of the Company's growth, the Company
increased total full-time equivalent employees to 55 in 1995 from 36 in 1994.
Personnel costs as a percentage of revenues remained relatively constant at
16.0% for the year ended December 31, 1995 compared to 16.2% in 1994.

Other operating expenses increased 82.1% to $2,120,000 for the year ended
December 31, 1995 from $1,164,000 for the same period in 1994. As a percentage
of revenues, other operating expenses increased to 12.1% in 1995 as compared to
10.6% in 1994. This increase is attributable to additional overhead incurred
with the significant growth of the Company primarily in connection with the
purchase of the GEFCO portfolio.

During 1995, the Company increased its provision for loan losses 59.2% to
$890,000 from $559,000 in 1994 primarily as the result of the increase in the
Serviced Portfolio.

LIQUIDITY AND CAPITAL RESOURCES

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

21
<PAGE> 22

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 $8,936,000 of loans at June 30, 1997 and $8,780,000 at
December 31, 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 $454,000 compared to $514,000 of such loans under the recourse
provisions of loan sales during the months ended June 30, 1997 and 1996,
respectively. The Company repurchased $991,000, $448,000, and $259,000 of such
loans under the recourse provisions of loan sales in 1996, 1995, and 1994,
respectively. As of June 30, 1997, $20,136,000 of the Company's cash was
restricted as credit enhancement for certain securitization programs.

The Company funds its loan purchases in part with borrowings under various
bank 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 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
$28,000,000 and $26,200,000 at June 30, 1997 and December 31, 1996,
respectively. 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
$5,000,000 to $8,000,000 with another financial institution. This line of credit
matures in January 1998. There were no outstanding borrowings on this line of
credit at June 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. There were no outstanding borrowings under this
facility at June 30, 1997. At December 31, 1996, the outstanding borrowings were
$8,300,000. This facility is secured by certain retained interests in loan
sales, restricted cash 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 June 30, 1997 were
$6,058,000. 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 June 30, 1997.

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

The Company also 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, 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
June 30, 1997, the outstanding balance of eligible loans sold under the facility
was $83,200,000. Outstanding borrowings under the line of credit at June 30,
1997 and

22
<PAGE> 23

December 31, 1996 were $229,000 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 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 balance of the loans pledged and sold
under the facility at any time cannot exceed $25,000,000.

In connection with the facility, the Company formed a wholly owned
subsidiary, Litchfield Capital Corporation 1996 ("LCC"), to purchase loans from
the Company. LCC either pledges the loans on a revolving line of credit with
Conduit B or sells the loans to Conduit B. Conduit B issues commercial paper or
other indebtedness to fund the purchase or pledge of loans from LCC. Conduit B
is not affiliated with the Company or its affiliates. As of June 30, 1997 the
outstanding balance of the eligible loans previously sold under the facility was
$13,767,000. There were no outstanding borrowings under the line of credit as of
June 30, 1997. Interest is payable on the line of credit at an interest rate
based on certain commercial paper rates.

During the first quarter of 1995, the Company issued a 10.43% promissory
note with an initial balance of $12,500,000 to 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 retained interests in loan sales and cash. The
balance outstanding on the note was $6,396,000 and $7,428,000 at June 30, 1997
and December 31, 1996, respectively. As of June 30, 1997 the approximate value
of the underlying collateral was $14,231,000.

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. The proceeds were
used to repay the outstanding balance on certain of the Company's lines of
credit.

In June 1997, the Company completed its first securitization of $15,325,000
of Hypothecation Loans in a private placement with a bank.

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 further mitigated its interest rate
exposure due to interest rate declines by instituting interest rate floors on
certain of its adjustable rate loans. The Company has also mitigated its
interest rate exposure due to basis risk attributable to differences between the
prime rate and the commercial paper and LIBOR rates by entering into interest
rate swap agreements.

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. Delinquent 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 .99% as of June 30, 1997 compared with 1.34% at December 31, 1996
and 1.74% at June 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 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 $5,541,000 at June 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 June 30, 1997 increased slightly to 1.97% from
1.87% at December 31, 1996.

23
<PAGE> 24

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
$10,626,000 and $10,628,000 at June 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.

24
<PAGE> 25

BUSINESS

OVERVIEW

The Company purchases and services Land Loans which are typically secured
by three to twenty acre rural parcels. The Company also purchases and services
VOI Loans which finance the purchase of ownership interests in a fully furnished
vacation property. The Company makes Hypothecation Loans to rural land dealers
and resort developers and other businesses secured by consumer receivables
consisting primarily of Land Loans and VOI Loans. The Company also makes A&D
Loans to rural land dealers and resort developers in order to finance additional
receivables generated by these A&D Loans. The Company sells substantially all
the Land Loans and VOI Loans it purchases and certain of the Hypothecation Loans
it originates either as whole loans or securitizations. 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. Because a significant
portion of the Company's revenues is comprised of gains realized upon sales of
loans, the timing of such sales has a significant effect on the Company's
results of operations.

CHARACTERISTICS OF THE SERVICED PORTFOLIO, LOAN PURCHASES AND ORIGINATIONS

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

<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------- JUNE 30,
1992 1993 1994 1995 1996 1997
----- ----- ----- ----- ----- --------
<S> <C> <C> <C> <C> <C> <C>
Purchased Loans.......................... 98.3% 89.0% 85.3% 81.6% 67.1% 60.8%
Hypothecation Loans...................... -- 5.0 9.0 12.5 20.7 24.2
A&D Loans................................ 1.7 4.3 3.3 3.1 8.7 11.8
Other Loans.............................. -- 1.7 2.4 2.8 3.5 3.2
----- ----- ----- ----- ----- -----
Total.......................... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
===== ===== ===== ===== ===== =====
</TABLE>

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

<TABLE>
<CAPTION>
SIX MONTHS
ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
--------------------------------------------- ---------------
1992 1993 1994 1995 1996 1996 1997
----- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Purchased Loans................... 96.6% 77.8% 67.6% 71.4% 49.9% 52.8% 39.3%
Hypothecation Loans............... -- 11.8 22.2 20.9 29.6 28.6 35.9
A&D Loans......................... 3.4 7.1 6.0 3.1 14.4 9.8 18.0
Other Loans....................... -- 3.3 4.2 4.6 6.1 8.8 6.8
----- ----- ----- ----- ----- ----- -----
Total 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
===== ===== ===== ===== ===== ===== =====
</TABLE>

(1) Purchased Loans

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

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

25
<PAGE> 26

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

Litchfield also engages in the purchase of portfolios of seasoned loans
from land dealers, resort developers and financial institutions. Most purchases
are from land dealers and resort developers, most of which guarantee the loans
sold and from which the Company ordinarily withholds a reserve. Management
believes that the portfolio acquisition program is attractive to land dealers
and resort developers because it provides them with liquidity to purchase
additional inventory.

Prior to purchasing such loans, Litchfield evaluates the credit and payment
history of each borrower in accordance with the Company's underwriting
guidelines, performs a sampling of borrower interviews, reviews the
documentation supporting the loans for completeness and obtains an appropriate
opinion from local legal counsel. Out of a land dealer's or resort developer's
total portfolio, Litchfield selects only individual loans which meet its credit
standards. In addition, Litchfield evaluates the dealer's or developer's credit
references, experience and financial statements and inspects a substantial
portion of the dealer's inventory prior to approval.

The Company, from time to time, acquires loan portfolios from financial
institutions and certain land dealers and resort developers secured by rural and
vacation land. In evaluating the portfolios, the Company conducts its normal
review of the borrower's documentation, payment history and underlying
collateral. Although the Company reviews loans included in these portfolios, the
Company may not always be able to reject individual loans, but rather must
purchase the entire portfolio offered. When the Company does not receive
guarantees, it adjusts its purchase price to reflect anticipated losses and its
required yield.

The Company's portfolio of Purchased Loans is secured by property located
in 39 states.

<TABLE>
<CAPTION>
PRINCIPAL AMOUNT OF LOANS
------------------------------------------------
DECEMBER 31,
----------------------------------- JUNE 30,
1992 1993 1994 1995 1996 1997
--- --- --- --- --- --------
<S> <C> <C> <C> <C> <C> <C>
Southwest........................................ 17% 18% 19% 16% 26% 31%
South............................................ 36 33 37 31 31 30
West............................................. -- 2 3 20 20 17
Mid-Atlantic..................................... 16 17 16 16 10 10
Northeast........................................ 31 30 25 17 13 12
--- --- --- --- --- ---
Total....................................... 100% 100% 100% 100% 100% 100%
=== === === === === ===
</TABLE>

a. Land Loans

Dealers from whom the Company purchases Land Loans are typically
closely-held firms with annual revenues of less than $3.0 million. Dealers
generally purchase large rural tracts (generally 100 or more acres) from farmers
or other owners and subdivide the property into five to twenty acre parcels for
resale to consumers. Generally the subdivided property is not developed
significantly beyond the provision of graded access roads. In recreational
areas, sales are made primarily to urban consumers who wish to use the property
for a vacation or retirement home or for recreational purposes such as fishing,
hunting or camping. In other rural areas, sales are more commonly made to
persons who will locate a manufactured home on the parcel. The aggregate
principal amount of Land Loans purchased from individual dealers during the six
months ended June 30, 1997 varied significantly from a low of approximately
$2,000 to a high of approximately $2.4 million. As of June 30, 1997, the five
largest dealers accounted for approximately 22.3% of the principal amount of the
Land Loans in the Serviced Portfolio, and no single dealer accounted for more
than 5.5%.

26
<PAGE> 27

As of June 30, 1997, 48.5% of the Serviced Portfolio consisted of Land
Loans with an average principal balance of approximately $12,600. The following
table sets forth as of June 30, 1997 the distribution of Land Loans in the
Company's Serviced Portfolio:

<TABLE>
<CAPTION>
PERCENTAGE OF PERCENTAGE OF
PRINCIPAL PRINCIPAL NUMBER OF NUMBER OF
PRINCIPAL BALANCE AMOUNT AMOUNT LOANS LOANS
- ----------------------------------------- ------------ ------------- --------- -------------
<S> <C> <C> <C> <C>
Less than $10,000........................ $ 24,469,000 17.9% 4,973 45.8%
$10,000-$19,999.......................... 54,816,000 40.1 4,010 37.0
$20,000 and greater...................... 57,413,000 42.0 1,867 17.2
------------ ----- ------ -----
Total............................... $136,698,000 100.0% 10,850 100.0%
============ ===== ====== =====
</TABLE>

As of June 30, 1997, the weighted average interest rate of the Land Loans
included in the Company's Serviced Portfolio was 12.2% and the weighted average
remaining maturity was 12.0 years. The following table sets forth as of June 30,
1997 the distribution of interest rates payable on the Land Loans:

<TABLE>
<CAPTION>
PERCENTAGE OF
PRINCIPAL
INTEREST RATE PRINCIPAL AMOUNT AMOUNT
- ---------------------------------------------------------------- ---------------- -------------
<S> <C> <C>
Less than 12.0%................................................. $ 46,341,000 33.9%
12.0%-13.9%..................................................... 56,320,000 41.2
14.0% and greater............................................... 34,037,000 24.9
------------ -----
Total...................................................... $136,698,000 100.0%
============ =====
</TABLE>

A Land Loan borrower generally uses the property which secures the loan as
a site for a lower-cost primary residence, often consisting of manufactured
housing, as a site for a vacation or retirement home or for recreational
purposes. As of June 30, 1997, the Company's Land Loan borrowers resided in 50
states, the District of Columbia and two territories or foreign countries.

b. VOI Loans

The Company purchases VOI Loans from various resort developers. The Company
generally targets small to medium size resorts with completed amenities and
established property owners associations. These resorts participate in programs
that permit purchasers of VOIs to exchange their time intervals for time
intervals in other resorts around the world. During the six months ended June
30, 1997, the Company acquired approximately $1.9 million of VOI Loans. As of
June 30, 1997, the five largest developers accounted for approximately 52.3% of
the principal amount of the VOI Loans in the Serviced Portfolio, and no single
developer accounted for more than 15.0%.

As of June 30, 1997, 12.3% of the Serviced Portfolio consisted of VOI
Loans, with an average principal balance of approximately $3,800. The following
table sets forth as of June 30, 1997 the distribution of VOI Loans.

<TABLE>
<CAPTION>
PERCENTAGE OF PERCENTAGE OF
PRINCIPAL PRINCIPAL NUMBER OF NUMBER OF
PRINCIPAL BALANCE AMOUNT AMOUNT LOANS LOANS
- ------------------------------------------ ----------- ------------- --------- -------------
<S> <C> <C> <C> <C>
Less than $4,000.......................... $ 9,030,000 26.1% 4,676 50.8%
$4,000-$5,999............................. 10,967,000 31.7 2,472 26.9
$6,000 and greater........................ 14,601,000 42.2 2,068 22.3
----------- ----- ----- -----
Total................................ $34,598,000 100.0% 9,216 100.0%
=========== ===== ===== =====
</TABLE>

27
<PAGE> 28

As of June 30, 1997, the weighted average interest rate of the VOI Loans
included in the Company's Serviced Portfolio was 14.6% and the weighted average
remaining maturity was 3.9 years. The following table sets forth as of June 30,
1997 the distribution of interest rates payable on the VOI Loans:

<TABLE>
<CAPTION>
PERCENTAGE OF
PRINCIPAL PRINCIPAL
INTEREST RATE AMOUNT AMOUNT
- ------------------------------------------------------------------ ----------- -------------
<S> <C> <C>
Less than 14.0%................................................... $ 9,203,000 26.6%
14.0%-15.9%....................................................... 12,317,000 35.6
16.0% and greater................................................. 13,078,000 37.8
----------- -----
Total........................................................ $34,598,000 100.0%
=========== =====
</TABLE>

As of June 30, 1997, the Company's VOI borrowers resided in 50 states, the
District of Columbia and eight territories or foreign countries.

(2) Hypothecation Loans

The Company extends Hypothecation Loans to land dealers and resort
developers and other businesses secured by consumer receivables. During the six
months ended June 30, 1997, the Company extended or acquired approximately $29.9
million of Hypothecation Loans, of which $12.3 million, or 41.1%, were secured
by Land Loans and $17.6 million, or 58.9%, were secured by VOI Loans.

The Company typically extends Hypothecation Loans to land dealers and
resort developers based on advance rates of 75% to 85% of the eligible consumer
receivables which serve as collateral. The Company's Hypothecation Loans are
typically made at variable rates based on the prime rate of interest plus 2% to
4%. As of June 30, 1997, the Company had $66.6 million of Hypothecation Loans
outstanding, none of which were 90 days or more past due. Hypothecation Loans
are secured by receivables from timeshare resorts and rural land in 25 states.
Hypothecation Loans range in size from $3,000 to $7.5 million with an average
principal balance of $1,004,000. The five largest Hypothecation Loans represent
8.5% of the Serviced Portfolio.

In addition, the Company has recently expanded its marketing of
Hypothecation Loans to include loans to other finance companies secured by other
types of collateral. The Company's objective is to identify other lending
opportunities or lines of business to diversify its portfolio as it did with VOI
Loans and Hypothecation Loans. These loans may be larger than the Company's
average Hypothecation Loans and may provide the Company with an option to take
an equity position in the borrower.

(3) A&D Loans

The Company also makes A&D Loans to dealers and developers in order to
finance the receivables generated from the sale of the properties. During the
six months ended June 30, 1997, the Company made $15.0 million of A&D Loans to
land dealers and resort developers, of which $8.0 million, or 53.6%, were
secured by land and $7.0 million, or 46.4%, were secured by resorts under
development.

The Company makes A&D Loans to land dealers and resort developers based on
loan to value ratios of 60% to 80% at variable rates based on the prime rate
plus 2% to 4%. As of June 30, 1997, the Company had $36.0 million of A&D Loans
outstanding, none of which were 90 days or more past due. A&D Loans are secured
by timeshare resort developments and rural land subdivisions in 19 states. A&D
Loans range in size from $10,000 to $4.7 million with an average principal
balance of $742,000. The five largest A&D Loans represent 5.6% of the Serviced
Portfolio.

(4) Other Loans

Other Loans consist primarily of consumer home improvement loans, consumer
construction loans and other secured commercial loans. Throughout its history
the Company has made or acquired certain other secured and unsecured loans to
identify additional lending opportunities or lines of business for possible
future expansion as it did with VOI Loans and Hypothecation Loans. As of June
30, 1997, the Company had $8.9

28
<PAGE> 29

million of such loans, 0.04% of which were 90 days or more past due. Commercial
Other Loans range in size from $50,000 to $900,000 with an average principal
balance of $445,000. The five largest Other Loans represent 1.1% of the Serviced
Portfolio.

LOAN UNDERWRITING

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

Litchfield's loan policy is to purchase Land and VOI Loans from $3,000 to
$50,000. On a case by case basis, the Company will also consider purchasing such
loans in excess of $50,000. As of June 30, 1997, the Company had 160 Loans
exceeding $50,000 representing 4.0% of the number of such loans in the Serviced
Portfolio, for a total of $11.5 million. There were no VOI Loans exceeding
$50,000 as of June 30, 1997. The Company will originate Hypothecation Loans up
to $15 million and A&D Loans up to $10 million. From time to time the Company
may have the opportunity to originate larger Hypothecation Loans or A&D Loans in
which case the Company would seek to participate such loans with other financial
institutions. All loans greater than $100,000 must be approved by the Credit
Committee which is comprised of the Chief Executive Officer, Executive Vice
President, Chief Financial Officer and two Senior Vice Presidents.

COLLECTIONS AND DELINQUENCIES

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

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

The Company extends a limited number of its loans for reasons the Company
considers acceptable such as temporary loss of employment or serious illness. In
order to qualify for a one to three month extension, the customer must make
three timely payments without any intervention from the Company. For extensions
of four to six months, the customer must make four to six timely payments,
respectively, without any intervention from the Company. The Company will not
extend a loan more than two times for an aggregate six months over the life of
the loan. The Company has extended approximately one percent of its loans
through June 30, 1997. The Company does not generally modify any other loan
terms such as interest rates or payment amounts.

Regulations and practices regarding the rights of the mortgagor in default
vary greatly from state to state. To the extent permitted by applicable law, the
Company collects late charges and return-check fees and records these items as
additional revenue. Only if a delinquency cannot otherwise be cured will the
Company decide that foreclosure is the appropriate course of action. If the
Company determines that purchasing a

29
<PAGE> 30

property securing a mortgage loan will minimize the loss associated with such
defaulted loan, the Company may accept a deed in lieu of foreclosure, take legal
action to collect on the underlying note or bid at the foreclosure sale for such
property.

Serviced Portfolio

The following table shows the Company's delinquencies, net of
dealer/developer reserves and guarantees for the Serviced Portfolio:

<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED
---------------------------------------------------------------------- JUNE 30,
1992 1993 1994 1995 1996 1997
----------- ----------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Serviced
Portfolio..... $58,968,000 $84,360,000 $105,013,000 $176,650,000 $242,445,000 $281,965,000
Delinquent
loans(1)...... 553,000 511,000 981,000 3,398,000 3,255,000 2,788,000
Delinquency as a
percentage of
Serviced
Portfolio..... .94% .61% .93% 1.92% 1.34% .99%
</TABLE>

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

Land Loans

The following table shows the Company's delinquencies, net of
dealer/developer reserves and guarantees for Land Loans in the Serviced
Portfolio:

<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED
-------------------------------------------------------------------- JUNE 30,
1992 1993 1994 1995 1996 1997
----------- ----------- ----------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Land Loans in
Serviced
Portfolio....... $58,668,000 $77,258,000 $90,502,000 $97,266,000 $119,370,000 $136,698,000
Delinquent Land
Loans(1)........ 553,000 511,000 981,000 1,059,000 1,920,000 1,771,000
Delinquency as a
percentage of
Land Loans in
Serviced
Portfolio....... .94% .66% 1.08% 1.09% 1.61% 1.30%
</TABLE>

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

30
<PAGE> 31

VOI Loans

The following table shows the Company's delinquencies, net of
dealer/developer reserves and guarantees for VOI Loans in the Serviced
Portfolio:

<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED
--------------------------------------------------------------- JUNE 30,
1992 1993 1994 1995 1996 1997
-------- ---------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
VOI Loans in Serviced
Portfolio............ $300,000 $1,434,000 $ 2,851,000 $46,700,000 $43,284,000 $34,598,000
Delinquent VOI
Loans(1)............. -- -- -- 1,958,000 1,316,000 860,000
Delinquency as a
percentage of VOI
Loans in Serviced
Portfolio............ -- -- -- 4.19% 3.04% 2.49%
</TABLE>

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

Hypothecation, A&D and Other Loans

The Company did not have any delinquent Hypothecation Loans or A&D Loans
for the years ended December 31, 1992 through December 31, 1996 or for the six
months ended June 30, 1997. The Company did not have significant amounts of
Other Loans during these periods and the delinquency rates did not exceed .25%
at the end of any period.

ALLOWANCE FOR LOAN LOSSES, NET CHARGE-OFFS AND DEALER RESERVES

The following is an analysis of the total allowances for all loan losses:

<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED
-------------------------------------------------------------- JUNE 30,
1992 1993 1994 1995 1996 1997
--------- ---------- ---------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Allowance, beginning of
year................... $ 299,000 $ 498,000 $1,064,000 $1,264,000 $ 3,715,000 $4,528,000
Provision for loan
losses................. 270,000 620,000 559,000 890,000 1,954,000 735,000
Net charge-offs of
uncollectible
accounts(1)............ (179,000) (493,000) (359,000) (946,000) (1,965,000) (904,000)
Allocation of purchase
adjustment(2).......... 108,000 439,000 -- 2,507,000 824,000 1,182,000
--------- ---------- ---------- ---------- ----------- ----------
Allowance, end of year... $ 498,000 $1,064,000 $1,264,000 $3,715,000 $ 4,528,000 $5,541,000
========= ========== ========== ========== =========== ==========
</TABLE>

- ---------------

(1) Net of recoveries of $20,000, $10,000, $47,000, $11,000, $310,000 and
$182,000 in 1992, 1993, 1994, 1995, 1996 and 1997, respectively.

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

31
<PAGE> 32

The following is an analysis of net charge-offs (recoveries) by major loan
and collateral types experienced by the Company:

<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED
------------------------------------------------------ JUNE 30,
1992 1993 1994 1995 1996 1997
-------- -------- -------- -------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Land Loans....................... $179,000 $493,000 $359,000 $546,000 $ 669,000 $411,000
VOI Loans........................ -- -- -- 45,000 1,284,000 498,000
Hypothecation Loans.............. -- -- -- -- -- --
A&D Loans........................ -- -- -- 352,000 (8,000) (2,000)
Other Loans...................... -- -- -- 3,000 20,000 (3,000)
-------- -------- -------- -------- ---------- --------
Total net charge-offs............ $179,000 $493,000 $359,000 $946,000 $1,965,000 $904,000
======== ======== ======== ======== ========== ========
Net charge-offs as a percentage
of the average Serviced
Portfolio...................... .37% .69% .38% .67% .94% .69%
</TABLE>

As part of the Company's financing of Land Loans and VOI Loans,
arrangements are entered into with most land 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 land
dealers and resort developers, a portion of the amount payable to them 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 land dealers and resort developers based upon various
criteria, two of which are the financial strength of the land dealers and resort
developers and the credit risk associated with the loans being purchased. Dealer
reserves for Land Loans amounted to $6,112,000, $6,420,000 and $7,555,000 at
December 31, 1994, 1995 and 1996, respectively, and $7,909,000 at June 30, 1997.
Developer reserves for VOI Loans amounted to $463,000, $3,224,000 and $3,072,000
at December 31, 1994, 1995 and 1996, respectively, and $2,664,244 at June 30,
1997. Historically, most dealers and developers have provided personal and, when
relevant, corporate guarantees to further protect the Company from loss.

LOAN SERVICING AND SALES

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

In connection with the Company's continuing 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. The Company retains responsibility for
servicing all loans as master servicer.

In 1990, the Company began privately placing issues of pass-through
certificates evidencing an undivided beneficial ownership interest in pools of
mortgage loans which have been transferred to trusts. The principal and part of
the interest payments on the loans transferred to the trust are collected by the
Company, as the servicer of the loan pool, remitted to the trust for the benefit
of the investors, and then distributed by the trust to the investors in the
pass-through certificates.

As of June 30, 1997, the Company had sold or securitized a total of
approximately $289.0 million in loans. In certain of the Company's issues of
pass-through certificates, credit enhancement was achieved by dividing the issue
into a senior portion which was sold to the investors and a subordinated portion
which was retained by the Company. In certain other of the Company's private
placements, credit enhancement was achieved through cash collateral. If
borrowers default in the payment of principal or interest on the mortgage loans
underlying these issues of pass-through certificates, losses would be absorbed
first by the subordinated

32
<PAGE> 33

portion or cash collateral account retained by the Company and might, therefore,
have to be charged against the allowance for loan losses to the extent dealer
guarantees and reserves are not available.

MARKETING AND ADVERTISING

The Company markets its program to rural land dealers and resort developers
through brokers, referrals, dealer and developer solicitation, and targeted
direct mail. The Company employs three marketing executives based in Denver,
Colorado and five marketing executives based in Stamford, Vermont. In the last 5
years the Company has closed loans with over 250 different dealers and
developers.

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

REGULATION

The Company is licensed as a mortgage banker in 15 of the states in which
it operates, and in those states its operations are subject to supervision by
state authorities (typically state banking or consumer credit authorities).
Expansion into other states may be dependent upon a finding of financial
responsibility, character and fitness of the Company and various other matters.
The Company is generally subject to state regulations, examination and reporting
requirements, and licenses are revocable for cause. The Company is subject to
state usury laws in all of the states in which it operates.

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

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

COMPETITION

The consumer finance business is highly competitive, with competition
occurring primarily on the basis of customer service and the term and interest
rate of the loans. Traditional competitors in the consumer finance business
include commercial banks, credit unions, thrift institutions, industrial banks
and finance companies, many of which have considerably greater financial,
technical and marketing resources than the Company. As a result of consolidation
and the failure of certain financial institutions, the number of financial
institutions is

33
<PAGE> 34

being reduced. There can be no assurance that the Company will not face
increased competition from remaining institutions or new financial institutions.

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

EMPLOYEES

As of June 30, 1997, the Company had 66 full-time equivalent employees.
None of the Company's employees is covered by a collective bargaining agreement.
The Company considers its relations with its employees to be good.

FACILITIES

The Company owns an aggregate of approximately 13,000 square feet of office
space in Stamford, Vermont, which is used as the Company's headquarters. The
Company also occupies an aggregate of approximately 5,100 square feet of office
space in Lakewood, Colorado, pursuant to a lease expiring in January 1998, with
an option to renew until 2001, providing for an annual rental of approximately
$40,000, including utilities and exterior maintenance expenses. The Company has
acquired a leasehold interest in approximately 26,000 square feet of office
space in Williamstown, Massachusetts for its planned headquarters which it is
currently renovating for occupancy in early 1998. The initial ten year lease
term expires in May 2007 and is renewable at the Company's option for two
additional ten year periods. The initial lease provides for an annual rental of
$20,000.

LEGAL PROCEEDINGS

The Company is not a party to any material legal proceedings.

34
<PAGE> 35

MANAGEMENT

The following table sets forth the name, age and position with the Company
of each person who is an executive officer or director of the Company as of
September 30, 1997:

<TABLE>
<CAPTION>
NAME AGE POSITION
- ----------------------------------- ---- ------------------------------------
<S> <C> <C>
Richard A. Stratton................ 47 Chief Executive Officer, President
and Director
Heather A. Sica.................... 35 Executive Vice President, Treasurer
and Director
Ronald E. Rabidou.................. 46 Chief Financial Officer
Wayne M. Greenholtz................ 56 Senior Vice President
James H. Shippee................... 37 Senior Vice President
Michael A. Spadacino............... 36 Senior Vice President
Joseph S. Weingarten............... 32 Senior Vice President
James A. Yearwood.................. 49 First Vice President
John A. Costa(2)................... 41 Director
Donald R. Dion, Jr................. 42 Director
David J. Ferrari(1), (2)........... 61 Director
Gerald Segel(1), (2)............... 76 Director
James Westra(2).................... 45 Director
</TABLE>

- ---------------
(1) Member of Audit Committee and Compensation Committee

(2) Member of Stock Option Committee

EXECUTIVE OFFICERS

Richard A. Stratton, 47 years old, has been a director of the Company since
1988. Mr. Stratton was a cofounder of the Company and has been the Chief
Executive Officer of the Company since 1996 and President of the Company since
1988. Prior to joining the Company, Mr. Stratton served as Vice President of
Finance for Patten Corporation and Vice President of Marketing for Summit
Software Technology, Inc. and held senior marketing and management positions
with the Gillette Company and the American Appraisal Company in Boston,
Massachusetts. Mr. Stratton is a graduate of The College of The Holy Cross.

Heather A. Sica, 35 years old, has been a director of the Company since
1995. Ms. Sica has been the Executive Vice President and Treasurer of the
Company since 1991. She served as Chief Financial Officer of the Company from
1991 to 1995. She served as a Vice President of the Company from 1989 to 1991.
Prior to joining the Company, Ms. Sica was an associate with the Real Estate
Group of General Electric Investment Corporation and a certified public
accountant with KPMG Peat Marwick. Ms. Sica received her B.S. in Business
Administration from the University of Vermont and her MBA from the Wharton
School of the University of Pennsylvania.

Ronald E. Rabidou, 46 years old, has been Chief Financial Officer of the
Company since May 1995. Prior to joining the Company, Mr. Rabidou was a
certified public accountant with Ernst & Young LLP from 1987 to May 1995. Mr.
Rabidou received his MBA and BA from the University of Massachusetts.

Wayne M. Greenholtz, 56 years old, has been a Senior Vice President of the
Company since April 1995. Prior to joining the Company, Mr. Greenholtz was the
Senior Vice President of Operations for Government Employees Financial
Corporation, a subsidiary of GEICO Corporation, from 1989 to 1995. Mr.
Greenholtz is a graduate of the University of Maryland.

Jim Shippee, 37 years old, has been Senior Vice President of Mortgage
Operations since 1989. Prior to joining the Company, Mr. Shippee was Vice
President of Patten Financial Services from 1987 to 1989.

35
<PAGE> 36

Michael A. Spadacino, 36 years old, has been a Senior Vice President of the
Company since January 1994 after joining the Company in 1992 as a Vice President
in charge of land portfolio acquisitions. Prior to joining the Company, Mr.
Spadacino attended law school from 1989 to 1992 at the Albany Law School of
Union University where he received a JD. Mr. Spadacino received a BBA in
Accounting from St. Bonaventure University and MS in Taxation from Georgetown
University and is also a CPA.

Joseph S. Weingarten, 32 years old, has been a Senior Vice President of the
Company since 1997. Prior to joining the Company, Mr. Weingarten served from
1993 to 1997 in the Structured Finance Group of ING Capital, most recently as a
Vice President, originating and managing structured lending and asset-backed
securitization transactions, with an emphasis on specialty finance companies.
Previously, he served as the Manager of Portfolio Administration for US West
Financial Services, Inc., and as a CPA with Arthur Andersen & Co. Mr. Weingarten
received his B.A. from New York University.

James A. Yearwood, 49 years old, has been a First Vice President of the
Company since 1996 after joining the Company in 1992 as a Vice President in
charge of vacation ownership receivable funding. Prior to joining the Company,
Mr. Yearwood was a Vice President with Del-Val Capital Corporation from 1989 to
1991 where he specialized in vacation ownership receivable lending. Mr. Yearwood
graduated from Southern Connecticut State University.

DIRECTORS

John A. Costa, 41 years old, has been a director of the Company since 1995.
Mr. Costa has been at Cardholder Management Services, L.P., a credit card
servicing business since 1995, serving first as Managing Director of Planning
and Business Development, and presently as Senior Vice President. Mr. Costa
served as a consultant to corporate clients from 1992 to 1995 in areas that
include mergers and acquisitions, financial modeling, asset securitization and
lending facility development. Previously, he served as Director of Consumer
Finance with US West Financial Services, Inc. in 1992 and as Director of
Structured Finance for Arsht & Company, Inc. from 1990 to 1992. Mr. Costa
received his B.A. from New York University.

Donald R. Dion, Jr., 42 years old, has been a director of the Company since
1988. Mr. Dion is Chairman and Chief Executive Officer of Dion Money Management
Advisors, Inc. Mr. Dion served as Chief Executive Officer of the Company until
1995 and Treasurer of the Company until 1991. Prior to joining the Company, Mr.
Dion served as an Executive Vice President of Finance, Treasurer and Director of
Patten Corporation, an attorney with Warner & Stackpole in Boston, Massachusetts
and a certified public accountant with Ernst & Young. He is a graduate of Saint
Michaels College, holds a J.D. from the University of Maine Law School, and an
LL.M. from Boston University School of Law.

David J. Ferrari, 61 years old, has been a director of the Company since
1988. Mr. Ferrari is President and a founder of Argus Management Corporation of
Natick, Massachusetts. Argus Management Corporation provides consulting and
management services to underperforming and troubled companies. Mr. Ferrari is a
Director of several companies, including Malden Mills Industries, Inc., and
Printed Circuit Corp. Prior to founding Argus, Mr. Ferrari was a certified
public accountant with Arthur Andersen & Co. He received a B.A. from Johns
Hopkins University and an MBA from Babson College.

Gerald Segel, 76 years old, has been a Director of the Company since 1989.
Prior to his retirement in May 1990, Mr. Segel was Chairman of Tucker Anthony
Incorporated from January 1987 to May 1990. From 1983 to January 1987 he served
as President of Tucker Anthony Incorporated. Mr. Segel is also a Director of
Hologic, Inc., Vivid Technologies, Inc. and Boston Communications Group, Inc.
Mr. Segel received his A.B. from Harvard College.

James Westra, 45 years old, has been a director of the Company since 1995.
Mr. Westra is a stockholder of the law firm of Hutchins, Wheeler & Dittmar, A
Professional Corporation, where he has practiced law since 1977. Mr. Westra
serves as a Director of several companies, including Bertucci's, Inc. Mr. Westra
graduated from Harvard College in 1973 and from Boston University Law School in
1977.

36
<PAGE> 37

PRINCIPAL STOCKHOLDERS

The following table sets forth information with respect to the beneficial
ownership of shares of Common Stock of the Company, as of September 30, 1997, by
all stockholders of the Company known to be beneficial owners of more than 5% of
the outstanding Common Stock of the Company, by each director, each of the Named
Executive Officers (as defined herein) and all directors and officers of the
Company as a group:

<TABLE>
<CAPTION>
AMOUNT AND NATURE
OF BENEFICIAL Percentage
NAME OWNERSHIP(a) of Class
- ---------------------------------------------------------------- ----------------- ----------
<S> <C> <C>
Nicholas Company, Inc. ......................................... 643,459 11.4%
700 North Water Street
Milwaukee, WI 53202
Arthur D. Charpentier........................................... 582,229 10.3%
660 White Plains Road, Suite 400
Tarrytown, NY 10591
Wellington Management Co. ...................................... 457,902 8.1%
75 State Street
Boston, MA 02109
J.P. Morgan Inv. Mgt., Inc. .................................... 451,060 8.0%
522 Fifth Ave.
New York, NY 10036
Richard A. Stratton(b).......................................... 420,055(c) 7.2%
Chief Executive Officer, President and Director
Heather A. Sica(b).............................................. 110,098(d) 1.9%
Executive Vice President, Treasurer and Director\
Michael A. Spadacino(b)......................................... 39,407(e) *
Senior Vice President
Gerald Segel.................................................... 23,137(f) *
Director
Tucker Anthony Incorporated
One Beacon Street
Boston, MA 02108
Donald R. Dion, Jr. ............................................ 17,181(g) *
Director
Dion Money Management, Inc.
279 Main Street
Williamstown, MA 01267
Ronald E. Rabidou(b)............................................ 15,531(h) *
Chief Financial Officer
Wayne M. Greenholtz(b).......................................... 7,263(i) *
Senior Vice President
James Westra.................................................... 5,411(j) *
Director
Hutchins, Wheeler & Dittmar, A Professional Corporation
101 Federal Street
Boston, MA 02110
David J. Ferrari................................................ 5,123(k) *
Director
Argus Management
207 Union Street
South Natick, MA 01760
John Costa...................................................... 4,116(j) *
Director
Cardholder Management Services
55 E. Ames Ct.
Plainview, NY 11803
All directors and executive officers as a group (13 persons).... 687,078(l) 11.3%
</TABLE>

37
<PAGE> 38

- ---------------
* Less than one percent.

(a) Beneficial ownership is determined in accordance with rules of the
Securities and Exchange Commission and includes general voting power and/or
investment power with respect to securities. Shares of common stock subject
to options and warrants currently exercisable or exercisable within 60 days
of September 30, 1997 are deemed outstanding for computing the percentage of
stock owned by a person holding such options but are not deemed outstanding
for computing the percentage of stock owned by any other person. Except as
otherwise specified below, the persons named in the table above have sole
voting and investment power with respect to all shares of common stock shown
as beneficially owned by them.

(b) Address: 789 Main Road, Stamford, VT 05352.

(c) Includes 194,892 shares of Common Stock issuable upon exercise of options.
Such options are exercisable within 60 days.

(d) Includes 107,783 shares of Common Stock issuable upon exercise of options.
Such options are exercisable within 60 days.

(e) Includes 39,407 shares of Common Stock issuable upon exercise of options.
Such options are exercisable within 60 days.

(f) Includes 18,812 shares of Common Stock issuable upon exercise of options.
Such options are exercisable within 60 days.

(g) Includes 9,181 shares of Common Stock issuable upon exercise of options.
Such options are exercisable within 60 days.

(h) Includes 15,531 shares of Common Stock issuable upon exercise of options.
Such options are exercisable within 60 days.

(i) Includes 7,263 shares of Common Stock issuable upon exercise of options.
Such options are exercisable within 60 days.

(j) Includes 3,675 shares of Common Stock issuable upon exercise of options.
Such options are exercisable within 60 days.

(k) Includes 5,123 shares of Common Stock issuable upon exercise of options.
Such options are exercisable within 60 days.

(l) In addition to the shares of Common Stock and options to purchase Common
Stock deemed to be beneficially owned by the directors and officers, as set
forth above, includes options to purchase Common Stock held by the following
executive officers in the following amounts: James Shippee -- 30,112 shares;
and James Yearwood -- 9,645 shares. Such options are exercisable currently
or within 60 days.

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<PAGE> 39

DESCRIPTION OF NOTES

GENERAL

The Notes are to be issued under the Indenture, a copy of which is filed as
an exhibit to the Registration Statement of which this Prospectus is a part. The
following statements, unless the context otherwise requires, are summaries of
the substance or general effect of certain provisions of the Indenture and are
qualified in their entirety by reference to the Indenture. Unless otherwise
defined herein, capitalized terms used in this Prospectus have the same meaning
as defined in the Indenture.

The Notes will be limited in aggregate principal amount to $51,750,000 and
will be issued as fully-registered Notes only in integral multiples of $1,000.
The Notes will bear interest at the rate of 8.45% per annum from and after the
date of delivery, and payments of interest will be made monthly in arrears
beginning December 1, 1997 to Noteholders of record as of the close of business
on the 15th day of the preceding month. At the option of the Company, interest
may be paid by Company checks mailed to registered holders of the Notes.

The Notes will mature on November 1, 2002 and payments of the principal of
the Notes will be made at the main office of the Trustee in New York, New York.
The Notes are also exchangeable and transferable at such office, without charge
therefor, except for any tax or other governmental charge connected therewith.
The Notes are direct unsecured obligations of the Company.

The Company intends to furnish to holders of the Notes annual reports
containing audited financial information.

NOTEHOLDERS' RIGHTS TO PREPAYMENT

If requested by a Noteholder, the Company will prepay, during the period
from the date of issuance through December 1, 1998, and thereafter in any
subsequent twelve-month period ending December 1 (in either case, a "Prepayment
Period") an aggregate maximum per Prepayment Period of 5% of the original
aggregate principal amount of the Notes issued under the Indenture, subject to
certain limitations. Any such prepayment shall be at a price of 100% of the
principal amount plus accrued interest to the date of prepayment. In the case of
deceased Noteholders (including tenants by the entirety, joint tenants and
tenants in common) or beneficial owners, commencing immediately upon issuance of
the Notes, such prepayment will take place within 60 days of the Trustee's
receipt of a prepayment request from the personal representative or surviving
tenant of any such deceased Noteholder or beneficial owner. In the case of other
Noteholders, the prepayment of those Notes tendered on or prior to September 30
in any Prepayment Period will take place on the immediately succeeding December
1, commencing December 1, 1998.

The Company is not obligated to prepay more than $25,000 of the Notes
tendered by any single Noteholder or the personal representative or surviving
tenant of a deceased Noteholder or beneficial owner in any Prepayment Period,
except that in the case of Notes registered in the name of banks, trust
companies or broker-dealers who are members of a national securities exchange or
the National Association of Securities Dealers, Inc. ("Qualified Institutions"),
the $25,000 limitation applies to each beneficial owner of Notes held by any
Qualified Institution.

A Note held in tenancy by the entirety, joint tenancy or tenancy in common
will be deemed to be held by a single holder, and the death of a tenant by the
entirety, joint tenant or tenant in common will be deemed the death of a holder.
The death of a person who, during his lifetime, was entitled to substantially
all of the beneficial ownership interest of a Note, will be deemed the death of
a holder, regardless of the registered holder, if such beneficial interest can
be established to the satisfaction of the Trustee. Such beneficial interest will
be deemed to exist in typical cases of street name or nominee ownership,
ownership by a custodian for the benefit of a minor under the Uniform Gifts to
Minors Act, community property or other joint ownership arrangements between a
husband and wife (including individual retirement accounts or Keogh plans
maintained solely by or for the decedent, or by or for the decedent and spouse)
and trusts and certain other arrangements whereby a person has substantially all
of the beneficial ownership interests in the Notes during

39
<PAGE> 40

his lifetime. Beneficial interests shall include the power to sell, transfer or
otherwise dispose of a Note and the right to receive the proceeds therefrom, as
well as interest and principal payable with respect thereto. Prepayments to the
personal representatives or surviving tenants of deceased Noteholders or
beneficial owners on or prior to December 1 of any Prepayment Period will be
subject to the aggregate limit applicable to such Prepayment Period of 5% of the
original aggregate principal amount of the Notes issued under the Indenture.

Except in the case of Qualified Institutions and the personal
representative or surviving tenant of a deceased Noteholder, no particular form
of request for prepayment or authority to request payment is necessary. However,
in order for Notes to be validly tendered for prepayment, the Trustee must have
received: (1) a written request for prepayment signed by the Noteholder or his
authorized representative, (2) the Notes to be prepaid, and (3) in the case of a
surviving tenant or personal representative of a deceased Noteholder or
beneficial owner, appropriate evidence of death and such other additional
documents as the Trustee shall require, including, but not limited to,
inheritance or estate tax waivers and evidence of authority of the personal
representative. Any Notes tendered or any request for prepayment may be
withdrawn by written request received by the Trustee on or prior to the last day
of September in the Prepayment Period or, in the case of Notes presented by
reason of death of a Noteholder or beneficial owner, prior to the issuance of a
check in payment thereof. Except in the case of a deceased Noteholder or
beneficial owner, Notes not prepaid because they are not validly presented on or
prior to the last day of September in a Prepayment Period or because of the
foregoing dollar limitations, will be held for prepayment during the following
Prepayment Period, subject to the $25,000 of 5% of original aggregate principal
amount limitations, in order of receipt until prepaid, unless sooner withdrawn
by the Noteholder. In the case of a deceased Noteholder or beneficial owner and
the personal representative or surviving tenant of a deceased Noteholder, Notes
tendered for prepayment in accordance with the preceding paragraph and not
prepaid because of the $25,000 or 5% of original aggregate principal amount
limitations, will be held for prepayment in order of receipt, subject to such
$25,000 or 5% of original aggregate principal amount limitations, within 60 days
following the commencement of the next succeeding Prepayment Period until paid,
unless sooner withdrawn by the personal representative or surviving tenant of
such deceased Noteholder or beneficial owner. Requests for prepayment covering
Notes not paid will remain in effect unless withdrawn. A Noteholder who has
tendered a Note for prepayment shall continue to receive all monthly interest
payments prior to the date of prepayment.

Notes tendered in the manner described in the preceding paragraph will be
prepaid, up to the $25,000 per Noteholder or beneficial owner or 5% of original
aggregate principal amount limitations, in the following order: (i) Notes
tendered by the personal representative or surviving tenant of a deceased
Noteholder or beneficial owner shall be prepaid first, and (ii) other Notes will
be prepaid in the order of the Trustee's receipt of a written request for
prepayment executed by the Noteholder or his duly authorized representative.
Notes that are properly tendered but not prepaid during any Prepayment Period
because of the $25,000 or 5% of original aggregate principal amount limitations
will be held for prepayment in the next Prepayment Period in order of receipt
(except in the case of a deceased Noteholder or beneficial owner, whose tenders
will be given priority as discussed above) unless withdrawn by the Noteholder.
If the $25,000 per holder limitation has been reached and the 5% aggregate
limitation has not been reached, if Notes have been properly presented for
payment on behalf of beneficial holders who are natural persons, each in an
aggregate principal amount exceeding $25,000, the Company will redeem such Notes
in order of their receipt (except Notes presented for payment in the event of
death of a holder, which will be given priority in order of their receipt), up
to the aggregate limitation of 5% notwithstanding the $25,000 limitation.

In the case of Notes held by Qualified Institutions on behalf of beneficial
owners, the $25,000 per Prepayment Period limitation shall apply to each such
beneficial owner. Such Qualified Institutions in their request for prepayment on
behalf of such a beneficial owner must submit evidence, satisfactory to the
Trustee, that they hold Notes on behalf of such beneficial owner and that the
aggregate requests for prepayment tendered by such Qualified Institution on
behalf of such beneficial owner per Prepayment Period do not exceed $25,000.

The Company's obligation to prepay Notes properly tendered for prepayment
is not cumulative. Although the Company is obligated to prepay in any Prepayment
Period up to 5% of the original aggregate principal amount of the Notes issued
under the Indenture, it is not required to establish a sinking fund or otherwise
set

40
<PAGE> 41

aside funds for that purpose, and the Company has no present intention of
setting aside funds for prepayment of Notes prior to maturity. The Company
intends to prepay Notes tendered out of its internally-generated funds or, if
necessary, short-term or other long-term borrowings. The obligation to prepay
the Notes, however, is an unsecured obligation of the Company.

Nothing in the Indenture prohibits the Company from purchasing any Notes on
the open market. However, the Company may not use any Notes purchased on the
open market as a credit against amounts the Company is otherwise obligated under
the Indenture to repay.

NOTEHOLDERS' RIGHTS TO PREPAYMENT AFTER FUNDAMENTAL STRUCTURAL CHANGE OR
SIGNIFICANT SUBSIDIARY DISPOSITION

In the event of any Fundamental Structural Change of the Company (as
defined herein below) or a Significant Subsidiary Disposition (as defined herein
below), each holder of Notes will have the right, at the holder's option and
subject to the terms and conditions of the Indenture, to require the Company to
purchase for cash all or any part (provided the principal amount of such part is
$1,000 or an integral multiple thereof) of the holder's Notes on the date that
is 75 days after the occurrence of the Fundamental Structural Change or
Significant Subsidiary Disposition (the "Repurchase Date") at a price equal to
100% of the principal amount thereof plus accrued interest to the Repurchase
Date, unless on or before the date that is 40 days after the occurrence of the
Fundamental Structural Change or Significant Subsidiary Disposition, the Notes
have received a rating of Baa3 or better by Moody's Investors Service, Inc., or
BBB- or better by either Standard & Poor's Corporation or Duff & Phelps Credit
Rating Co. Neither the Board of Directors of the Company nor the Trustee has the
ability to waive the Company's obligation to redeem a holder's Notes upon
request in the event of a Fundamental Structural Change or Significant
Subsidiary Disposition. Exercise of this redemption option by a holder is
irrevocable.

If within 40 days after the Fundamental Structural Change or Significant
Subsidiary Disposition the Notes have not received a rating as described in the
immediately preceding paragraph, the Company is obligated to provide promptly,
but in any event within three business days after expiration of such 40 day
period, notice to the Trustee, who shall promptly (and in all events within five
days after receipt of notice from the Company) notify all holders of the Notes,
of the Fundamental Structural Change or Significant Subsidiary Disposition,
which notice shall state, among other things (i) the availability of the
redemption option, (ii) the date before which a holder must notify the Trustee
of such holder's intention to exercise the redemption option (which date shall
be no more than three business days prior to the Repurchase Date), and (iii) the
procedure such holder must follow to exercise such right. To exercise this
right, the holder must deliver to the Trustee on or before the close of business
on the Repurchase Date, written notice of such holder's redemption election
signed by such holder or its authorized representative and the Note or Notes to
be redeemed free of liens or encumbrances.

Under the Indenture, a "Fundamental Structural Change" in the Company is
deemed to have occurred at such time as (i) the Company shall consolidate with
or merge into any other corporation or partnership, or convey, transfer or lease
all or substantially all of its assets to any person other than as part of a
loan securitization or sale entered into in the ordinary course of business,
(ii) any person shall consolidate with or merge into the Company pursuant to a
transaction in which at least a majority of the common stock of the Company then
outstanding is changed or exchanged or in which the number of shares of common
stock issued by the Company in the transaction to persons who were not
stockholders of the Company immediately prior to such transaction is greater
than the number of shares outstanding immediately prior to the transaction,
(iii) any person shall purchase or otherwise acquire in one or more transactions
beneficial ownership of 50% or more of the common stock of the Company
outstanding on the date immediately prior to the last purchase or other
acquisition, (iv) the Company or any subsidiary shall purchase or otherwise
acquire in one or more transactions during the twelve month period preceding the
date of the last such purchase or other acquisition an aggregate of 25% or more
of the common stock of the Company outstanding on the date immediately prior to
the last such purchase or acquisition, or (v) the Company shall make a
distribution of cash, property or securities to holders of common stock in their
capacity as such (including by means of dividend, reclassification or
recapitalization) which, together with all other distributions during such 12
month period preceding the

41
<PAGE> 42

date of such distribution, has an aggregate fair market value in excess of an
amount equal to 25% of the fair market value of common stock of the Company
outstanding on the date immediately prior to such distribution.

Under the Indenture, a "Significant Subsidiary Disposition" shall be deemed
to have occurred upon (i) the merger, consolidation, or conveyance or transfer
of all or substantially all of the assets of a Significant Subsidiary, or (ii)
the issuance, sale, transfer, assignment, pledge or other disposition of the
capital stock of a Significant Subsidiary or securities convertible or
exchangeable into shares of capital stock of such Significant Subsidiary. A
Significant Subsidiary is any subsidiary of the Company the consolidated assets
of which constitute 20% or more of the Company's consolidated assets. The
Company does not currently have any Significant Subsidiaries.

Although there is a developing body of case law interpreting the phrase
"substantially all," there is no precise established definition of the phrase
under applicable law. Accordingly, the ability of a holder of Notes to require
the Company to repurchase such Notes as a result of conveyance, transfer or
lease of less than all of the assets of the Company or a Significant Subsidiary
to another person may be uncertain.

Except as described above with respect to a Fundamental Structural Change
or Significant Subsidiary Disposition, the Indenture does not contain any other
provisions that permit the holders of the Notes to require that the Company
repurchase the Notes in the event of a takeover or similar transaction.
Moreover, a recapitalization of the Company or a transaction entered into by the
Company with management or their affiliates would not necessarily be included
within the definition of a "Fundamental Structural Change" or a "Significant
Subsidiary Disposition." Accordingly, while such definitions cover a wide
variety of arrangements which have traditionally been used to effect
highly-leveraged transactions, the Indenture does not afford the holders of
Notes protection in all circumstances from highly leveraged transactions,
reorganizations, restructurings, mergers or similar transactions involving the
Company and its Significant Subsidiaries that may adversely affect holders of
Notes.

The indentures pursuant to which the 1992 Notes, the 1993 Notes and the
1995 Notes in the aggregate principal amounts of $15,065,000, $17,570,000 and
$18,400,000, respectively, were issued permit the holders thereof to require the
Company to repurchase such 1992 Notes, 1993 Notes and 1995 Notes upon the
occurrence of events which are substantially identical to those described in the
definitions of "Fundamental Structural Change" and "Significant Subsidiary
Disposition" above. The 1992 Notes, 1993 Notes and 1995 Notes rank on a parity
with the Notes. No assurance can be given that if a Fundamental Structural
Change or Significant Subsidiary Disposition were to occur, there would be
sufficient funds available to the Company to pay the amounts outstanding under
the Notes, the 1992 Notes, the 1993 Notes, the 1995 Notes and any other
instruments or facilities then outstanding which are senior to or on a parity
with the Notes.

The Fundamental Structural Change purchase feature of the Notes may, in
certain circumstances, make more difficult or discourage a takeover of the
Company and thus removal of incumbent management. The Fundamental Structural
Change purchase feature, however, is not the result of management's knowledge of
any specific effort to obtain control of the Company or part of a plan by
management to adopt a series of anti-takeover provisions. Rather, the terms of
the Fundamental Structural Change purchase feature is a result of negotiations
between the Company and the Underwriters.

To the extent that the right of redemption by a holder in the event of a
Fundamental Structural Change constitutes a tender offer under Section 14(e) of
the Exchange Act and the rules thereunder, the Company will comply with all
applicable tender offer rules.

OPTIONAL REDEMPTION BY THE COMPANY

Beginning November 1, 1999, the Company shall have the option to redeem,
upon not less than 30 and not more than 60 days' notice, all or any portion of
the Notes.

42
<PAGE> 43

If the Company redeems the Notes prior to maturity, it will pay in cash a
redemption price equal to the following percentages of the principal amount of
the Notes redeemed, plus interest to the date fixed for redemption:

<TABLE>
<CAPTION>
IF REDEEMED DURING REDEMPTION
THE 12 MONTHS BEGINNING PRICE
-------------------------- ----------
<S> <C>
November 1, 1999.................................................. 103.0 %
November 1, 2000.................................................. 101.5 %
November 1, 2001 and thereafter................................... 100.0 %
</TABLE>

If less than all the Notes are redeemed, the particular Notes to be
redeemed will be selected by lot by the Trustee. Notice of redemption will be
mailed to each holder of Notes to be redeemed at the address appearing in the
registry books for the Notes maintained by the Company.

EVENTS OF DEFAULT; NOTICE AND WAIVER

The following will be Events of Default: (a) default in the payment of
principal, or premium, if any, when due; (b) default in the payment of any
interest when due, continued for five days; (c) default in the meeting of any
redemption payment when due, continued for five days; (d) default in the
performance of any other covenant or warranty of the Company, continued for 30
days (or, in certain circumstances, 60 days) after written notice to the Company
by the Trustee or to the Company and the Trustee by the holders of 10% in
principal amount of the outstanding Notes; (e) any default by the Company under
the terms of any instrument under which Indebtedness in an aggregate principal
amount in excess of $1,000,000 outstanding is accelerated and such acceleration
is not rescinded or annulled within 10 days after written notice to the Company
from the Trustee or to the Trustee and the Company from the holders of not less
than 25% in principal amount of the outstanding Notes; or (f) certain events of
bankruptcy, insolvency or reorganization. If any Event of Default shall occur
and be continuing, the Trustee or the holders of not less than 25% in principal
amount of outstanding Notes may declare the Notes immediately due and payable.

The Company is required to deliver quarterly to the Trustee an officers'
certificate as to the absence or existence of any default in the performance of
any covenant contained in the Indenture during the preceding quarter and is also
required to provide the Trustee notice within ten business days after the
Company knew or should have known of a default under the Indenture or any other
Indebtedness of the Company.

The Indenture provides that the Trustee will, within 60 days after
obtaining notice of the occurrence of a default, give the holders of Notes (and
to certain other persons and former noteholders) notice of all uncured defaults
known to it; but, except in the case of a default in the payment of principal,
or premium, if any, or interest on any of the Notes, the Trustee shall be
protected in withholding such notice if it in good faith determines that the
withholding of such notice is in the interest of such holders.

The holders of a majority of the aggregate principal amount of outstanding
Notes may on behalf of the holders of all Notes waive certain past defaults, not
including a default in payment of principal, or premium, if any, or interest on
any Note.

RESTRICTIONS ON ADDITIONAL INDEBTEDNESS

In the Indenture, the Company has covenanted that on each of June 30,
December 31 and any day on which the Company directly or indirectly incurs any
Indebtedness (as defined in the Indenture), the Company will maintain a Ratio
equal to or in excess of 2:1. The term "Ratio" means the ratio of (A) the
Company's earnings before deduction of taxes, depreciation, amortization and
interest expense (but after deduction for any extraordinary item) for the twelve
month period immediately preceding the date such Ratio is calculated (as shown
by a pro forma consolidated income statement of the Company) to (B) the
aggregate dollar amount of interest paid by the Company on the Notes and all
other Indebtedness of the Company or its subsidiaries during such twelve month
period, in each case, after giving effect to the incurrence of such Indebtedness
and, if applicable, the application of the proceeds therefrom. The Company is
required to deliver to the Trustee, within 30 days after each June 30 and
December 31, and each incurrence of Indebtedness, an

43
<PAGE> 44

officer's certificate containing appropriate calculations of the Ratio and the
compliance of the Company with this covenant. At June 30, 1997, the Company's
Ratio was 2.88.

LIQUIDITY MAINTENANCE REQUIREMENT

The Company is not required to establish a sinking fund for the purpose of
redeeming the Notes. The Company has, however, covenanted to maintain on or
before ten days prior to and until the next Interest Payment Date, Permitted
Investments the fair market value of which is equal to or in excess of the
product of the aggregate amount of interest payable with respect to the Notes
for the next succeeding Interest Payment Date multiplied by three. The Company
is required to deliver to the Trustee, within 30 days after the end of each
fiscal quarter, an officer's certificate as to compliance with this covenant.

LIMITATION ON DIVIDENDS AND OTHER PAYMENTS

The Company has agreed pursuant to the Indenture that it will not make, pay
or declare any of the following (each a "Restricted Payment"): (i) any dividend
or other distribution of property or assets other than dividends paid solely in
the Company's stock, (ii) a repayment or defeasance of any indebtedness which is
subordinate to the Notes (except, so long as the Notes are not in default,
scheduled payments of principal and interest thereon), (iii) an exchange of
equity for debt issued subsequent to October 31, 1997, or (iv) any stock
repurchase, unless such Restricted Payment is less than the sum of (A)
$2,000,000 plus (B) 45% of the Company's and its subsidiaries' cumulative net
income earned during the period commencing October 31, 1997 and ending on the
date of such Restricted Payment, plus (C) the cumulative cash and non-cash
proceeds to the Company of all public or private equity offerings during such
time. In addition, the Company is prohibited by the Indenture from making any
Restricted Payment if, by so doing, the Company will be in violation of any
other provisions of the Indenture or any other loan agreement or indenture to
which the Company is a party.

MERGER, CONSOLIDATION OR SALE OF ASSETS; SUCCESSOR CORPORATION

The Company has covenanted that it will not merge or consolidate with, or
sell all or substantially all of its assets to, any person, firm or corporation
unless the Company is the continuing corporation in such transaction and,
immediately thereafter, is not in default under the Indenture or, if it is not
the continuing corporation, the successor corporation expressly assumes the
Company's obligations under the Indenture and, immediately after such
transaction, the successor corporation is not in default under the Indenture.
Any successor corporation shall succeed to and be substituted for the Company as
if such successor corporation has been named as the Company in the Indenture.

MODIFICATION OF THE INDENTURE

Modifications and amendments of the Indenture may be made by the Company
and the Trustee with the consent of the holders of 66 2/3% in principal amount
of outstanding Notes, provided that no such modification or amendment may (i)
reduce the principal amount of or interest on any Note or change the stated
maturity of the principal or the interest payment dates or change the currency
in which the Notes are to be paid, without the consent of each holder of any
Note affected thereby, or (ii) reduce the percentage of holders of Notes
necessary to modify or alter the Indenture, without the consent of the holders
of all Notes then outstanding.

THE TRUSTEE

The Bank of New York is the Trustee under the Indenture. Its mailing
address is 101 Barclay Street, New York, NY 10286.

The Indenture contains a provision pursuant to which the Company will
indemnify the Trustee against any and all losses or liabilities incurred by the
Trustee in connection with its execution and performance of the Indenture;
provided, however, that such indemnification will not extend to losses resulting
from a breach of the Trustee's duties under the Indenture. The Indenture
provides that the holders of a majority in principal

44
<PAGE> 45

amount of the outstanding Notes may direct the time, method and place of
conducting any proceeding for any remedy available to the Trustee or exercising
any trust or power conferred upon the Trustee, subject to certain limitations
set forth in the Indenture. The Trustee is not required to take any action at
the direction of the holders of the Notes unless such holders have provided the
Trustee with a reasonable indemnity.

BOOK-ENTRY; DELIVERY AND FORM

The Notes will initially be issued in the form of one or more registered
notes in global form without coupons (each a "Global Note"). Each Global Note
will be deposited on the date of the closing of the sale of the Notes (the
"Closing Date") with, or on behalf of, the Depository Trust Company and
registered in the name of Cede & Co., as nominee of The Depository Trust
Company. Any person having a beneficial interest in a Global Note may, upon
request to the Trustee, exchange such beneficial interest for certificated
notes. Upon such issuance, the Trustee is required to register such certificated
notes in the name of, and cause the same to be delivered to, such person or
persons (or the nominee of any thereof).

CERTAIN FEDERAL INCOME TAX CONSIDERATIONS

Set forth below is a discussion of certain federal income tax consequences
to persons purchasing the Notes. The discussion relates only to the material
federal income tax consequences regarding the purchase of the Notes and is not
necessarily inclusive of all matters which may be of interest to an individual
investor. EACH PROSPECTIVE INVESTOR IS ADVISED TO CONSULT WITH HIS OR HER OWN
TAX ADVISOR AS TO PARTICULAR FACTS AND CIRCUMSTANCES THAT MAY BE UNIQUE TO SUCH
INVESTOR AND NOT COMMON TO INVESTORS AS A WHOLE, AND ALSO AS TO ANY ESTATE,
GIFT, STATE, LOCAL OR FOREIGN TAX CONSEQUENCES REGARDING HOLDING AND DISPOSING
OF THE NOTES.

SALE OR REDEMPTION

The difference between the holder's tax basis in a Note and the amount
realized upon the sale of a Note that is held as a capital asset (including the
redemption of such a Note or the payment of its principal amount at maturity),
will be recognized as capital gain or loss.

MARKET DISCOUNT

Prospective purchasers of the Notes should be aware that a holder's sale of
the Notes may be affected by the "market discount" rules of the Code. If a Note
is purchased by a subsequent holder for less than the original issue price, the
Note will have been acquired at a "market discount" (except that the "market
discount" will be considered to be zero if it is less than 0.25% of stated
redemption price of the Notes multiplied by the number of complete years to
maturity from the date of the subsequent purchase). Upon the later disposition
of a Note (including payment by the issuer at or before maturity) acquired at a
"market discount," the holder must treat any gain, to the extent of the accrued
"market discount," as ordinary income. "Market discount" will accrue ratably
from the date following the date the holder acquired the Note to the date of its
maturity. The holder may elect, however, to accrue "market discount" at a
constant interest rate in lieu of ratable accrual, which will result in smaller
accruals of "market discount" in the earlier years and larger accruals in the
later years.

Under the "market discount" rules, a portion of the deduction for interest
expense on indebtedness incurred or continued to purchase or carry the Notes may
have to be deferred to the extent of any "market discount" accruing on the
Notes. A holder may avoid such a deferral of interest expense deductions,
however, if the holder elects to include "market discount" on all "market
discount" instruments held by such holder in income as it accrues, rather than
when the instruments are sold or redeemed.

BACKUP WITHHOLDING

The Company is required to comply with information reporting requirements
imposed by the Code and will be required to withhold 31% of the interest payable
to holders of the Notes who are subject to the backup withholding rules and who
(i) fail to provide to the Company their correct taxpayer identification number

45
<PAGE> 46

under penalty of perjury, (ii) fail to comply with federal income tax reporting
obligations, or (iii) under certain circumstances, fail to provide the Company
with a certified statement, under penalty of perjury, that the holder is not
subject to backup withholding. The certification required by (iii) above should
include a certified statement, under penalties of perjury, that (a) the holder
has not been notified by the Internal Revenue Service that he is subject to
backup withholding due to under reporting of dividends or interest, and (b) the
taxpayer identification number provided to the Company is the holder's correct
number. Any amounts so withheld from payments on the Notes will be paid over to
the Internal Revenue Service and will be allowed as a credit against the
Noteholder's federal income tax.

UNDERWRITING

Pursuant to the Underwriting Agreement, and subject to the terms and
conditions thereof, the Underwriters named below have agreed, severally, to
purchase from the Company the principal amount of Notes set forth below opposite
their respective names.

<TABLE>
<CAPTION>
AMOUNT
NAME OF UNDERWRITERS OF NOTES
---------------------------------------------------------------- -----------
<S> <C>
McDonald & Company Securities, Inc.............................. $33,750,000
J.C. Bradford & Co. L.L.C....................................... 8,000,000
Tucker Anthony Incorporated..................................... 10,000,000
-----------
Total................................................. $51,750,000
===========
</TABLE>

In the Underwriting Agreement, the Underwriters have agreed, subject to the
terms and conditions therein set forth, to purchase all the principal amount of
Notes offered hereby if any of such Notes are purchased.

The Underwriters have advised the Company that they propose initially to
offer the Notes to the public at the public offering price set forth on the
cover page of this Prospectus and to certain dealers at such a price less a
concession not in excess of 1.80% of the principal amount. The Underwriters may
allow and such dealers may reallow a concession not in excess of 0.25% of the
principal amount to certain other dealers. After the initial public offering,
the public offering price and such concessions may be changed.

The offering of the Notes is made for delivery when, as and if accepted by
the Underwriters and subject to prior sale and to withdrawal, cancellation or
modification of the offer without notice. The Underwriters reserve the right to
reject any order for the purchase of Notes.

There is no public market for the Notes, and the Company does not intend to
apply for listing of the Notes on the Nasdaq stock market or any Securities
exchange. The Company has been advised by the Underwriters that, following the
public offering of the Notes, the Underwriters presently intend to make a market
in the Notes; however, the Underwriters are not obligated to do so, and any
market-making activity with respect to the Notes may be discontinued at any time
without notice. There can be no assurances as to the liquidity of the public
market for the Notes or that an active public market for the Notes will develop.
If an active market does not develop, the market price and liquidity of the
Notes may be adversely affected.

The Underwriting Agreement provides that the Company will indemnify the
Underwriters, and controlling persons, if any, against certain liabilities,
including liabilities under the Securities Act of 1933, as amended, or to
contribute to payments which the Underwriters or any such controlling persons
may be required to make in respect thereof.

46
<PAGE> 47

LEGAL MATTERS

Hutchins, Wheeler & Dittmar, A Professional Corporation, 101 Federal
Street, Boston, Massachusetts, will render an opinion on the legality of the
Notes being offered hereby. Bass, Berry & Sims, 2700 First American Center,
Nashville, Tennessee, will pass upon certain legal matters for the Underwriters.
James Westra, a shareholder of Hutchins, Wheeler & Dittmar, is a Director of the
Company. Mr. Westra owns 1,735 shares of the Company's Common Stock, and has
options to acquire another 5,512 shares.

EXPERTS

The consolidated financial statements of Litchfield Financial Corporation
incorporated by reference in Litchfield Financial Corporation's Annual Report
(Form 10-K) for the year ended December 31, 1996, have been audited by Ernst &
Young LLP, independent auditors, as set forth in their report thereon
incorporated by reference therein and incorporated herein by reference. Such
financial statements are, and audited financial statements to be included in
subsequently filed documents will be, incorporated herein in reliance upon the
reports of Ernst & Young LLP pertaining to such financial statements (to the
extent covered by consents filed with the Securities and Exchange Commission)
given upon the authority of such firm as experts in accounting and auditing.

ADDITIONAL INFORMATION

The Company has filed with the Securities and Exchange Commission (the
"Commission") a registration statement on Form S-3 (herein, with all amendments
and exhibits thereto, referred to as the "Registration Statement") under the
Securities Act of 1933, as amended (the "Securities Act"). This Prospectus,
which is part of the Registration Statement, does not contain all of the
information set forth in the Registration Statement or the exhibits and
schedules thereto, certain portions having been omitted pursuant to the rules
and regulations of the Commission. Statements made in this Prospectus as to the
contents of any contract or other document are not necessarily complete; with
respect to each such contract or other document filed with the Commission as an
exhibit to the Registration Statement, or incorporated by reference to exhibits
previously filed, reference is made to the exhibit for a more complete
description of the matter involved, and each such statement shall be deemed
qualified in its entirety by such reference.

The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act") and in accordance
therewith files reports, proxy statements and other information with the
Commission. Such reports, proxy statements and other information can be
inspected and copied at the Public Reference Section of the Commission at Room
1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the following
Regional Offices of the Commission: New York Regional Office, Seven World Trade
Center, New York, New York 10048 and Chicago Regional Office, Northwestern
Atrium Center, 500 West Madison, Room 3190, Chicago, Illinois 60661. Copies of
such material can also be obtained at prescribed rates by writing to the Public
Reference Section of the Commission at 450 Fifth Street, N.W., Washington, D.C.
The Commission maintains a World Wide Web site that contains reports, proxy and
information statements and other information regarding registrants that file
electronically with the Commission at http://www.sec.gov. The Company's Common
Stock is listed on The Nasdaq Stock Market's National Market, and such reports,
proxy statements and other information can also be inspected at the Offices of
Nasdaq Operations, 1735 K Street, N.W., Washington D.C. 20006.

No person is authorized to give any information or to make any
representations other than those contained or incorporated by reference in this
Prospectus in connection with the offer made by this Prospectus, and, if given
or made, such information or representations must not be relied upon as having
been authorized. This Prospectus does not constitute an offer or solicitation by
anyone in any jurisdiction to any person to whom it is unlawful to make such
offer or solicitation. The delivery of this Prospectus at any time shall not
under any circumstances create an implication that there has been no change in
the affairs of the Company since the date hereof.

47
<PAGE> 48

[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE> 49

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Auditors......................................................... F-2
Financial Statements at December 31, 1996
Consolidated Balance Sheets.......................................................... F-3
Consolidated Statements of Income.................................................... F-4
Consolidated Statements of Stockholders' Equity...................................... F-5
Consolidated Statements of Cash Flows................................................ F-6
Notes to Consolidated Financial Statements........................................... F-7
Financial Statements at June 30, 1997
Consolidated Balance Sheets.......................................................... F-20
Consolidated Statements of Income.................................................... F-21
Consolidated Statements of Stockholders' Equity...................................... F-23
Consolidated Statements of Cash Flows................................................ F-24
Notes to Consolidated Financial Statements........................................... F-25
</TABLE>

F-1
<PAGE> 50

REPORT OF INDEPENDENT AUDITORS

The Board of Directors and Stockholders
LITCHFIELD FINANCIAL CORPORATION

We have audited the accompanying consolidated balance sheets of Litchfield
Financial Corporation as of December 31, 1996 and 1995, and the related
consolidated statements of income, changes in stockholders' equity, and cash
flows for each of the three years in the period ended December 31, 1996. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Litchfield
Financial Corporation at December 31, 1996 and 1995, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended December 31, 1996, in conformity with generally accepted accounting
principles.

Ernst & Young LLP
Boston, Massachusetts
January 31, 1997

F-2
<PAGE> 51

LITCHFIELD FINANCIAL CORPORATION

CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------
1996 1995
------------ ------------
<S> <C> <C>
ASSETS
Cash and cash equivalents....................................... $ 5,557,000 $ 18,508,000
Restricted cash................................................. 18,923,000 16,345,000
Loans held for sale, net of allowance for loan losses of
$817,000 and $1,100,000 in 1996 and 1995, respectively........ 12,260,000 14,380,000
Loans held for investment, net of allowance for loan losses of
$1,200,000 and $413,000 in 1996 and 1995, respectively........ 79,996,000 33,613,000
Subordinated pass-through certificates held to maturity, net of
allowance for loan losses of $1,400,000 and $1,270,000 in 1996
and 1995, respectively........................................ 18,004,000 13,468,000
Excess servicing asset.......................................... 12,019,000 10,058,000
Other........................................................... 7,041,000 7,019,000
------------ ------------
Total assets.......................................... $153,800,000 $113,391,000
============ ============

LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Lines of credit............................................... $ 36,299,000 $ --
Term note payable............................................. 7,428,000 9,836,000
Accounts payable and accrued liabilities...................... 3,811,000 4,442,000
Dealer/developer reserves..................................... 10,628,000 9,644,000
Allowance for loans sold...................................... 1,111,000 932,000
Deferred income taxes......................................... 5,080,000 3,740,000
------------ ------------
64,357,000 28,594,000
------------ ------------
10% Notes due 2002............................................ 12,785,000 12,888,000
8 7/8% Notes due 2003......................................... 15,930,000 16,113,000
10% Notes due 2004............................................ 18,280,000 18,400,000
------------ ------------
46,995,000 47,401,000
------------ ------------
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,
5,444,399 shares issued and outstanding in 1996; 5,223,715
shares issued and 5,174,715 shares outstanding in 1995..... 54,000 52,000
Additional paid in capital.................................... 34,633,000 31,873,000
Retained earnings............................................. 7,761,000 6,065,000
Less 49,000 common shares held in treasury, at cost, in
1995....................................................... -- (594,000)
------------ ------------
Total stockholders' equity............................ 42,448,000 37,396,000
------------ ------------
Total liabilities and stockholders' equity............ $153,800,000 $113,391,000
============ ============
</TABLE>

See accompanying notes to consolidated financial statements.

F-3
<PAGE> 52

LITCHFIELD FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF INCOME

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Revenues:
Interest and fees on loans........................ $15,396,000 $11,392,000 $ 5,669,000
Gain on sale of loans............................. 7,331,000 5,161,000 4,847,000
Servicing and other fee income.................... 1,456,000 908,000 459,000
----------- ----------- -----------
24,183,000 17,461,000 10,975,000
----------- ----------- -----------
Expenses:
Interest expense.................................. 7,197,000 6,138,000 3,158,000
Salaries and employee benefits.................... 3,233,000 2,798,000 1,776,000
Other operating expenses.......................... 3,225,000 2,120,000 1,164,000
Provision for loan losses......................... 1,954,000 890,000 559,000
----------- ----------- -----------
15,609,000 11,946,000 6,657,000
----------- ----------- -----------
Income before income taxes and extraordinary item... 8,574,000 5,515,000 4,318,000
Provision for income taxes.......................... 3,301,000 2,066,000 1,619,000
Income before extraordinary item.................... 5,273,000 3,449,000 2,699,000
Extraordinary item (net of applicable tax benefit of
$76,0000)......................................... -- -- (126,000)
----------- ----------- -----------
Net income.......................................... $ 5,273,000 $ 3,449,000 $ 2,573,000
=========== =========== ===========
Primary per common share amounts:
Income before extraordinary item.................. $ .93 $ .76 $ .63
Extraordinary item................................ -- -- (.03)
----------- ----------- -----------
Net income........................................ $ .93 $ .76 $ .60
=========== =========== ===========
Primary weighted average number of shares........... 5,674,264 4,522,983 4,280,006
Fully-diluted per common share amounts:
Income before extraordinary item.................. $ .92 $ .76 $ .63
Extraordinary item................................ -- -- (.03)
----------- ----------- -----------
Net income........................................ $ .92 $ .76 $ .60
=========== =========== ===========
Fully-diluted weighted average number of shares..... 5,736,467 4,543,009 4,280,006
</TABLE>

See accompanying notes to consolidated financial statements.

F-4
<PAGE> 53

LITCHFIELD FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
ADDITIONAL
COMMON PAID IN RETAINED TREASURY
STOCK CAPITAL EARNINGS STOCK TOTAL
------- ----------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1993....... $36,000 $ 9,662,000 $ 5,024,000 $ -- $14,722,000
Issuance of 178,313 shares in
connection with 5% stock
dividend.................... 2,000 2,183,000 (2,185,000) -- --
Issuance of 12,995 shares...... -- 23,000 -- -- 23,000
Repurchase of 49,100 shares.... -- -- -- (595,000) (595,000)
Dividends ($.03 per share)..... -- -- (113,000) -- (113,000)
Net income..................... -- -- 2,573,000 -- 2,573,000
------- ----------- ----------- --------- -----------
Balance, December 31, 1994....... 38,000 11,868,000 5,299,000 (595,000) 16,610,000
Issuance of 186,819 shares in
connection with 5% stock
dividend.................... 2,000 2,473,000 (2,475,000) -- --
Issuance of 1,282,551 shares
(including reissuance of 100
shares held in treasury).... 12,000 17,532,000 -- 1,000 17,545,000
Dividends ($.04 per share)..... -- -- (208,000) -- (208,000)
Net income..................... -- -- 3,449,000 -- 3,449,000
------- ----------- ----------- --------- -----------
Balance, December 31, 1995....... 52,000 31,873,000 6,065,000 (594,000) 37,396,000
Issuance of 259,124 shares in
connection with 5% stock
dividend.................... 3,000 3,301,000 (3,304,000) -- --
Issuance of 10,560 shares
(including reissuance of ten
shares held in treasury).... -- 52,000 -- -- 52,000
Retirement of 48,990 shares
held in treasury............ (1,000) (593,000) -- 594,000 --
Dividends ($.05 per share)..... -- -- (273,000) -- (273,000)
Net income..................... -- -- 5,273,000 -- 5,273,000
------- ----------- ----------- --------- -----------
Balance, December 31, 1996....... $54,000 $34,633,000 $ 7,761,000 $ -- $42,448,000
======= =========== =========== ========= ===========
</TABLE>

See accompanying notes to consolidated financial statements.

F-5
<PAGE> 54
LITCHFIELD FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------
1996 1995 1994
------------ ------------ -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income................................................ $ 5,273,000 $ 3,449,000 $ 2,573,000
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Gain on sale of loans................................... (7,331,000) (5,161,000) (4,847,000)
Loss on retirement of 10% Notes due 2002................ -- -- 88,000
Amortization and depreciation........................... 520,000 511,000 490,000
Amortization of excess servicing asset.................. 3,444,000 2,267,000 1,996,000
Provision for loan losses............................... 1,954,000 890,000 559,000
Provision for deferred income taxes..................... 1,340,000 1,209,000 1,101,000
Net changes in operating assets and liabilities:
Restricted cash....................................... (2,578,000) (4,957,000) (6,791,000)
Loans held for sale................................... (532,000) (11,978,000) 2,220,000
Dealer/developer reserves............................. 984,000 3,069,000 1,649,000
Net change in other assets and liabilities............ (2,701,000) 881,000 (3,549,000)
------------ ------------ -----------
Net cash provided by (used in) operating activities..... 373,000 (9,820,000) (4,511,000)
------------ ------------ -----------
Cash flows from investing activities:
Purchase of investments held to maturity.................. -- (5,595,000) (2,011,000)
Redemption of investments held to maturity................ 118,000 9,232,000 7,890,000
Net originations and principal payments on loans held for
investment.............................................. (47,170,000) (18,022,000) (7,051,000)
Sale of loans originally held for investment.............. -- -- 1,011,000
Collections on subordinated pass-through certificates..... 590,000 -- --
Capital expenditures and other assets..................... (126,000) (1,676,000) (1,697,000)
------------ ------------ -----------
Net cash used in investing activities................... (46,588,000) (16,061,000) (1,858,000)
------------ ------------ -----------
Cash flows from financing activities:
Net borrowings (repayments) on lines of credit............ 36,299,000 (5,823,000) 5,823,000
Proceeds from issuance of long-term notes................. -- 18,400,000 --
Redemption of long-term notes............................. (406,000) (895,000) (2,406,000)
Proceeds from term note................................... -- 12,500,000 --
Payments of term note..................................... (2,408,000) (2,664,000) --
Net proceeds from issuance of common stock................ 52,000 17,544,000 23,000
Reissuance (purchase) of treasury stock................... -- 1,000 (595,000)
Dividends paid............................................ (273,000) (208,000) (113,000)
------------ ------------ -----------
Net cash provided by financing activities............... 33,264,000 38,855,000 2,732,000
------------ ------------ -----------
Net (decrease) increase in cash and cash equivalents........ (12,951,000) 12,974,000 (3,637,000)
Cash and cash equivalents, beginning of period.............. 18,508,000 5,534,000 9,171,000
------------ ------------ -----------
Cash and cash equivalents, end of period.................... $ 5,557,000 $ 18,508,000 $ 5,534,000
============ ============ ===========
Supplemental Schedule of Noncash Financing and Investing
Activities:
Exchange of loans for subordinated pass-through
certificates............................................ $ 3,540,000 $ 8,842,000 $ --
============ ============ ===========
Exchange of loans for investments held to maturity........ $ -- $ 358,000 $ --
============ ============ ===========
Transfers from loans to real estate acquired through
foreclosure............................................. $ 1,654,000 $ 1,991,000 $ 843,000
============ ============ ===========
Supplemental Cash Flow Information:
Interest paid............................................. $ 6,674,000 $ 5,766,000 $ 2,972,000
============ ============ ===========
Income taxes paid......................................... $ 1,411,000 $ 1,151,000 $ 448,000
============ ============ ===========
</TABLE>

See accompanying notes to consolidated financial statements.

F-6
<PAGE> 55

LITCHFIELD FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Business

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 secured by consumer
receivables and other secured loans (collectively, "Dealer/Other Loans".)

Basis of Presentation

The consolidated financial statements include the accounts of Litchfield
Financial Corporation and its wholly-owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated in consolidation.

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates.

Interest income

Interest income from loans and subordinated pass-through certificates held
to maturity is recognized using the interest method. Accrual of interest is
suspended when collection is doubtful and, in any event, when a loan is
contractually delinquent for ninety days and it is determined that amounts
cannot be recovered from dealer/developer reserves or guarantees. The accrual is
resumed when the loan becomes contractually current as to principal and interest
and past-due interest is recognized at that time.

Gain on sale of loans

Loans are typically sold to investors with the Company retaining a
participation in cash flows derived from the loans sold. Gain on sales of loans
are recorded on the settlement date based upon the difference between the
selling price and the carrying value of the loans sold using the specific
identification method. The gain is increased by the present value of the
differential 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 fees for normal servicing of the loans (referred
to as excess servicing asset). The excess servicing asset is calculated using
prepayment, default, and interest rate assumptions prevalent in the marketplace
at the time of sale for similar instruments. The Company provides an allowance
for expected losses under the recourse provisions at the time of the loan sale.
The excess servicing asset is amortized over the estimated life of the loans
using the interest method. 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.

On a quarterly basis, the Company assesses the carrying value of the excess
servicing asset by comparing actual versus assumed prepayment rates on a
disaggregated basis reflecting factors such as origination dates of the loans
and the types of loans. The Company will adjust the carrying value of the excess
servicing asset for any unfavorable changes.

Loans

Loans held for sale are carried at the lower of aggregate cost or market
value. Market value is determined by outstanding commitments from investors or
current investor yield requirements.

F-7
<PAGE> 56

LITCHFIELD FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Provisions for loan losses and impairment of loans

Provisions for loan losses are charged to income in amounts sufficient to
maintain the allowances at levels considered adequate to cover anticipated
losses on outstanding loans, including loans sold and subordinated pass-through
certificates. Management evaluates allowance requirements on a quarterly basis
by examining current delinquencies, historical loan losses, the value of the
underlying collateral and general economic conditions and trends. Management
also evaluates the availability of dealer/developer reserves to absorb loan
losses. The Company determines those loans that are uncollectible based upon
detailed review of all loans and any charge-offs are charged to the allowance
for loan losses.

Land Loans and VOI Loans which consist of large groups of smaller balance
loans are evaluated collectively for impairment and are stated at the lower of
cost or fair value.

Dealer/Other Loans are evaluated individually for impairment based on the
factors described above. No such loans were impaired at December 31, 1996 or
1995.

Loan origination fees and related costs

The Company defers the excess of loan origination fees over related direct
costs and recognizes such amount as interest income over the estimated life of
the related loans using the interest method.

Real estate acquired through foreclosure

Real estate acquired through foreclosure is carried at the lower of fair
value less estimated costs to sell or cost. On a quarterly basis, the Company
evaluates the carrying value of the real estate and establishes a valuation
allowance if the fair value of the asset less the estimated costs to sell the
asset is less than the carrying value of the asset. Subsequent increases in the
fair market value less the estimated cost to sell the asset would reduce the
valuation allowance, but not below zero. There was no such valuation allowance
at December 31, 1996 or 1995. Other real estate owned of $1,775,000 and
$1,288,000 is included in other assets at December 31, 1996 and 1995,
respectively.

Dealer/developer reserves

As part of the Company's financing of loans through dealer/developers, the
Company retains a portion of the proceeds from the purchased loans as a reserve
to offset potential losses on those loans. The Company negotiates the amount of
reserves with the dealer/developers based upon various criteria, including the
credit risk associated with the dealer/developer and the loans being purchased.
The Company generally returns any excess reserves to the dealer/developer on a
quarterly basis as the related loans are repaid by borrowers.

Income taxes

The Company uses the liability method of accounting for income taxes in its
financial statements.

Net income per common share

Primary and fully diluted earnings per share were computed by dividing net
income by the weighted average number of shares of common stock and common stock
equivalents outstanding for each period.

Cash and cash equivalents

The Company considers all highly liquid instruments purchased with an
original maturity of three months or less to be cash equivalents.

Restricted cash

Restricted cash and cash equivalents represent accounts established as
credit enhancements for certain loan sales and escrow deposits held for
customers.

F-8
<PAGE> 57

LITCHFIELD FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Investments held to maturity and Subordinated pass-through certificates held
to maturity

Management determines the appropriate classification of debt securities at
the time of purchase. Debt securities are classified as held to maturity when
the Company has the intent and ability to hold the investments to maturity.
Investments held to maturity are carried at amortized cost and are included in
other assets.

The Company classifies its subordinated pass-through certificates as held
to maturity based on its ability and expressed intent to hold the certificates
of maturity. Historically, the Company has not sold its subordinated
pass-through certificates and cannot sell such certificates without the consent
of the senior certificate holders. In addition, the Company has pledged certain
pass-through certificates as collateral for certain liabilities and cannot sell
such certificates without the further consent of the lenders.

Subordinated pass-through certificates held to maturity are carried at
amortized cost less an allowance for loan losses. On a quarterly basis, the
Company assesses the carrying value of the subordinated pass-through
certificates for impairment. The Company considers the affect of changes in
prepayment, default and interest rates on the cash flows underlying the
subordinated pass-through certificates. The Company will adjust the carrying
value for any impairment of carrying value that it considers to be other
than-temporary.

Deferred debt issuance costs

Deferred debt issuance costs are amortized over the life of the related
debt. The unamortized balance of $1,820,000 and $2,211,000 is included in other
assets at December 31, 1996 and 1995, respectively. The amount of the
accumulated amortization was $1,051,000 and $675,000 at December 31, 1996 and
1995 respectively.

Mortgage servicing rights

In May 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 122 "Accounting for Mortgage Servicing
Rights, an Amendment of FASB Statement No. 65." The Company adopted the
provisions of the standard in 1996. The standard requires the Company to
allocate the cost of purchasing or originating mortgage loans to the mortgage
servicing rights and the loans (without the servicing rights) based on their
relative fair values if the Company sells or securitizes the loans and retains
the servicing rights. Any cost allocated to mortgage servicing rights is
recognized as a separate asset. Mortgage servicing rights are amortized in
proportion to and over the period of estimated net servicing income and are
evaluated for impairment based on their fair value.

In the absence of fair market values for the servicing of Land and VOI
Loans, the Company uses fair values derived from cash flows to estimate fair
value. Such estimates consider assumptions about prepayments, defaults and
interest rates consistent with those used in the Company's gain on sale of loan
models described above.

Because estimated future cash flows from servicing approximate the cost of
servicing the related Land and VOI Loans, the Company did not allocate any cost
to mortgage servicing rights in 1996.

Reclassification

Certain amounts in the 1994 and 1995 financial statements have been
reclassified to conform to the 1996 presentation.

New accounting standards

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

F-9
<PAGE> 58

LITCHFIELD FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

applied prospectively. In future periods, the Company's excess servicing asset
will be reclassified as interest only strips and will be accounted for under the
provisions of the Statement of Financial Accounting Standards No. 115
"Accounting For Certain Investments in Debt and Equity Securities."

2. INVESTMENTS HELD TO MATURITY AND SUBORDINATED PASS-THROUGH CERTIFICATES HELD
TO MATURITY

The following is a summary of investments and subordinated pass-through
certificates held to maturity:

<TABLE>
<CAPTION>
GROSS UNREALIZED
--------------------
DECEMBER 31, 1996 COST GAINS LOSSES FAIR VALUE
----------------- ----------- -------- ------- -----------
<S> <C> <C> <C> <C>
Mortgage-backed securities.......... $ 142,000 $ -- $ -- $ 142,000
Subordinated pass-through
certificates...................... 18,004,000 185,000 -- 18,189,000
----------- -------- ------- -----------
Total debt securities..... $18,146,000 $185,000 $ -- $18,331,000
=========== ======== ======= ===========

<CAPTION>
GROSS UNREALIZED
--------------------
DECEMBER 31, 1995 COST GAINS LOSSES FAIR VALUE
----------------- ----------- -------- ------- -----------
<S> <C> <C> <C> <C>
Mortgage-backed securities.......... $ 260,000 $ -- $ -- $ 260,000
Subordinated pass-through
certificates...................... 13,468,000 15,000 -- 13,483,000
----------- -------- ------- -----------
Total debt securities..... $13,728,000 $ 15,000 $ -- $13,743,000
=========== ======== ======= ===========
</TABLE>

The amortized cost and estimated fair value of debt securities at December
31, 1996, by contractual maturity, are shown below. Expected maturities will
differ from contractual maturities because the issuers of the securities may
have the right to prepay obligations without prepayment penalties.
Mortgage-backed securities are included in other assets.

<TABLE>
<CAPTION>
ESTIMATED
COST FAIR VALUE
----------- -----------
<S> <C> <C>
Due in one year or less........................... $ -- $ --
Due after one year through five years............. 18,146,000 18,331,000
----------- -----------
Total debt securities................... $18,146,000 $18,331,000
=========== ===========
</TABLE>

In 1990, the Company began privately placing issues of pass-through
certificates evidencing an undivided beneficial ownership interest in pools of
loans held by a trust. The principal and part of the interest payments on the
loans transferred to the trust are collected by the Company, as the servicer of
the loan pool, remitted to the trust for the benefit of the investors, and then
distributed by the trust to the investors in the pass-through certificates.

In certain of the Company's issues of pass-through certificates, credit
enhancement was achieved by dividing the issue into a senior portion which was
sold to the investors and a subordinated portion which was retained by the
Company. The Company had investments in pass-through certificates of $18,004,000
and $13,468,000 at December 31, 1996 and 1995, respectively. In certain other of
the Company's private placements, credit enhancement was achieved through cash
collateral. The Company had $18,647,000 and $16,179,000 of restricted cash at
December 31, 1996 and 1995 representing credit enhancements.

If borrowers default in the payment of principal or interest on the loans
underlying these issues of pass-through certificates, losses would be absorbed
first by the subordinated portion or cash collateral retained by the Company and
might, therefore, have to be charged against the allowance for the loan losses
to the extent dealer/developer guarantees and reserves are not available.

F-10
<PAGE> 59

LITCHFIELD FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

3. LOANS

Loans at December 31, 1996 and 1995 consisted of the following:

<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
LOANS HELD FOR SALE 1996 1995
------------------- ----------- -----------
<S> <C> <C>
Land...................................... $11,833,000 $ 9,125,000
VOI....................................... 2,194,000 7,546,000
Discount, net of accretion................ (950,000) (1,191,000)
Allowance for loan losses................. (817,000) (1,100,000)
----------- -----------
Loans, net................................ $12,260,000 $14,380,000
=========== ===========

<CAPTION>
DECEMBER 31,
---------------------------
LOANS HELD FOR INVESTMENT 1996 1995
------------------------- ----------- -----------
<S> <C> <C>
Land...................................... $ 1,861,000 $ 1,429,000
VOI....................................... 1,313,000 3,698,000
Dealer/Other.............................. 79,374,000 30,140,000
Discount, net of accretion................ (1,352,000) (1,241,000)
Allowance for loan losses................. (1,200,000) (413,000)
----------- -----------
Loans, net................................ $79,996,000 $33,613,000
=========== ===========
</TABLE>

Contractual maturities of loans as of December 31, 1996 are as follows:

<TABLE>
<CAPTION>
DECEMBER 31,
1996
------------
<S> <C>
1996..................................................... $ 13,654,000
1997..................................................... 14,669,000
1998..................................................... 10,517,000
1999..................................................... 3,690,000
2000..................................................... 4,613,000
Thereafter............................................... 45,113,000
------------
$ 92,256,000
============
</TABLE>

It is the Company's experience that a substantial portion of the loans will
be repaid before contractual maturity dates. Consequently, the above tabulation
is not to be regarded as a forecast of future cash collections.

4. ALLOWANCES FOR LOAN LOSSES

An analysis of the allowances for loan losses follows:

<TABLE>
<CAPTION>
LOANS OWNED AND YEAR ENDED DECEMBER 31,
SUBORDINATED ----------------------------------------
PASS-THROUGH CERTIFICATES 1996 1995 1994
- ---------------------------------------------------- ----------- ---------- ---------
<S> <C> <C> <C>
Allowance at beginning of period.................... $ 2,783,000 $ 384,000 $ 464,000
Net charge-offs of uncollectible accounts(1)........ (1,395,000) (539,000) (80,000)
Provision for loan losses........................... 1,735,000 761,000 --
Allocation of purchase adjustment(2)................ 294,000 2,177,000 --
----------- ---------- ---------
Allowance at end of period.......................... $ 3,417,000 $2,783,000 $ 384,000
=========== ========== =========
</TABLE>

F-11
<PAGE> 60

LITCHFIELD FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------
LOANS SOLD 1996 1995 1994
- ---------- ----------- ---------- ---------
<S> <C> <C> <C>
Allowance at beginning of period.................... $ 932,000 $ 880,000 $ 600,000
Net charge-offs of uncollectible accounts(3)........ (570,000) (407,000) (279,000)
Provision for loan losses........................... 219,000 129,000 559,000
Allocation of purchase adjustment(2)................ 530,000 330,000 --
----------- ---------- ---------
Allowance at end of period.......................... $ 1,111,000 $ 932,000 $ 880,000
=========== ========== =========
</TABLE>

- ---------------
(1) Net of recoveries of $240,000 in 1996 and $42,000 in 1994. There were no
recoveries in 1995.

(2) Represents allocation of purchase adjustment related to the purchase of
pools of certain loans including the GEFCO portfolio in 1995. (See Note 12.)

(3) Net of recoveries of $70,000, $11,000 and $5,000 in 1996, 1995 and 1994,
respectively.

Net charge-offs by major loan and collateral types experienced by the
Company are summarized as follows:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------
1996 1995 1994
---------- -------- --------
<S> <C> <C> <C>
Land...................................... $ 669,000 $546,000 $359,000
VOI....................................... 1,284,000 45,000 --
Dealer/Other.............................. 12,000 355,000 --
---------- -------- --------
Total..................................... $1,965,000 $946,000 $359,000
========== ======== ========
</TABLE>

5. EXCESS SERVICING ASSET

The activity in the excess servicing asset is summarized as follows:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Balance, beginning of period........ $10,058,000 $ 8,925,000 $ 4,931,000
Gain on sale of loans............... 4,641,000 3,232,000 5,971,000
Recapture on repurchase of loans.... (70,000) (52,000) (366,000)
Amortization........................ (2,610,000) (2,047,000) (1,611,000)
----------- ----------- -----------
Balance, end of period.............. $12,019,000 $10,058,000 $ 8,925,000
=========== =========== ===========
</TABLE>

6. DERIVATIVE FINANCIAL INSTRUMENT HELD FOR PURPOSES OTHER THAN TRADING

In June, 1994, the Company entered into an interest rate cap agreement with
a bank in order to manage its exposure to certain interest rate increases. 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 upon an amortizing notional amount, when commercial paper rates exceed 8%.
The notional amount was $5.4 million at December 31, 1996.

The premium paid for this interest rate cap agreement is amortized ratably
in the interest expense during the life of the agreement of seven years.
Payments to be received as a result of the cap agreement are accrued as a
reduction of interest expense. The unamortized cost of the premium is included
in other assets. The Company is exposed to credit loss in the event of
nonperformance by the cap provider. The balance of the unamortized premium at
December 31, 1996 was $196,000.

F-12
<PAGE> 61

LITCHFIELD FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

7. DEBT

Financial data relating to the Company's lines of credit is as follows:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1996 1995
----------- -----------
<S> <C> <C>
Lines of credit available:
Unsecured lines of credit...................... $ -- $ --
Secured lines of credit(1)..................... 51,799,000 15,000,000
----------- -----------
Total lines of credit available........ $51,799,000 $15,000,000
=========== ===========
Borrowings outstanding at end of period:
Unsecured lines of credit...................... $--......... $ --
Secured lines of credit(1)..................... 36,299,000.. --
----------- -----------
Total borrowings outstanding at end of
period............................... $36,299,000 $ --
=========== ===========
Weighted average interest rate at end of period:
Unsecured lines of credit...................... --% --%
Secured lines of credit........................ 7.9% 9.5%
Total weighted average interest rate... 7.9% 9.5%
Maximum borrowings outstanding at any month end:
Unsecured lines of credit...................... $ -- $ 3,000,000
Secured lines of credit........................ $36,299,000 $ 5,000,000
Average amount outstanding during period:
Unsecured lines of credit...................... $ -- $ 231,000
Secured lines of credit........................ $15,948,000 $ 2,306,000
Weighted average interest rate during the period
(determined by dividing interest expense by
average borrowings):
Unsecured lines of credit...................... --% 13.0%
Secured lines of credit........................ 7.6% 9.8%
Total weighted average interest rate
during the period.................... 7.6% 10.1%
</TABLE>

- ---------------
(1) Amount includes $1,799,000 of outstanding borrowings at December 31, 1996 on
the revolving line of credit with Holland Limited Securities, Inc. (See Note
11.)

The Company had a secured line of credit of $30,000,000 from the Bank of
Boston as lead agent, and Fleet Bank. The Company can elect to borrow all or
part of the outstanding balance on the line of credit at either the Bank's prime
interest rate or the Eurodollar rate plus 2%. Outstanding borrowings under this
line of credit at December 31, 1996 were $26,200,000. The line of credit matures
in April 1997, with renewal at the lender's discretion.

The Company also 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 line of credit matures in July 1997. There were no
outstanding borrowings on this line of credit at December 31, 1996. In January
1997, the secured line of credit was increased to $8,000,000 and the maturity
was extended to January 1998. The above lines of credit are secured by consumer
receivables and other secured loans.

The Company also entered into a $15,000,000 line of credit facility with
the Bank of Scotland. The outstanding borrowings under this facility at December
31, 1996 were $8,300,000. This facility is secured by certain subordinated
pass-through certificates, excess servicing assets, cash collateral accounts and
certain

F-13
<PAGE> 62

LITCHFIELD FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

other loans and matures in September 1999. Interest is payable quarterly in
arrears at the Bank's prime interest rate plus 1%. In January 1997, this
facility was increased to $20,000,000.

The Company is not required to maintain compensating balances or forward
sales commitments under the terms of these lines of credit. As described in Note
11, the Company also has line of credit as part of an asset backed commercial
paper facility.

At December 31, 1995 the secured line of credit from the Bank of Boston as
lead agent was $15,000,000 at the Bank's prime interest rate plus 1%. There were
no outstanding borrowings at December 31, 1995.

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 subordinated pass-through certificates, excess
servicing assets, and cash. At December 31, 1996 and 1995, the balance
outstanding on the note was $7,428,000 and $9,836,000 and the approximate value
of the underlying collateral was $13,772,000 and $17,700,000, respectively.

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 at the election of the noteholders of $920,000 and contain certain
restrictions regarding the payment of cash 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.

Previously, the Company completed public 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 November 1, 1996, the Company repaid $103,000 of the 1992 Notes due 2002
pursuant to the noteholders' annual redemption rights. 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.

8. RETIREMENT PLANS

Effective January 1, 1996, the Company implemented the Litchfield Financial
Corporation Employee 401(k) Plan ("the Plan"), a defined contribution plan for
all eligible employees at least 21 years of age and who have been employed by
the Company for at least six months. Participating employees may elect to defer
up to fifteen percent of their annual gross earnings. The Company will match an
amount equal to one hundred percent of the employee's pretax contributions up to
five percent of the employee's eligible compensation contributed into the Plan.
Contributions made by the Company in 1996 were $101,000.

The Company established a Simplified Employee Pension (SEP) Plan in 1992.
The SEP is a defined contribution plan for all eligible employees at least 21
years of age and who have worked for the Company in at least three of the
immediately preceding five years. Contributions to the SEP were made entirely at
the discretion of the Company. Contributions to the SEP in 1994 were $92,000.
There were no contributions in 1995 and the plan was discontinued in 1996.

F-14
<PAGE> 63

LITCHFIELD FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

9. INCOME TAXES

Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets and liabilities are as follows:

<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1996 1995
---------- ----------
<S> <C> <C>
Deferred Tax Assets:
Loan loss allowance............................... $ 350,000 $ 348,000
Other............................................. 282,000 109,000
---------- ----------
Total deferred tax assets...................... 632,000 457,000
Valuation allowance....................... -- --
---------- ----------
Net deferred tax assets................... 632,000 457,000
---------- ----------
Deferred Tax Liabilities:
Depreciation...................................... 50,000 28,000
Mortgage loan income recognition.................. 3,696,000 2,746,000
Accretion income.................................. 1,662,000 1,423,000
Other............................................. 304,000 --
---------- ----------
Total deferred tax liabilities................. 5,712,000 4,197,000
---------- ----------
Net deferred tax liabilities.............. $5,080,000 $3,740,000
========== ==========
</TABLE>

Significant components of the provision for income taxes attributable to
continuing operations are as follows:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Current:
Federal.............................. $1,911,000 $ 819,000 $ 462,000
State................................ 50,000 38,000 56,000
---------- ---------- ----------
Total Current................ 1,961,000 857,000 518,000
---------- ---------- ----------
Deferred:
Federal.............................. 1,288,000 1,191,000 1,098,000
State................................ 52,000 18,000 3,000
---------- ---------- ----------
Total Deferred............... 1,340,000 1,209,000 1,101,000
---------- ---------- ----------
$3,301,000 $2,066,000 $1,619,000
========== ========== ==========
</TABLE>

The reconciliation of income tax attributable to continuing operations
computed at the U.S. federal statutory tax rates to income tax expense is:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Tax at U.S. statutory rates.......................... 35.0% 34.0% 34.0%
State income taxes, net of federal tax benefit....... 3.4 3.4 3.5
Other -- net......................................... 0.1 0.1 --
---- ---- ----
38.5% 37.5% 37.5%
==== ==== ====
</TABLE>

F-15
<PAGE> 64

LITCHFIELD FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

10. STOCKHOLDERS' EQUITY AND STOCK OPTION PLANS

Stockholders' Equity

In July 1996, the Board of Directors declared a five percent stock dividend
of the Company's Common Stock paid August 9, 1996 to stockholders of record on
July 23, 1996. Accordingly, weighted average share and per share amounts have
been restated for periods presented. The Company also declared 5% stock
dividends in 1995 and 1994.

Stock Option Plans

The Company has reserved 1,122,319 shares of common stock for issuance to
officers, directors and employees on exercise of options granted under a stock
option plan established in 1990. Options were granted at prices equal to or in
excess of the fair market value of the stock on the date of the grant. There
were 615,000 and 384,000 shares exercisable at December 31, 1996 and 1995,
respectively.

Information with respect to options granted is as follows:

<TABLE>
<CAPTION>
NUMBER EXERCISE
OF PRICE
SHARES PER SHARE
------- ---------------
<S> <C> <C>
Outstanding at December 31, 1993.................. 503,644
Granted......................................... 200,656 $11.11 - $11.67
Canceled or exercised........................... (26,831) $1.15 - $11.23
-------
Outstanding at December 31, 1994.................. 677,469
Granted......................................... 81,588 $9.98 - $11.56
Canceled or exercised........................... (43,385) $1.44 - $11.67
-------
Outstanding at December 31, 1995.................. 715,672
Granted......................................... 204,311 $11.55 - $14.05
Canceled or exercised........................... (13,175) $1.15 - $11.55
-------
Outstanding at December 31, 1996.................. 906,808
=======
</TABLE>

In April 1995, the Company established the Stock Option Plan for
Non-Employee Directors which provides for the grant of options to purchase 5,513
shares of common stock to each non-employee director serving on the Board at the
time the plan was approved and to each new non-employee director elected in the
five year period commencing April 1995. The maximum number of shares for which
options may be granted under the plan is 66,150 shares. Options for 22,052
shares were granted at an exercise price of $12.02 per share in 1995 which was
the fair market value on the date of grant. There were 22,052 options
outstanding at December 31, 1996 and 1995. There were 7,352 options that were
exercisable at December 31, 1996. There were no options exercisable at December
31, 1995.

In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123 "Accounting for Stock-Based
Compensation." The Company has elected to follow Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25) and related
Interpretations in accounting for its employee stock options because, as
discussed below, the alternative fair value accounting provided for under FASB
Statement No. 123, "Accounting for Stock-Based Compensation," requires use of
option valuation models that were not developed for use in valuing employee
stock options. Under APB 25, because the exercise price of the Company's
employee stock options equals the market price of the underlying stock on the
date of grant, no compensation expense is recognized.

Pro forma information regarding net income and earnings per share is
required by Statement 123, which also requires that the information be
determined as if the Company has accounted for its employee stock options
granted subsequent to December 31, 1994 under the fair value method of that
Statement. The fair value for these options was estimated at the date of grant
using the Black-Scholes option pricing model with

F-16
<PAGE> 65

LITCHFIELD FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

the following weighted-average assumptions for 1996 and 1995, respectively:
risk-free interest rates of 6.23% and 6.31%; a dividend yield of .35%,
volatility factors of the expected market price of the Company's common stock of
.24; and a weighted-average expected life of the option of 7.5 years.

The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.

For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma information follows:

<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Pro forma net income................................ $4,983,000 $3,363,000
Pro forma earnings per share
Primary........................................... $ .88 $ .74
Fully-diluted..................................... $ .87 $ .74
</TABLE>

Because Statement 123 is applicable only to options granted subsequent to
December 31, 1994, its pro forma effect will not be fully reflected until 1997.

11. SALE OF LOANS

The Company has sold $249,451,000 and $194,515,000 of loans at face value
through December 31, 1996 and 1995, respectively. The principal amount remaining
on the loans sold was $129,619,000 and $111,117,000 at December 31, 1996 and
1995, respectively. 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 exposure to loss on loans sold in the event of nonperformance
by the consumer, the dealer/developer on its guarantee, and the determination
that the collateral is of no value was $8,780,000, $10,259,000, and $12,456,000
at December 31, 1996, 1995 and 1994, respectively. Such amounts have not been
discounted. The Company repurchased $991,000, $448,000 and $259,000 of loans
under the recourse provisions of loan sales in 1996, 1995, and 1994,
respectively. Net charge-offs on loans repurchased under recourse provisions
were $570,000, $407,000, and $279,000 in 1996, 1995, and 1994, respectively. 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 document.

The Company's Serviced Portfolio is geographically diversified with
collateral and consumers located in 41 and 50 states, respectively. At December
31, 1996, 14.3% of the collateral by principal balance was located in Texas and
14.4% and 12.2% of the borrowers by collateral location were located in Texas
and Florida, respectively. No other state accounted for more than 10.0% of the
total.

The Company has a revolving line of credit and sale facility 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 $100,000,000, subject to
certain terms and conditions, reduce credit enhancement requirements and expand
certain loan eligibility criteria. The facility expires in June 1998.

F-17
<PAGE> 66

LITCHFIELD FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

indebtedness to fund the purchase or pledge of loans from LMSC. HLS is not
affiliated with the Company or its affiliates. As of December 31, 1996, the
outstanding balance of the loans sold under this facility was $77,521,000 and
outstanding borrowings under the line of credit were $1,799,000. Interest is
payable on the line of credit at an interest rate based on certain commercial
paper rates.

12. PORTFOLIO ACQUISITION

On April 27, 1995, the Company purchased a portfolio of VOI Loans, loans to
developers secured by VOI Loans, other performing and non performing loans, and
other related assets from GEFCO. The purchase price and allocation of the
purchase price was as follows:

<TABLE>
<S> <C>
Purchase Price:
Cash paid to GEFCO............................................ $37,985,000
Net liabilities assumed from GEFCO............................ 1,688,000
Other direct costs of acquisition............................. 1,263,000
-----------
Total................................................. $40,936,000
===========
Allocation of purchase price:
VOI Loans..................................................... $34,138,000
Loans secured by VOI Loans.................................... 2,799,000
Other loans and assets........................................ 3,999,000
-----------
Total................................................. $40,936,000
===========
</TABLE>

13. MARKET FOR COMMON STOCK (UNAUDITED)

The Company's Common Stock is traded on The Nasdaq Stock Market's National
Market under the symbol "LTCH." The following table sets forth, for the periods
indicated, the high and low stock prices of the Company's Common Stock. All
share prices have been adjusted for a 5% stock dividend in each of 1996, 1995
and 1994.

<TABLE>
<CAPTION>
HIGH LOW DIVIDENDS
---- --- ---------
<S> <C> <C> <C>
1994
1st Quarter.................................................. $12 3/8 $ 9 1/4 --
2nd Quarter.................................................. 11 7/8 10 3/8 --
3rd Quarter.................................................. 13 3/8 10 3/8 --
4th Quarter.................................................. 11 3/8 9 1/2 $ .03
1995
1st Quarter.................................................. $10 7/8 $ 9 5/8 --
2nd Quarter.................................................. 12 7/8 10 --
3rd Quarter.................................................. 16 12 3/8 --
4th Quarter.................................................. 15 1/4 12 3/8 $ .04
1996
1st Quarter.................................................. $13 5/8 $11 --
2nd Quarter.................................................. 14 1/4 12 7/8 --
3rd Quarter.................................................. 15 11 1/2 --
4th Quarter.................................................. 15 12 1/2 $ .05
</TABLE>

F-18
<PAGE> 67

LITCHFIELD FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

14. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)

<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH TOTAL
---------- ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C>
1994
Total revenues...................... $1,952,000 $2,979,000 $3,672,000 $2,372,000 $10,975,000
Total expenses...................... 1,435,000 1,670,000 1,579,000 1,973,000 6,657,000
Income before extraordinary item.... 318,000 805,000 1,346,000 230,000 2,699,000
Extraordinary item (net of
applicable taxes)................. -- (125,000) (2,000) 1,000 (126,000)
Net income.......................... 318,000 680,000 1,344,000 231,000 2,573,000
Income before extraordinary item per
common share...................... .07 .19 .31 .05 .63
Extraordinary item per common
share............................. -- (.03) -- -- (.03)
Net income per common share......... .07 .16 .31 .05 .60
Weighted average number of shares
outstanding....................... 4,293,753 4,308,684 4,287,744 4,236,444 4,280,006

1995
Total revenues...................... $2,750,000 $4,574,000 $5,464,000 $4,673,000 $17,461,000
Total expenses...................... 2,157,000 3,013,000 3,137,000 3,639,000 11,946,000
Net income.......................... 370,000 975,000 1,454,000 650,000 3,449,000
Net income per common share......... .09 .22 .33 .13 .76
Weighted average number of shares
outstanding....................... 4,233,442 4,345,396 4,412,366 5,198,700 4,543,009

1996
Total revenues...................... $4,715,000 $6,261,000 $7,136,000 $6,071,000 $24,183,000
Total expenses...................... 3,420,000 3,720,000 3,967,000 4,502,000 15,609,000
Net income.......................... 798,000 1,564,000 1,946,000 965,000 5,273,000
Primary net income per common
share............................. .14 .27 .34 .17 .93
Primary weighted average number of
shares outstanding................ 5,637,643 5,708,160 5,697,094 5,706,037 5,674,264
Fully-diluted net income per common
share............................. .14 .27 .34 .17 .92
Fully-diluted weighted average
number of shares outstanding...... 5,700,891 5,708,191 5,720,924 5,754,250 5,736,467
</TABLE>

A significant portion of the Company's revenues consists of gains on sales
of loans. Thus, the timing of loan sales has a significant effect on the
Company's results of operations. Accruals of approximately $510,000 and $285,000
for salary compensation as the result of the realization of performance criteria
by certain executive and management personnel were recorded in the fourth
quarter of 1995 and 1994. In 1996, such amounts were accrued throughout the year
including $128,000 in the fourth quarter.

F-19
<PAGE> 68

LITCHFIELD FINANCIAL CORPORATION

CONSOLIDATED BALANCE SHEETS
(IN 000'S EXCEPT SHARE AMOUNTS)

<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1997 1996
-------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Cash and cash equivalents............................................ $ 7,061 $ 5,557
Restricted cash...................................................... 21,364 18,923
Loans held for sale, net of allowance for loan losses of $1,406 in
1997 and $817 in 1996.............................................. 20,475 12,260
Other loans, net of allowance for loan losses of $1,500 in 1997 and
$1,200 in 1996..................................................... 91,750 79,996
Retained interests in loan sales..................................... 27,759 28,912
Other................................................................ 6,901 7,041
-------- --------
Total assets............................................... $175,310 $152,689
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Lines of credit.................................................... $ 34,287 $ 36,299
Term note payable.................................................. 6,396 7,428
Accounts payable and accrued liabilities........................... 3,981 3,811
Dealer/developer reserves.......................................... 10,626 10,628
Deferred income taxes.............................................. 6,035 5,080
-------- --------
61,325 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,
5,616,372 shares issued and outstanding in 1997 and 5,444,399
shares issued and outstanding in 1996.......................... 56 54
Additional paid in capital...................................... 36,238 34,633
Net unrealized gain on retained interests in loan sales......... 523 --
Retained earnings............................................... 10,786 7,761
-------- --------
Total stockholders' equity................................. 47,603 42,448
-------- --------
Total liabilities and stockholders' equity................. $175,310 $152,689
======== ========
</TABLE>

See accompanying notes to unaudited consolidated financial statements.

F-20
<PAGE> 69

LITCHFIELD FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF INCOME
(IN 000'S EXCEPT SHARE AND PER SHARE AMOUNTS)
UNAUDITED

<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30,
---------------------------
1997 1996
---------- ----------
<S> <C> <C>
Revenues:
Interest and fees on loans...................................... $ 4,783 $ 3,348
Gain on sale of loans........................................... 2,563 2,474
Servicing and other fee income.................................. 345 279
---------- ----------
7,691 6,101
---------- ----------
Expenses:
Interest expense................................................ 2,648 1,768
Salaries and employee benefits.................................. 833 645
Other operating expenses........................................ 853 618
Provision for loan losses....................................... 300 529
---------- ----------
4,634 3,560
---------- ----------
Income before income taxes........................................ 3,057 2,541
Provision for income taxes........................................ 1,177 977
---------- ----------
Net income........................................................ $ 1,880 $ 1,564
========== ==========
Primary and fully-diluted net income per common share............. $ .32 $ .27
========== ==========
Fully-diluted weighted average number of shares................... 5,917,911 5,708,191
</TABLE>

See accompanying notes to unaudited consolidated financial statements.

F-21
<PAGE> 70

LITCHFIELD FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF INCOME
(IN 000'S EXCEPT SHARE AND PER SHARE AMOUNTS)
UNAUDITED

<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
-------------------------
1997 1996
--------- ---------
<S> <C> <C>
Revenues:
Interest and fees on loans........................................ $ 9,329 $ 6,640
Gain on sale of loans............................................. 4,067 3,354
Servicing and other fee income.................................... 702 757
--------- ---------
14,098 10,751
--------- ---------
Expenses:
Interest expense.................................................. 5,042 3,297
Salaries and employee benefits.................................... 1,646 1,382
Other operating expenses.......................................... 1,756 1,282
Provision for loan losses......................................... 735 954
--------- ---------
9,179 6,915
--------- ---------
Income before income taxes.......................................... 4,919 3,836
Provision for income taxes.......................................... 1,894 1,474
--------- ---------
Net income.......................................................... $ 3,025 $ 2,362
========= =========
Primary and fully-diluted net income per common share............... $ .52 $ .41
========= =========
Fully-diluted weighted average number of shares..................... 5,861,180 5,698,866
</TABLE>

See accompanying notes to unaudited consolidated financial statements.

F-22
<PAGE> 71

LITCHFIELD FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN 000'S)
UNAUDITED

<TABLE>
<CAPTION>
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 171,973 shares of
common stock................... 2 1,605 -- -- 1,607
Net unrealized gain on retained
interests in loan sales........ -- -- 523 -- 523
Net income........................ -- -- -- 3,025 3,025
--- ------- ---- ------- -------
Balance, June 30, 1997.............. $ 56 $ 36,238 $523 $10,786 $47,603
=== ======= ==== ======= =======
</TABLE>

See accompanying notes to unaudited consolidated financial statements.

F-23
<PAGE> 72

LITCHFIELD FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN 000'S)
UNAUDITED

<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
---------------------
1997 1996
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income......................................................... $ 3,025 $ 2,362
Adjustments to reconcile net income to net cash used in operating
activities:
Gain on sale of loans........................................... (4,067) (3,354)
Amortization and depreciation................................... 332 296
Amortization of retained interests in loan sales................ 2,061 1,364
Provision for loan losses....................................... 735 954
Deferred income taxes........................................... 955 130
Net changes in operating assets and liabilities:
Restricted cash............................................... (2,441) 133
Loans held for sale........................................... (8,300) 1,327
Retained interests in loan sales.............................. 470 (3,071)
Dealer/developer reserves..................................... (2) (414)
Net change in other assets and liabilities.................... 753 (2,891)
-------- --------
Net cash used in operating activities........................... (6,479) (3,164)
-------- --------
Cash flows from investing activities:
Redemption of investments held to maturity......................... 32 71
Net originations and principal payments on other loans............. (27,379) (19,834)
Other loans sold................................................... 15,325 --
Collections on retained interests in loan sales.................... 2,534 142
Capital expenditures and other assets.............................. (479) (72)
-------- --------
Net cash used in investing activities........................... (9,967) (19,693)
-------- --------
Cash flows from financing activities:
Net borrowings (payments) on lines of credit....................... (2,012) 11,145
Proceeds from issuance of 9.3% Notes............................... 20,000 --
Retirement of long-term Notes...................................... (613) (283)
Payments on term note.............................................. (1,032) (1,067)
Net proceeds from issuance of common stock......................... 1,607 42
-------- --------
Net cash provided by financing activities....................... 17,950 9,837
-------- --------
Net increase (decrease) in cash and cash equivalents................. 1,504 (13,020)
Cash and cash equivalents, beginning of period....................... 5,557 18,508
-------- --------
Cash and cash equivalents, end of period............................. $ 7,061 $ 5,488
======== ========
Supplemental Schedule of Noncash Financing and Investing Activities:
Exchange of loans for retained interests in loan sales............. $ 364 $ 2,785
======== ========
Transfers from loans to real estate acquired through foreclosure... $ 516 $ 170
======== ========
Supplemental Cash Flow Information:
Interest paid...................................................... $ 4,339 $ 3,059
======== ========
Income taxes paid.................................................. $ 937 $ 840
======== ========
</TABLE>

See accompanying notes to unaudited consolidated financial statements.

F-24
<PAGE> 73

LITCHFIELD FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

A. BASIS OF PRESENTATION

The accompanying unaudited consolidated interim financial statements as of
June 30, 1997 and for the three and six month periods ended June 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 six month
periods ended June 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 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. 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 June 30, 1997 and 1996 and $.03 and $.02 per
share higher for the six months ended June 30, 1997 and 1996, respectively.
There would be no impact on the calculation of diluted earnings per share for
these periods.

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 had no effect on net income for the three or six
months ended June 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
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 $288,952,000 of loans at face
value ($249,451,000 through December 31, 1996). In June 1997, the Company
completed its first securitization of $15,325,000 of dealer hypothecation loans
in a private placement with a bank. Dealer hypothecation loans are loans to
rural land dealers and VOI resort developers secured by consumer receivables.
The principal amount remaining on the loans sold was $138,771,000 at June 30,
1997 and $129,619,000 at December 31, 1996. In connection with

F-25
<PAGE> 74

LITCHFIELD FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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
$8,936,000 at June 30, 1997 ($8,780,000 at December 31, 1996). The Company
repurchased $119,000 and $359,000 of loans under the recourse provisions of loan
sales during the three months ended June 30, 1997 and 1996. Loans repurchased
during the six months ended June 30, 1997 and 1996 were $454,000 and $514,000,
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 June 30, 1997,
$20,136,000 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 current principal balance of Land, VOI and
Dealer/Other Loans serviced by or on behalf of the Company. At June 30, 1997,
15.4% of the portfolio by collateral location was located in Texas, and 17.7%
and 12.4% 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.

C. ALLOWANCE FOR LOAN LOSSES

The total allowance for loan losses consists of the following:

<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1997 1996
---------- ------------
<S> <C> <C>
Allowance for losses on loans held for sale........ $1,406,000 $ 817,000
Allowance for losses on other loans................ 1,500,000 1,200,000
Recourse obligation on retained interests in loan
sales............................................ 2,635,000 2,511,000
---------- ----------
$5,541,000 $4,528,000
========== ==========
</TABLE>

D. DEBT

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 $28,000,000 and $26,200,000 at June 30, 1997 and December 31,
1996, respectively. 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. There were no outstanding borrowings under this
facility at June 30, 1997. At December 31, 1996, the outstanding borrowings were
$8,300,000. This facility is secured by certain retained interests in loan
sales, cash collateral accounts and certain other loans and matures in September
1999.

F-26
<PAGE> 75

LITCHFIELD FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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.

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.

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 June 30, 1997, the
outstanding balance of the eligible loans previously sold under the facility was
$13,767,000. There were no outstanding borrowings under the line of credit as of
June 30, 1997. Interest is payable on the line of credit at an interest rate
based on certain commercial paper rates.

F-27
<PAGE> 76

LITCHFIELD FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

$6,000,000, $6,000,000 and $500,000 in March 2001, 2002, 2003 and 2004,
respectively. The proceeds were used to repay the outstanding balance on certain
of the Company's the lines of credit.

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.

F-28
<PAGE> 77

================================================================================

NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE
RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR THE UNDERWRITERS. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO
BUY TO ANY PERSON IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION WOULD
BE UNLAWFUL OR TO ANY PERSON TO WHOM IT IS UNLAWFUL. NEITHER THE DELIVERY OF
THIS PROSPECTUS NOR ANY OFFER OR SALE MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF THE COMPANY OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF
ANY TIME SUBSEQUENT TO THE DATE HEREOF.

------------------------

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................... 3
The Company........................... 9
Risk Factors.......................... 10
Incorporation by Reference............ 14
Forward-Looking Statements............ 14
Use of Proceeds....................... 15
Capitalization........................ 15
Selected Consolidated Financial
Information......................... 16
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 18
Business.............................. 25
Management............................ 35
Principal Stockholders................ 37
Description of Notes.................. 39
Certain Federal Income Tax
Considerations...................... 45
Underwriting.......................... 46
Legal Matters......................... 47
Experts............................... 47
Additional Information................ 47
Index to Financial Statements......... F-1
</TABLE>

================================================================================

$51,750,000
8.45% NOTES DUE 2002
[LITCHFIELD LOGO]
-----------------

PROSPECTUS

-----------------
MCDONALD & COMPANY
SECURITIES, INC.

J.C. BRADFORD & CO.

TUCKER ANTHONY
INCORPORATED
NOVEMBER 3, 1997

================================================================================