Litecoin uses the scrypt factors (N=1024, r=1, p=1) This means that each hashing thread takes 128kB of memory. The scrypt paper recommends r=8.
Colin Percival, the creator of scrypt, has said:
Q: are you into #litecoin at all?
A: I'm aware of it, and I'm aware that they used scrypt poorly (not enough RAM usage). That's the limit of my knowledge.
Q: I'm considering enhancing #litecoin. How is scrypt being used poorly? Maybe I can help improve it
A: I'd suggest talking to @solardiz about this -- my knowledge of how litecoin misuses scrypt comes mostly from him. The 1-tweet summary is that scrypt is designed to achieve security by using lots of RAM, and litecoin doesn't use lots of RAM.
Is there a technical justification for such a low N and r?