UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549



FORM 10-Q



|X | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ---------------------------------------------------------------------------------------

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2001

OR



| | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
| | ----------------------------------------------------------------------------------------

COMMISSION FILE NO. 0-7107



SOUTHERN SCOTTISH INNS, INC.

(Exact name of registrant as specified in its charter)



|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|LOUISIANA                                                      |  | 72-0711739                          
|(State or other jurisdiction of
incorporation or organization) |  | (I.R.S. Employer
Identification No.)

1726 Montreal Circle

Tucker, Georgia 30084

(Address of principal executive offices)

(Zip Code)

(770) 938-5966

(Registrant's telephone number, including area code)

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



Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. Yes No X

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes No X



|                                        |  |                                         
|--------------------------------------- |  | ----------------------------------------
|CLASS                                   |  | SHARES OUTSTANDING
AT SEPTEMBER 30 ,2001
|Common Stock, Par Value $0.01 per share |  | 2,366,395                               





SOUTHERN SCOTTISH INNS, INC.

INDEX





|                                                                                                                  |  |         
|----------------------------------------------------------------------------------------------------------------- |  | --------
|                                                                                                                  |  | PAGE NO.
|PART I. FINANCIAL INFORMATION:                                                                                    |  |         
|                                                                                                                  | 
|Financial Statements                                                                                              |  |         
|                                                                                                                  | 
|Consolidated Balance Sheets-As of September 30, 2001 (Unaudited) and December 31, 2000                            |  | 2-3     
|Consolidated Statements of Income-For the nine months ended September 30, 2001 and September 30, 2000 (Unaudited) |  | 4-5     
|                                                                                                                  | 
|Consolidated Statements of Cash Flows-For the nine months ended September 30, 2001 (Unaudited)                    |  | 6       
|                                                                                                                  | 
|Notes to Consolidated Financial Statements                                                                        |  | 7-9     
|                                                                                                                  | 
|                                                                                                                  | 
|PART II. MANAGEMENT'S DISCUSSION AND ANALYSIS:                                                                    |  |         
|                                                                                                                  | 
|Item 1-Business                                                                                                   |  | 10-12   
|                                                                                                                  | 
|Item 2-Legal Proceedings                                                                                          |  | 12-13   
|                                                                                                                  | 
|Item 3-Management's Discussion and Analysis of Financial Conditions and Results of Operations                     |  | 13      
|                                                                                                                  | 
|Item 4-Controls and Procedures                                                                                    |  | 14      
|                                                                                                                  | 
|                                                                                                                  | 
|SIGNATURES                                                                                                        |  | 15      







PART I. FINANCIAL INFORMATION



SOUTHERN SCOTTISH INNS, INC.

CONSOLIDATED BALANCE SHEETS

ASSETS

|                                                |   | September 30, 2001
(Unaudited) |   | December 31,
2000
|----------------------------------------------- | - | ------------------------------ | - | -----------------
|CURRENT ASSETS                                  |   |                                |   |                  
|Cash                                            | $ | 150,081                        | $ | 54,612           
|Accounts Receivable-Net                         |   | 1,328,877                      |   | 1,234,991        
|Accounts Receivable-Affiliates                  |   | 753,020                        |   | 502,649          
|Mortgages & Notes-Affiliates                    |   | 654,515                        |   | 82,919           
|Mortgages & Notes Receivable                    |   | 614,386                        |   | 807,673          
|Inventory                                       |   | 40,749                         |   | 40,749           
|Prepaid Expenses                                |   | 43,541                         |   | 69,256           
|Interest Receivable                             |   | 366,530                        |   | 612,246          
|Net Deferred Tax Asset                          |   | 0                              |   | 28,776           
|                                                |   |                                |   |                  
|TOTAL CURRENT ASSETS                            |   | 3,951,699                      |   | 3,443,871        
|                                                |   |                                |   |                  
|PROPERTY AND EQUIPMENT                          |   |                                |   |                  
|Land                                            |   | 1,700,094                      |   | 1,649,726        
|Buildings & Building Improvements               |   | 3,204,723                      |   | 2,629,367        
|Furniture, Fixtures & Equipment                 |   | 347,077                        |   | 376,062          
|Vehicles                                        |   | 292,138                        |   | 193,350          
|Total Property & Equipment                      |   | 5,544,032                      |   | 4,848,545        
|Less: Accumulated Depreciation                  |   | (1,234,693)                    |   | (1,248,451)      
|TOTAL NET PROPERTY AND EQUIPMENT                |   | 4,309,339                      |   | 3,600,094        
|                                                |   |                                |   |                  
|                                                |   |                                |   |                  
|OTHER ASSETS                                    |   |                                |   |                  
|Mortgages & Notes Receivable                    |   | 3,858,884                      |   | 4,785,076        
|Mortgages & Notes-Affiliates                    |   | 0                              |   | 1,010,132        
|Investments in Unconsolidated Affiliates        |   | (233,346)                      |   | (109,112)        
|Investment in Real Estate                       |   | 217,964                        |   | 217,964          
|Trademarks - Net                                |   | 1,230,299                      |   | 1,252,859        
|Loan Cost                                       |   | 7,828                          |   | 7,822            
|Other Assets                                    |   | 3,711                          |   | 4,498            
|Deferred Tax Asset                              |   | 0                              |   | 61,603           
|Marketable Equity Securities, Carried at Market |   | 25,210                         |   | 25,210           
|                                                |   |                                |   |                  
|TOTAL OTHER ASSETS                              |   | 5,110,550                      |   | 7,256,052        
|                                                |   |                                |   |                  
|TOTAL ASSETS                                    | $ | 13,371,588                     | $ | 14,290,017       

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS

2

SOUTHERN SCOTTISH INNS, INC.

CONSOLIDATED BALANCE SHEETS (Continued)

LIABILITIES AND STOCKHOLDERS' EQUITY

|                                                                                                                 |   | September 30, 2001
(Unaudited) |   | December 31,
2000
|---------------------------------------------------------------------------------------------------------------- | - | ------------------------------ | - | -----------------
|                                                                                                                 |   |                                |   |                  
|CURRENT LIABILITIES                                                                                              |   |                                |   |                  
|Accounts Payable - Trade                                                                                         | $ | 238,481                        | $ | 281,416          
|Interest Payable                                                                                                 |   | 203,942                        |   | 241,363          
|Income Taxes Payable                                                                                             |   | 254,862                        |   | 160,486          
|Other Taxes Payable                                                                                              |   | 250,339                        |   | 311,630          
|Other Liabilities                                                                                                |   | 282,707                        |   | 332,617          
|Mortgages & Notes Payable                                                                                        |   | 197,995                        |   | 396,617          
|Mortgages & Notes Payable-Affiliates                                                                             |   | 132,877                        |   | 118,327          
|Deferred Severance Pay                                                                                           |   | 6,000                          |   | 14,250           
|                                                                                                                 |   |                                |   |                  
|TOTAL CURRENT LIABILITIES                                                                                        |   | 1,567,203                      |   | 1,857,064        
|                                                                                                                 |   |                                |   |                  
|LONG-TERM LIABILITIES                                                                                            |   |                                |   |                  
|Mortgages & Notes Payable                                                                                        |   | 1,060,297                      |   | 1,223,658        
|Mortgages & Notes Payable-Affiliates                                                                             |   | 309,069                        |   | 327,619          
|Escrow - Real Estate Tax                                                                                         |   | 6,925                          |   | 971              
|TOTAL LONG-TERM LIABILITIES                                                                                      |   | 1,376,291                      |   | 1,552,248        
|                                                                                                                 |   |                                |   |                  
|DEFERRED AMOUNTS                                                                                                 |   |                                |   |                  
|Deferred Income-Installment                                                                                      |   | 608,625                        |   | 1,485,521        
|Deferred Income Tax                                                                                              |   | 26,717                         |   | 66,552           
|Deferred Severance Pay                                                                                           |   | 167,500                        |   | 167,500          
|TOTAL DEFERRED AMOUNTS                                                                                           |   | 802,842                        |   | 1,719,573        
|                                                                                                                 |   |                                |   |                  
|TOTAL LIABILITIES &
DEFERRED AMOUNTS                                                                             |   | 3,746,336                      |   | 5,128,885        
|                                                                                                                 |   |                                |   |                  
|MINORITY INTEREST                                                                                                |   | 875,006                        |   | 839,296          
|                                                                                                                 |   |                                |   |                  
|STOCKHOLDERS' EQUITY                                                                                             |   |                                |   |                  
|Common Stock- no par value, Authorized 5,000,000 shares, Issued & Outstanding 2,366,395 year ended 2001 and 2000 |   | 6,023,981                      |   | 6,023,981        
|Additional Paid in Capital                                                                                       |   | 42,201                         |   | 42,201           
|Retained Earnings                                                                                                |   | 2,684,065                      |   | 2,256,320        
|                                                                                                                 |   |                                |   |                  
|TOTAL STOCKHOLDERS' EQUITY                                                                                       |   | 8,750,246                      |   | 8,322,502        
|                                                                                                                 |   |                                |   |                  
|TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                                                                       | $ | 13,371,588                     | $ | 14,290,017       

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS

3



SOUTHERN SCOTTISH INNS, INC.

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)



|                                                                              |   | Three Months Ended |   | Nine Months Ended
|----------------------------------------------------------------------------- | - | ------------------ | - | -----------------
|                                                                              |   | September 30,      |   | September 30,    
|                                                                              |   | 2001               |   | 2000             
|                                                                              |   |                    |   |                  
|REVENUES                                                                      |   |                    |   |                  
|                                                                              |   |                    |   |                  
|Franchising Revenues                                                          | $ | 520,728            | $ | 550,650          
|Financing Revenues                                                            |   | 86,926             |   | 219,283          
|Leasing & Lodging Revenues                                                    |   | 114,226            |   | 102,453          
|Equity in Income of Unconsolidated Affiliates                                 |   | 28,519             |   | 0                
|Legal Settlement Revenues                                                     |   | 107,400            |   | 0                
|Gain on Sale of Assets                                                        |   | 0                  |   | 0                
|Other Income                                                                  |   | 18,087             |   | 30,516           
|                                                                              |   |                    |   |                  
|TOTAL REVENUES                                                                |   | 875,886            |   | 902,902          
|                                                                              |   |                    |   |                  
|EXPENSES                                                                      |   |                    |   |                  
|                                                                              |   |                    |   |                  
|Operating Expense-Franchise Division                                          |   | 460,190            |   | 504,790          
|Operating Expense-Financing & Investing                                       |   | 171,937            |   | 157,758          
|Leasing & Lodging Expense                                                     |   | 39,850             |   | 0                
|Interest Expense                                                              |   | 41,391             |   | 50,477           
|Depreciation & Amortization                                                   |   | 47,213             |   | 62,448           
|                                                                              |   |                    |   |                  
|TOTAL EXPENSES                                                                |   | 760,581            |   | 775,473          
|                                                                              |   |                    |   |                  
|Net Income (Loss) from Continuing Operations before Taxes & Minority Interest |   | 115,305            |   | 127,429          
|                                                                              |   |                    |   |                  
|Provisions for Income Taxes                                                   |   | 21,953             |   | (109,168)        
|                                                                              |   |                    |   |                  
|Net Income (Loss) before Minority
Interest                                    | $ | 137,258            |   | 18,261           
|                                                                              |   |                    |   |                  
|Minority Interest in (Income) Loss - RCII                                     | $ | (11,358)           |   | (10,169)         
|                                                                              |   |                    |   |                  
|NET INCOME (LOSS)                                                             |   | 125,900            |   | 8,092            



THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS

4

SOUTHERN SCOTTISH INNS, INC.

CONSOLIDATED STATEMENTS OF INCOME (Continued)

(Unaudited)

|                                                          |   | Three Months Ended
September 30,
2001 2000 |  | Nine Months Ended
September 30,
2001 2000
|--------------------------------------------------------- | - | ------------------------------------------ |  | -----------------------------------------
|INCOME (LOSS) PER SHARE                                   |   |                                            |  |                                          
|                                                          |   |                                            |  |                                          
|Income (Loss) per Share before Taxes &, Minority Interest |   | .05                                        |  | .05                                      
|Income (Loss) per Share before Minority Interest          |   | .06                                        |  | .01                                      
|                                                          |   |                                            |  |                                          
|Basic Net Income (Loss) per Common Share                  | $ | .05                                        |  | .005                                     
|Average Shares Outstanding                                |   | 2,366,395                                  |  | 2,366,395                                





























THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS

5



SOUTHERN SCOTTISH INNS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

|                                                       |   | 2001     
|------------------------------------------------------ | - | ---------
|CASH FLOWS PROVIDED BY (USED FOR) OPERATING ACTIVITIES |   |          
|                                                       |   |          
|Net Income                                             | $ | 427,738  
|Non-Cash Items Included in Net Income:                 |   |          
|Depreciation and Amortization                          |   | 142,757  
|Investment (Income)/Loss - Affiliates                  |   | (28,519) 
|Minority Interest Income                               |   | 36,377   
|(Gain) Loss on the Sale of Assets                      |   | (182,974)
|Miscellaneous                                          |   | 3,200    
|                                                       |   |          
|Net Changes In Current Assets and Liabilities:         |   |          
|Accounts Receivable                                    |   | 70,636   
|Accounts Receivable-Affiliates                         |   | (250,371)
|Deposits                                               |   | 787      
|Interest Receivable                                    |   | 245,716  
|Prepaid Expense                                        |   | 25,715   
|Accounts Payable                                       |   | (42,935) 
|Interest Payable                                       |   | (37,421) 
|Taxes Payable                                          |   | 33,085   
|Deferred Income Tax                                    |   | 50,544   
|Other Accrued Liabilities                              |   | (58,974) 
|Escrow - Real Estate Taxes                             |   | 5,954    
|                                                       |   |          
|NET CASH PROVIDED BY (USED FOR) OPERATING ACTIVITIES   |   | 441,315  
|                                                       |   |          
|CASH FLOWS PROVIDED BY (USED FOR) INVESTING ACTIVITIES |   |          
|                                                       |   |          
|Collections on Mortgages and Notes Receivable          |   | 84,312   
|Acquisition (Disposition) of Fixed Assets              |   | (9,408)  
|                                                       |   |          
|NET CASH PROVIDED BY (USED FOR) INVESTING ACTIVITIES   |   | 74,904   
|                                                       |   |          
|CASH FLOWS PROVIDED BY (USED FOR) FINANCING ACTIVITIES |   |          
|                                                       |   |          
|Principal Payments on Mortgages and Notes Payable      |   | (420,750)
|                                                       |   |          
|NET CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES   |   | (420,750)
|                                                       |   |          
|Increase (Decrease) in Cash                            |   | 95,469   
|                                                       |   |          
|Cash - Beginning                                       |   | 54,612   
|                                                       |   |          
|Cash - Ending                                          | $ | 150,081  



THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS

6



SOUTHERN SCOTTISH INNS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE

A - BASIS OF PRESENTATION

The accompanying consolidated financial statements for the nine months ended September 30, 2001 and 2000 have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") for interim financial information and with the instructions to Form 10Q and Rule 10-01 of Regulation S-X. These financial statements for the nine months ended September 30, 2001 and September 30, 2000 have not been audited by independent public accountants but include all adjustments, consisting of normal recurring accruals, which in the management of Southern Scottish Inns, Inc. and subsidiaries ("SSI" or "the Company") are necessary for a fair statement of the financial position, results of operations and cash flows for the period presented. These statements should be read in conjunction with the audited financial statements and footnotes in the Company's annual report on Form 10-K for the year ended December 31, 2001. The accompanying consolidated balance sheet as of December 31, 2000 has been derived from audited financial statements but does not include all disclosures required by GAAP. The results of operations for the nine months ended September 30, 2001 are not necessarily indicative of the results to be expected for the full year ending December 31, 2001.

The consolidated financial statements include the accounts of the Company and all subsidiaries except where control is temporary or does not rest with the Company. The Company's investments in companies in which it has the ability to exercise significant influence over operating and financial policies are accounted for by the equity method. Accordingly, the Company's share of the net earnings of these companies is included in consolidated net income. The Company's investments in other companies are carried at cost or fair value, as appropriate. All significant inter-company accounts and transactions are eliminated.

Prior to 2001, the Company did not provide Consolidated Statements of Cash Flows or Industry Segments in its filed 10Q's. Therefore, the 10Q for period ending March 31, 2001, June 30, 2001 and September 30, 2001 do not include any comparative figures for the same periods of 2000. Consolidated Statements of Cash Flows and Industry Segments are, however, included in the filed 10K for year ended 2000.



B - RECLASSIFICATIONS

Certain reclassifications have been made to prior period information to conform to the current period presentation.



7

SOUTHERN SCOTTISH INNS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



C - INDUSTRY SEGMENTS

Our operations consist of three reportable segments, which are based on similar products or services. Information on segments is as follows:

|                                      |   | Nine Months Ended
September 30,
|------------------------------------- | - | -------------------------------
|                                      |  
|                                      |   | 2001                           
|Sales to Unaffiliated Customers       |   |                                
|                                      |   |                                
|Franchising                           | $ | 1,425,377                      
|Financing & Investing                 |   | 478,008                        
|Leasing & Lodging                     |   | 349,522                        
|Total Sales to Unaffiliated Customers |   | 2,252,907                      
|                                      |   |                                
|Other Income:                         |   |                                
|Franchising                           |   | 455,771                        
|Financing & Investing                 |   | 20,617                         
|Leasing & Lodging                     |   | 19,113                         
|Total Other Income                    |   | 495,501                        
|                                      |   |                                
|Depreciation and Amortization:        |   |                                
|Franchising                           |   | 34,534                         
|Financing & Investing                 |   | 22,950                         
|Leasing & Lodging                     |   | 85,273                         
|Total Depreciation and Amortization   |   | 142,757                        
|                                      |   |                                
|Interest Expense:                     |   |                                
|Franchising                           |   | 4,118                          
|Financing & Investing                 |   | 19,172                         
|Leasing & Lodging                     |   | 85,820                         
|Total Interest Expense                |   | 109,110                        
|                                      |   |                                
|Bad Debt Expense:                     |   |                                
|Franchising                           |   | 23,664                         
|Financing & Investing                 |   | 0                              
|Leasing & Lodging                     |   | 0                              
|Total Bad Debt Expense                |   | 23,664                         
|                                      |   |                                
|Net Income (Loss):                    |   |                                
|Franchising                           |   | 402,439                        
|Financing & Investing                 |   | (53,582)                       
|Leasing & Lodging                     |   | 78,881                         
|Total Net Income (Loss)               | $ | 427,738                        

8

SOUTHERN SCOTTISH INNS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

C - INDUSTRY SEGMENTS (Continued)

|                                        |   | Nine Months Ended
|--------------------------------------- | - | -----------------
|                                        |   | September 30,    
|                                        |   | 2001             
|                                        |   |                  
|Identifiable Assets:                    |   |                  
|Franchising                             | $ | 1,884,974        
|Financing & Investing                   |   | 7,759,751        
|Leasing & Lodging                       |   | 3,576,682        
|Total Identifiable Assets               |   | 13,221,507       
|                                        |   |                  
|                                        |   |                  
|Additions in Property & Equipment:      |   |                  
|Franchising                             |   | 9,408            
|Financing & Investing                   |   | 0                
|Leasing & Lodging                       |   | 0                
|Total Additions in Property & Equipment | $ | 9,408            
|                                        |   |                  



9

PART II

Item 1. Business

A. - General

Due to the Company's development and finance division's acquiring and selling properties, the number of properties owned, operated, leased and the number of wrap around mortgages held fluctuates constantly.

B. - Segment Information

The Company identifies three significant industry segments as "franchising," "financing & investing," and "leasing & lodging." All revenue items represent sales to unaffiliated customers, as sales or transfers between industry segments are negligible.

C. - Description of Business

Products and Services

The Company's franchise division offers advertising, reservation, group sales, quality assurance and consulting services to motel owner/operators.

The Company's Financing division offers owner financing to persons acquiring motel properties previously operated and/or owned by the Company.

Leasing revenue is derived from the leasing of real and personal properties, i.e. motels, restaurants and part of Hospitality's office building belonging to the Company.

Status of Products and Segments

Each of the Company's industry segments is fully developed with an operational history of several years under Company's direction.

Raw Materials

Not Applicable.

Patents, Trademarks, Licenses, Franchises, and Concessions

The Company has no patents. The Company does own the trade names "Master Hosts Inns", "Red Carpet Inns", "Scottish Inns", "Downtowner Inns", "Passport Inns", "Sundowner Inns" and related trademarks, etc. used in operating lodging facilities or reservation services under these names.

"Sundowner Inns" Trademarks, Registration No. 1,280,236 and No. 1,280,237, United States Patent and Trademark office, were registered May 29, 1984. In 1994, Joe W. Hudgins, the owner of the corporation to which said marks were then registered, transferred ownership of said corporation, Sundowner Reservations, Inc., a Tennessee corporation, to Hospitality International, Inc. in consideration of cancellation of inter-company debt and promise to pay the assigned corporation's debt to Red Carpet Inns International, Inc. On April 30, 1995, Sundowner Reservations, Inc. transferred title to the subject marks to Hospitality International, Inc. As of December 31, 1996, Hospitality International, Inc. transferred ownership of the subject marks to Red Carpet Inns International, Inc. for consideration of $360,000.

10

Seasonality

The Company's financing and leasing businesses by their nature are not subject to seasonal fluctuations except, perhaps, as to mortgagors and lessees' ability to meet payment schedules due to seasonality of their businesses. The revenues from the Company's franchising and lodging segments tend to be greater in the spring and summer months during peak travel periods than during slower business months.

Working Capital

The Company's financing receipts are comprised primarily of interest which does not become reflected on its balance sheet until after it is earned, whereas its payments on underlying debts are comprised primarily of principal reduction and the portion which will be returned over the next twelve months is reflected on the balance sheet as a current liability. Because of this, the Company believes a current ratio of less than one to one is appropriate for its business. However, the Company continues to attempt to, among other things, (1) reduce and contain overhead costs, (2) seek to dispose of underproductive assets, and (3) seek the most advantageous financing terms available.

From 1995 to 2000, in particular, the Company aggressively pursued its legal rights to its trademarks. Largely, it has been successful in stopping motel operations from illegally using its trademarks as well as in enforcing compliance to its franchisee agreements. Settlements were reached on a number of lawsuits in most years that significantly increased the revenues of the Company. Attorney fees related to those settlements also increased in those same years.

Customers

The Company's business of franchising motels is contingent upon its being able to locate qualified property owner-operators who are seeking national affiliation. Through use of its franchise sales force, the Company has not experienced insurmountable difficulty in locating independent motel owner-operators or owner-operators seeking to change national affiliation nor does it anticipate any such difficulty in the future. However, more franchisors are offering multi-level brands, resulting in more downscaling conversions into the economy lodging sector and, therefore, providing more competition. Likewise, the Company's financing division requires that it locate qualified owner-operators or investors for its properties. Because of its franchise affiliations the financing division has not experienced, nor does it anticipate experiencing too much difficulty in locating qualified investors to purchase its developed properties. However, due to the Company's desire to limit the loans it holds to a manageable number and because third party or institutional financings for used motel properties are difficult to arrange, once a property is sold the Company carries the entire financing package and accordingly, each individual loan represents a larger portion of portfolio than it does with traditional lending institutions. Therefore, the continued performance of each existing loan may be material to the operation of the financing division.

Backlogs - Not Applicable.

Government Contracts

The Company is not involved in, nor does it anticipate becoming involved in, any government contracts.



11



Competition

The Company's franchising, leased lodging and leased food service divisions each compete with other similar businesses, many of which are larger and have more national recognition than the Company. Each of these divisions competes on the basis of service and price/value relationship.

The Company's financing division competes with other, more traditional sources of long-term financing, most of which have greater financial resources than does the Company.

Developing and financing lodging properties is being significantly affected by over-development in many areas and is somewhat adversely affected by the area's and the country's general economic downturn.

Research and Development

No significant research activities were conducted by the Company during the Fiscal year and the Company does not expect to expend sums on research activities during the next Fiscal Year.

Environmental Protection

The Company is not directly affected by environmental protection measures of federal, state or local authorities to any extent which would reasonably be expected to cause material capital expenditures for compliance, so far as in known. However, it is possible that an approximately five and three-tenths (5.09) acre tract of land held as an investment and acquired as a possible motel site, located on I-10 in Ocean Springs, Mississippi, may under the new guidelines, be determined to be in part "wetlands." If so, its use and value would be adversely affected. On January 27, 1995, 3.2 acres contiguous to said tract were sold at a consideration undiminished by the wetlands issue; the value of the remaining 5.09 acres, therefore, may not be diminished. The 5.09 acre tract is carried on the Company's books at $55,647.

Foreign Operations

The Company is not currently involved in any business operations outside of the United States of America, except through its franchising division which does do limited business in Canada and has one franchise in the Bahamas and two in Jamaica.

Item 2. Legal Proceedings

The Company is named as a defendant for damages in an unspecified amount, reasonable attorney fees, interest and costs as a result of the Company's alleged violation of a patent. It is counsel's opinion that the Company will be dismissed any liability.

In settlement of a foreclosure action brought by Registrant on a delinquent note and mortgage on the McComb, Mississippi motel, Registrant accepted a deed in lieu.

The Company also has two cases where there is a trial for Declaratory Judgment where the franchisee is seeking a determination as to the validity of the franchise. In these cases, the Company is seeking damages under the franchise agreement against the franchisee. In one case, the franchisee has filed a counterclaim. Counsel expects the matter to be dismissed in a Motion for Summary Judgment.



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Item 3. Management's Discussion and Analysis of Financial Conditions and Results of Operations

Results of Operation:

Franchising revenues in the third quarter of 2001 decreased approximately 5.5% compared to the third quarter of 2000. This is due to continuing increased competition from other franchisors offering multi-level brands, resulting in more down-scaling conversions into the economy lodging sector. To increase revenues, the Company believes that it has to become more stringent in its requirements relating to franchises in the areas of quality assurance to increase guest satisfaction. A major source of revenue for the franchising area is legal settlements. The Company vigorously asserts its legal rights in the area of franchise infringements and violations of the franchise agreements.

Financing revenues continue to drop because the interest amount on the notes receivable is declining as the notes move toward maturity.

Leasing revenues declined in 1998 through 2000 due to the restructuring of the lease agreements due to economic conditions, such as new competition at each of our locations and our failure to refurbish and upgrade. In third quarter 2001, leasing revenues increased slightly compared to third quarter 2000 because the lease agreements were restructured.

Largely, as a result of the foreclosure of a mortgage on a motel by a subsidiary of Registrant, on July 20, 2001, Mortgages and Notes Receivable decreased by $1,148,230 and land increased by $50,368 and Building and Building Improvements increased y $575,356. Prior to foreclosure, the property was condemned and closed by action of a municipality. As a subsequent event note, this property was sold in an "as is" condition for $910,000, of which $739,784.84 was seller financed, on November 11, 2001.

Liquidity:

The question of liquidity should not be an issue in the near future. The non-affiliated entity formerly leasing properties from the Company is in arrears in its past lease payments; collection is doubtful. If cash requirements became an issue, any of the notes receivable could be sold at a discount. However, there is no reason to believe this will be required.

Capital Resources

No material commitments for capital expenditures are planned for 2001 other than possible purchases of properties through the financing division.

The trend in capital resources has resulted in a gradual tightening of credit with regard to new motel construction but continues tighter with regard to older properties. This has forced more sellers of older properties into the seller-financed arena creating more competition for the Company in its Finance and Development Division. This fact, coupled with less available loan money on the new property construction side, has meant less profitable opportunities for the Company. Although the economy for the past two years has not been good, fewer foreclosures have resulted than in recent prior periods of economic downturns and therefore there are not a lot of bank REO properties available. Individual sellers are asking multiples of sales of pre-downturn years rather than of more current years. These events and tendencies shorten the supply of motel inventory while increasing the cost of acquiring the same.

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Item 4. Controls & Procedures

Evaluation of disclosure controls and procedures.

As required by Rule 13a-15 under the Securities Exchange Act of 1934 (the "Exchange Act"), as of September 30, 2001, we carried out an evaluation under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. In designing and evaluating our disclosure controls and procedures, we and our management recognize that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. Based upon the required evaluation, the Chief Executive Officer and Chief Financial Officer believe that, as of the date of completion of the evaluation, our disclosure controls and procedures were reasonably effective to ensure that information required to be disclosed by us in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission's rules and forms. In connection with the rules, we are continuing the process of reviewing and documenting our disclosure controls and procedures, including our internal controls and procedures for financial reporting, and may from time to time make changes aimed at enhancing their effectiveness and to ensure that our systems evolve with our business.

Changes in internal controls.

There has been no change in our internal controls over financial reporting during our most recent fiscal year that has been materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.



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SIGNATURES

(Originals on file)

Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

SOUTHERN SCOTTISH INNS, INC.

(Registrant)



By: __________________ ______ __	________________ ______

Bobby E. Guimbellot Date Jack M. Dubard Date

Chief Executive Officer President & CFO

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.

FOR THE BOARD OF DIRECTORS:



______________________ ______ _____________________ ______

Michael M. Bush Date Richard A. Johnson Date

Director Director





______________________ ______ _____________________ ______

Melanie C. Hanemann Date C. Guy Lowe, Jr. Date

Director Director





______________________ ______ _____________________ ______

Jack M. Dubard Date Harry C. McIntire Date

Director Director





______________________ ______ _____________________ ______

Bobby E. Guimbellot Date Gretchen W. Nini Date

Director Director



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______________________ ______ _____________________ ______

George O. Swindell Date John Snyder Date

Director Director





______________________ ______ _____________________ ______

Melinda Hotho Date Timothy J. DeSandro Date

Director Director



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