##### Table of Contents



FORM 10-Q

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934



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|                                            |  |                            
|------------------------------------------- |  | ---------------------------
|For the Third Quarter Ended
October 6, 2002 |  | Commission File No. 0-19840

SHOLODGE, INC.
(Exact name of registrant as specified in its charter)



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|                                                                                          |  |                                                   
|----------------------------------------------------------------------------------------- |  | --------------------------------------------------
|Tennessee
(State or other jurisdiction
of incorporation or organization)                  |  | 62-1015641
(I.R.S. Employer
Identification Number)
|                                                                                          |  |                                                   
|130 Maple Drive North, Hendersonville, Tennessee
(address of principal executive offices) |  | 37075
(Zip Code)                                  
|                                                                                          |  |                                                   
|Registrants telephone number, including area code                                        |  | (615)
264-8000                                    



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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period as the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.

Yes [X] No [  ]

Indicate the number of shares outstanding of each of the registrants classes of
common stock as of the latest practicable date.

As of November 15, 2002, there were 5,118,278 shares of ShoLodge, Inc. common
stock outstanding.





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TABLE OF CONTENTS



|                                             |  |  |  |  |  |  |  | 
|-------------------------------------------- |  |  |  |  |  |  |  | 
|PART I                                      
|PART II  OTHER INFORMATION                 
|SIGNATURES                                  
|CERTIFICATION                               
|CERTIFICATION                               
|Section 906 Certification of the CEO and CFO



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##### Table of Contents



ShoLodge, Inc. and Subsidiaries
Consolidated Balance Sheets

|                                                       |                           |                                                                              |             |             |           |              |             |           |           | 
|------------------------------------------------------ | ------------------------- | ---------------------------------------------------------------------------- | ----------- | ----------- | --------- | ------------ | ----------- | --------- | --------- | 
|                                                       |                           |                                                                              |             | October 6,  |           | December 30,
|                                                       |                           |                                                                              |             | 2002        |           | 2001(1)     
|                                                       |                           |                                                                              |             |             |           |             
|                                                       |                           |                                                                              |             | (unaudited) |           |              |             |          
|Assets                                                 |                           |                                                                              |             |             |           |              |             |          
|Current assets:                                        |                           |                                                                              |             |             |           |              |             |          
|                                                       | Cash and cash equivalents |                                                                              | $           | 1,060,736   |           |              | $           | 2,704,161 |          
|                                                       | Restricted cash           |                                                                              |             | 200,000     |           |              |             | 200,000   |          
|                                                       | Accounts receivable:      |                                                                              |             |             |           |              |             |           |          
|                                                       |                           | Accounts receivable-trade, net                                               |             |             | 4,186,634 |              |             |           | 3,557,591 | 
|                                                       |                           | Construction contracts                                                       |             |             | 5,927,117 |              |             |           | 4,016,502 | 
|                                                       |                           | Costs and estimated earnings in excess of
billings on construction contracts |             |             | 401,564   |              |             |           | 3,063,747 | 
|                                                       | Prepaid expenses          |                                                                              |             | 661,869     |           |              |             | 365,849   |          
|                                                       | Notes receivable, net     |                                                                              |             | 63,247,337  |           |              |             | 1,728,340 |          
|                                                       | Other current assets      |                                                                              |             | 170,995     |           |              |             | 153,766   |          
|                                                       |                           |                                                                              |             |             |           |              |             |           |          
|Total current assets                                   |                           |                                                                              | 75,856,252  |             |           |              | 15,789,956  |          
|Notes receivable, net                                  |                           |                                                                              | 10,151,457  |             |           |              | 68,227,306  |          
|Restricted cash                                        |                           |                                                                              | 24,194      |             |           |              | 1,781,747   |          
|Property and equipment                                 |                           |                                                                              | 114,182,786 |             |           |              | 123,112,190 |          
|Less accumulated depreciation and amortization         |                           |                                                                              | (22,098,664 | )           |           |              | (21,944,927 | )        
|                                                       |                           |                                                                              |             |             |           |              |             |           |          
|                                                       |                           |                                                                              | 92,084,122  |             |           |              | 101,167,263 |          
|Land under development or held for sale                |                           |                                                                              | 11,124,795  |             |           |              | 9,254,986   |          
|Deferred charges, net                                  |                           |                                                                              | 2,345,670   |             |           |              | 6,111,825   |          
|Goodwill, net                                          |                           |                                                                              | 765,711     |             |           |              | 2,387,100   |          
|Trademark, franchise costs and reservation rights, net |                           |                                                                              | 128,104     |             |           |              | 408,559     |          
|Other assets                                           |                           |                                                                              | 1,269,578   |             |           |              | 1,457,907   |          
|                                                       |                           |                                                                              |             |             |           |              |             |           |          
|                                                       |                           | $                                                                            | 193,749,883 |             |           | $            | 206,586,649 |          
|                                                       |                           |                                                                              |             |             |           |              |             |           |          



---

|(1) |  | Derived from fiscal year ended December 30, 2001 audited financial statements.
|--- |  | ------------------------------------------------------------------------------
|    |  | See accompanying notes.                                                       





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##### Table of Contents



ShoLodge, Inc. and Subsidiaries
Consolidated Balance Sheets (continued)

|                                                                           |                                                                                                                                    |                                                                                                                                                                            |             |             |            |              |             |            |            | 
|-------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----------- | ----------- | ---------- | ------------ | ----------- | ---------- | ---------- | 
|                                                                           |                                                                                                                                    |                                                                                                                                                                            |             | October 6,  |            | December 30,
|                                                                           |                                                                                                                                    |                                                                                                                                                                            |             | 2002        |            | 2001(1)     
|                                                                           |                                                                                                                                    |                                                                                                                                                                            |             |             |            |             
|                                                                           |                                                                                                                                    |                                                                                                                                                                            |             | (unaudited) |            |              |             |           
|Liabilities and Shareholders equity                                       |                                                                                                                                    |                                                                                                                                                                            |             |             |            |              |             |           
|Current liabilities:                                                       |                                                                                                                                    |                                                                                                                                                                            |             |             |            |              |             |           
|                                                                           |                                                                                                                                    | Accounts payable and accrued expenses                                                                                                                                      |             | $           | 8,876,447  |              |             | $          | 14,171,631 | 
|                                                                           |                                                                                                                                    | Taxes payable other than on income                                                                                                                                         |             |             | 569,142    |              |             |            | 476,809    | 
|                                                                           |                                                                                                                                    | Income taxes payable                                                                                                                                                       |             |             | 1,057,258  |              |             |            | 3,859,873  | 
|                                                                           |                                                                                                                                    | Current portion of long-term debt                                                                                                                                          |             |             | 4,009,967  |              |             |            | 4,058,700  | 
|                                                                           |                                                                                                                                    |                                                                                                                                                                            |             |             |            |              |             |            |            | 
|Total current liabilities                                                  |                                                                                                                                    |                                                                                                                                                                            | 14,512,814  |             |            |              | 22,567,013  |           
|Long-term debt, less current portion                                       |                                                                                                                                    |                                                                                                                                                                            | 86,991,637  |             |            |              | 86,293,381  |           
|Deferred income taxes                                                      |                                                                                                                                    |                                                                                                                                                                            | 992,275     |             |            |              | 992,275     |           
|Deferred gain on sale/leaseback                                            |                                                                                                                                    |                                                                                                                                                                            |            |             |            |              | 4,129,962   |           
|Deferred credits                                                           |                                                                                                                                    |                                                                                                                                                                            | 2,366,829   |             |            |              | 2,545,004   |           
|Minority interests in equity of consolidated subsidiaries and
partnerships |                                                                                                                                    |                                                                                                                                                                            | 824,750     |             |            |              | 786,477     |           
|                                                                           |                                                                                                                                    |                                                                                                                                                                            |             |             |            |              |             |            |            | 
|Total liabilities                                                          |                                                                                                                                    |                                                                                                                                                                            | 105,688,305 |             |            |              | 117,314,112 |           
|Shareholders equity:                                                      |                                                                                                                                    |                                                                                                                                                                            |             |             |            |              |             |           
|                                                                           |                                                                                                                                    | Preferred stock (no par value; 1,000,000 shares authorized;
no shares issued)                                                                                              |             |             |           |              |             |            |           | 
|                                                                           |                                                                                                                                    | Series A redeemable nonparticipating stock
(no par value; 1,000 shares authorized, no
shares issued)                                                                       |             |             |           |              |             |            |           | 
|                                                                           |                                                                                                                                    | Common stock (no par value; 20,000,000 shares
authorized, 5,118,778 and 5,088,278 shares
issued and outstanding as of October 6, 2002
and December 30, 2001, respectively) |             |             | 1,000      |              |             |            | 1,000      | 
|                                                                           | Additional paid-in capital                                                                                                         |                                                                                                                                                                            |             | 23,579,621  |            |              |             | 23,519,506 |           
|                                                                           | Retained earnings                                                                                                                  |                                                                                                                                                                            |             | 65,863,900  |            |              |             | 67,001,529 |           
|                                                                           | Unrealized gain on securities available-for-sale, net of income
taxes                                                              |                                                                                                                                                                            |             |            |            |              |             | 100,307    |           
|                                                                           | Notes receivable from officer, net of discount of $148,305 and
$181,444, as of October 6, 2002 and December 30, 2001,
respectively |                                                                                                                                                                            |             | (1,382,943  | )          |              |             | (1,349,805 | )         
|                                                                           |                                                                                                                                    |                                                                                                                                                                            |             |             |            |              |             |            |            | 
|                                                                           |                                                                                                                                    | Total shareholders equity                                                                                                                                                 |             |             | 88,061,578 |              |             |            | 89,272,537 | 
|                                                                           |                                                                                                                                    |                                                                                                                                                                            |             |             |            |              |             |            |            | 
|                                                                           |                                                                                                                                    | $                                                                                                                                                                          | 193,749,883 |             |            | $            | 206,586,649 |           
|                                                                           |                                                                                                                                    |                                                                                                                                                                            |             |             |            |              |             |            |            | 



---

|(1) |  | Derived from fiscal year ended December 30, 2001 audited financial statements.
|--- |  | ------------------------------------------------------------------------------
|    |  | See accompanying notes.                                                       





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##### Table of Contents



ShoLodge, Inc. and Subsidiaries
Consolidated Statements of Earnings (unaudited)

|                                                                                      |                                                  |                                                                              |                         |                     |         |                |           |                |        |            |             |            |         |            |            |            |        |            |           | 
|------------------------------------------------------------------------------------- | ------------------------------------------------ | ---------------------------------------------------------------------------- | ----------------------- | ------------------- | ------- | -------------- | --------- | -------------- | ------ | ---------- | ----------- | ---------- | ------- | ---------- | ---------- | ---------- | ------ | ---------- | --------- | 
|                                                                                      |                                                  |                                                                              |                         |                     |         | 12 weeks ended |           | 40 weeks ended
|                                                                                      |                                                  |                                                                              |                         |                     |         |                |           |               
|                                                                                      |                                                  |                                                                              |                         |                     |         | October 6,     |           | October 7,     |        | October 6, |             | October 7,
|                                                                                      |                                                  |                                                                              |                         |                     |         | 2002           |           | 2001           |        | 2002       |             | 2001      
|                                                                                      |                                                  |                                                                              |                         |                     |         |                |           |                |        |            |             |           
|Revenues:                                                                             |                                                  |                                                                              |                         |                     |         |                |           |                |        |            |             |            |         |            |            |           
|                                                                                      | Hotel                                            |                                                                              | $                       | 3,520,189           |         |                | $         | 2,905,125      |        |            | $           | 11,550,205 |         |            | $          | 10,114,528 |       
|                                                                                      | Franchising, management and reservation services |                                                                              |                         | 1,478,344           |         |                |           | 1,060,872      |        |            |             | 4,701,111  |         |            |            | 2,940,829  |       
|                                                                                      | Construction and development                     |                                                                              |                         | 2,934,630           |         |                |           | 7,891,073      |        |            |             | 7,114,691  |         |            |            | 18,048,458 |       
|                                                                                      | Rent income                                      |                                                                              |                         | 777,722             |         |                |           | 800,269        |        |            |             | 2,647,386  |         |            |            | 2,700,249  |       
|                                                                                      | Other income                                     |                                                                              |                         | (25,470             | )       |                |           | 8,171          |        |            |             | 40,805     |         |            |            | 134,012    |       
|                                                                                      |                                                  |                                                                              |                         |                     |         |                |           |                |        |            |             |            |         |            |            |            |       
|                                                                                      |                                                  |                                                                              | Total revenues          |                     |         | 8,685,415      |           |                |        | 12,665,510 |             |            |         | 26,054,198 |            |            |        | 33,938,076 |          
|Cost and expenses:                                                                    |                                                  |                                                                              |                         |                     |         |                |           |                |        |            |             |            |         |            |            |           
|                                                                                      | Hotel                                            |                                                                              |                         | 3,141,537           |         |                |           | 2,353,337      |        |            |             | 9,347,601  |         |            |            | 7,832,266  |       
|                                                                                      | Franchising, management and reservation services |                                                                              |                         | 1,159,087           |         |                |           | 494,907        |        |            |             | 3,082,636  |         |            |            | 1,426,563  |       
|                                                                                      | Construction and development                     |                                                                              |                         | 3,052,646           |         |                |           | 7,425,456      |        |            |             | 8,270,784  |         |            |            | 16,846,922 |       
|                                                                                      | Rent expense, net                                |                                                                              |                         | 161,507             |         |                |           | 156,589        |        |            |             | 470,990    |         |            |            | 466,438    |       
|                                                                                      | General and administrative                       |                                                                              |                         | 1,548,815           |         |                |           | 1,324,866      |        |            |             | 5,284,760  |         |            |            | 4,417,648  |       
|                                                                                      | Depreciation and amortization                    |                                                                              |                         | 1,016,509           |         |                |           | 982,338        |        |            |             | 3,383,156  |         |            |            | 3,442,386  |       
|                                                                                      | Write-off of goodwill                            |                                                                              |                         |                    |         |                |           |               |        |            |             | 2,387,100  |         |            |            |           |       
|                                                                                      | Write-off of franchise and trademark costs       |                                                                              |                         |                    |         |                |           |               |        |            |             | 4,421,535  |         |            |            |           |       
|                                                                                      |                                                  |                                                                              |                         |                     |         |                |           |                |        |            |             |            |         |            |            |            |       
|                                                                                      |                                                  |                                                                              | Total cost and expenses |                     |         | 10,080,101     |           |                |        | 12,737,493 |             |            |         | 36,648,562 |            |            |        | 34,432,223 |          
|                                                                                      |                                                  |                                                                              |                         |                     |         |                |           |                |        |            |             |            |         |            |            |            |       
|Operating loss                                                                        |                                                  |                                                                              | (1,394,686              | )                   |         |                | (71,983   | )              |        |            | (10,594,364 | )          |         |            | (494,147   | )         
|                                                                                      | Gain on sale of property and leasehold interests |                                                                              |                         | 449,632             |         |                |           | 117,675        |        |            |             | 596,897    |         |            |            | 3,797,066  |       
|                                                                                      | Gain on sale of available-for-sale securities    |                                                                              |                         | 314,998             |         |                |           |               |        |            |             | 314,998    |         |            |            |           |       
|                                                                                      | Gain on early extinguishments of debt            |                                                                              |                         | 101,460             |         |                |           | 591,694        |        |            |             | 2,605,218  |         |            |            | 847,859    |       
|                                                                                      | Interest expense                                 |                                                                              |                         | (2,184,446          | )       |                |           | (1,692,095     | )      |            |             | (6,901,969 | )       |            |            | (6,000,632 | )     
|                                                                                      | Interest income                                  |                                                                              |                         | 1,216,615           |         |                |           | 1,343,306      |        |            |             | 4,235,872  |         |            |            | 5,075,656  |       
|                                                                                      | Arbitration award                                |                                                                              |                         |                    |         |                |           |               |        |            |             | 8,900,000  |         |            |            |           |       
|                                                                                      |                                                  |                                                                              |                         |                     |         |                |           |                |        |            |             |            |         |            |            |            |       
|(Loss) earnings from continuing operations before income taxes and minority interests |                                                  |                                                                              | (1,496,427              | )                   |         |                | 288,597   |                |        |            | (843,348    | )          |         |            | 3,225,802  |           
|Income tax benefit (expense)                                                          |                                                  |                                                                              | 37,000                  |                     |         |                | (198,000  | )              |        |            | (421,000    | )          |         |            | (1,521,000 | )         
|Minority interests in earnings of consolidated
subsidiaries and partnerships          |                                                  |                                                                              | (12,009                 | )                   |         |                | (12,924   | )              |        |            | (38,271     | )          |         |            | (44,951    | )         
|                                                                                      |                                                  |                                                                              |                         |                     |         |                |           |                |        |            |             |            |         |            |            |            |       
|(Loss) earnings from continuing operations                                            |                                                  |                                                                              | (1,471,436              | )                   |         |                | 77,673    |                |        |            | (1,302,619  | )          |         |            | 1,659,851  |           
|Discontinued operations:                                                              |                                                  |                                                                              |                         |                     |         |                |           |                |        |            |             |            |         |            |            |           
|                                                                                      |                                                  | (Loss) income from operations of hotel
disposed of, net of income tax effect |                         |                     | (19,641 | )              |           |                | 14,055 |            |             |            | (40,082 | )          |            |            | 70,833 |           
|                                                                                      |                                                  | (Loss) gain on disposal of hotel, net of income
tax effect                   |                         |                     | (5,403  | )              |           |                |       |            |             |            | 205,072 |            |            |            |       |           
|                                                                                      |                                                  |                                                                              |                         |                     |         |                |           |                |        |            |             |            |         |            |            |            |       
|Net (loss) earnings                                                                   |                                                  | $                                                                            | (1,496,480              | )                   |         | $              | 91,728    |                |        | $          | (1,137,629  | )          |         | $          | 1,730,684  |           
|                                                                                      |                                                  |                                                                              |                         |                     |         |                |           |                |        |            |             |            |         |            |            |            |       
|Net (loss) earnings per common share:                                                 |                                                  |                                                                              |                         |                     |         |                |           |                |        |            |             |            |         |            |            |           
|                                                                                      |                                                  | Basic:                                                                       |                         |                     |         |                |           |                |        |            |             |            |         |            |            |            |        |            |           | 
|                                                                                      |                                                  | Continuing operations                                                        |                         |                     |         | $              | (0.29     | )              |        | $          | 0.01        |            |         | $          | (0.25      | )          |        | $          | 0.30      | 
|                                                                                      |                                                  | Discontinued operations:                                                     |                         |                     |         |                |           |                |        |            |             |            |         |            |            |            |        |            |          
|                                                                                      |                                                  | Operations of hotel disposed of                                              |                         |                     | (0.00   | )              |           |                | 0.01   |            |             |            | (0.01   | )          |            |            | 0.01   |           
|                                                                                      |                                                  | (Loss) gain on sale of hotel disposed of                                     |                         |                     | (0.00   | )              |           |                |       |            |             |            | 0.04    |            |            |            |       |           
|                                                                                      |                                                  |                                                                              |                         |                     |         |                |           |                |        |            |             |            |         |            |            |            |       
|                                                                                      |                                                  |                                                                              |                         | Net (loss) earnings |         | $              | (0.29     | )              |        | $          | 0.02        |            |         | $          | (0.22      | )          |        | $          | 0.31      | 
|                                                                                      |                                                  |                                                                              |                         |                     |         |                |           |                |        |            |             |            |         |            |            |            |       
|                                                                                      |                                                  | Diluted:                                                                     |                         |                     |         |                |           |                |        |            |             |            |         |            |            |            |        |            |           | 
|                                                                                      |                                                  | Continuing operations                                                        |                         |                     |         | $              | (0.29     | )              |        | $          | 0.01        |            |         | $          | (0.25      | )          |        | $          | 0.30      | 
|                                                                                      |                                                  | Discontinued operations:                                                     |                         |                     |         |                |           |                |        |            |             |            |         |            |            |            |        |            |          
|                                                                                      |                                                  | Operations of hotel disposed of                                              |                         |                     | (0.00   | )              |           |                | 0.01   |            |             |            | (0.01   | )          |            |            | 0.01   |           
|                                                                                      |                                                  | (Loss) gain on sale of hotel disposed of                                     |                         |                     | (0.00   | )              |           |                |       |            |             |            | 0.04    |            |            |            |       |           
|                                                                                      |                                                  |                                                                              |                         |                     |         |                |           |                |        |            |             |            |         |            |            |            |       
|                                                                                      |                                                  |                                                                              |                         | Net (loss) earnings |         | $              | (0.29     | )              |        | $          | 0.02        |            |         | $          | (0.22      | )          |        | $          | 0.31      | 
|                                                                                      |                                                  |                                                                              |                         |                     |         |                |           |                |        |            |             |            |         |            |            |            |       
|Weighted average common shares outstanding:                                           |                                                  |                                                                              |                         |                     |         |                |           |                |        |            |             |            |         |            |            |           
|                                                                                      |                                                  |                                                                              |                         | Basic               |         |                | 5,118,778 |                |        |            | 5,521,873   |            |         |            | 5,112,506  |            |        |            | 5,533,792 | 
|                                                                                      |                                                  |                                                                              |                         |                     |         |                |           |                |        |            |             |            |         |            |            |            |       
|                                                                                      |                                                  |                                                                              |                         | Diluted             |         |                | 5,118,778 |                |        |            | 5,604,016   |            |         |            | 5,112,506  |            |        |            | 5,605,611 | 
|                                                                                      |                                                  |                                                                              |                         |                     |         |                |           |                |        |            |             |            |         |            |            |            |       

See accompanying notes.





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##### Table of Contents



ShoLodge, Inc. and Subsidiaries
Consolidated Statements of Cash Flows (unaudited)

|                                                                                                                  |                                                                                       |                                       |                                                                              |             |                 |            |                 |             |           |            |  
|----------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------- | ------------------------------------- | ---------------------------------------------------------------------------- | ----------- | --------------- | ---------- | --------------- | ----------- | --------- | ---------- | -
|                                                                                                                  |                                                                                       |                                       |                                                                              |             | 40 weeks ended 
|                                                                                                                  |                                                                                       |                                       |                                                                              |             |                
|                                                                                                                  |                                                                                       |                                       |                                                                              |             | October 6, 2002 |            | October 7, 2001
|                                                                                                                  |                                                                                       |                                       |                                                                              |             |                 |            |                
|Cash flows from operating activities                                                                              |                                                                                       |                                       |                                                                              |             |                 |            |                 |            
|(Loss) earnings from continuing operations                                                                        |                                                                                       | $                                     | (1,302,619                                                                   | )           |                 | $          | 1,659,851       |            
|Adjustments
to reconcile net (loss) earnings from continuing operations to net
cash used in operating activities: |                                                                                       |                                       |                                                                              |             |                 |            |                 |            
|                                                                                                                  | Gain from discontinued operations                                                     |                                       |                                                                              | 164,990     |                 |            |                 | 70,833      |          
|                                                                                                                  | Depreciation and amortization                                                         |                                       |                                                                              | 3,383,156   |                 |            |                 | 3,442,386   |          
|                                                                                                                  | Write-off of goodwill and other intangible assets                                     |                                       |                                                                              | 6,808,635   |                 |            |                 |            |          
|                                                                                                                  | Amortization of deferred charges recorded as interest expense                         |                                       |                                                                              | 462,757     |                 |            |                 | 496,360     |          
|                                                                                                                  | Accretion of debt recorded as interest expense                                        |                                       |                                                                              | 201,852     |                 |            |                 |            |          
|                                                                                                                  | Recognition of previously deferred gains                                              |                                       |                                                                              | (178,175    | )               |            |                 | (255,148    | )        
|                                                                                                                  | Gain on sale of property and other assets                                             |                                       |                                                                              | (596,897    | )               |            |                 | (3,797,066  | )        
|                                                                                                                  | Gain
on sale of available-for-sale securities                                         |                                       |                                                                              | (314,998    | )               |            |                 |            |          
|                                                                                                                  | Gain on early extinguishments of debt                                                 |                                       |                                                                              | (2,605,218  | )               |            |                 | (847,859    | )        
|                                                                                                                  | Increase in minority interest in equity of consolidated subsidiaries
and partnerships |                                       |                                                                              | 38,271      |                 |            |                 | 44,951      |          
|                                                                                                                  | Changes in assets and liabilities:                                                    |                                       |                                                                              |             |                 |            |                 |             |          
|                                                                                                                  |                                                                                       |                                       | Trade receivables                                                            |             |                 | (629,043   | )               |             |           | (286,280   | )
|                                                                                                                  |                                                                                       |                                       | Construction contract receivables                                            |             |                 | (1,910,615 | )               |             |           | (1,709,577 | )
|                                                                                                                  |                                                                                       |                                       | Costs and estimated earnings in excess of billings on
construction contracts |             |                 | 2,662,183  |                 |             |           | (6,070,625 | )
|                                                                                                                  |                                                                                       |                                       | Income and other taxes receivable and payable                                |             |                 | (2,710,282 | )               |             |           | 603,753    |  
|                                                                                                                  |                                                                                       |                                       | Prepaid expenses                                                             |             |                 | (296,020   | )               |             |           | (164,690   | )
|                                                                                                                  |                                                                                       |                                       | Other assets                                                                 |             |                 | 167,791    |                 |             |           | 413,158    |  
|                                                                                                                  |                                                                                       | Accounts payable and accrued expenses |                                                                              |             | (5,295,184      | )          |                 |             | 4,821,774 |           
|                                                                                                                  |                                                                                       |                                       |                                                                              |             |                 |            |                 |            
|Net cash used in operating activities                                                                             |                                                                                       |                                       | (1,949,416                                                                   | )           |                 |            | (1,578,179      | )          
|Cash flow from investing activities                                                                               |                                                                                       |                                       |                                                                              |             |                 |            |                 |            
|                                                                                                                  | Restricted cash                                                                       |                                       |                                                                              | 1,758,364   |                 |            |                 | 10,373,176  |          
|                                                                                                                  | (Advances to) payments received on notes receivable                                   |                                       |                                                                              | (58,170     | )               |            |                 | 472,657     |          
|                                                                                                                  | Capital expenditures                                                                  |                                       |                                                                              | (6,885,132  | )               |            |                 | (14,111,405 | )        
|                                                                                                                  | Proceeds from sale of property and leasehold interests                                |                                       |                                                                              | 2,794,998   |                 |            |                 | 2,899,018   |          
|                                                                                                                  | Proceeds from sale of investment securities                                           |                                       |                                                                              | 428,415     |                 |            |                 |            |          
|                                                                                                                  |                                                                                       |                                       |                                                                              |             |                 |            |                 |            
|Net cash used in investing activities                                                                             |                                                                                       |                                       | (1,961,525                                                                   | )           |                 |            | (366,554        | )          
|Cash flow from financing activities                                                                               |                                                                                       |                                       |                                                                              |             |                 |            |                 |            
|Deferred loan costs                                                                                               |                                                                                       |                                       | (795,146                                                                     | )           |                 |            | (110,030        | )          
|                                                                                                                  | Proceeds from long-term debt                                                          |                                       |                                                                              | 23,970,000  |                 |            |                 | 4,500,000   |          
|                                                                                                                  | Payments on long-term debt                                                            |                                       |                                                                              | (20,967,453 | )               |            |                 | (5,475,163  | )        
|                                                                                                                  | Exercise of stock options                                                             |                                       |                                                                              | 208,125     |                 |            |                 | 4,001       |          
|                                                                                                                  | Purchase of treasury stock                                                            |                                       |                                                                              | (148,010    | )               |            |                 | (270,385    | )        
|                                                                                                                  |                                                                                       |                                       |                                                                              |             |                 |            |                 |            
|Net cash provided by (used in) financing activities                                                               |                                                                                       |                                       | 2,267,516                                                                    |             |                 |            | (1,351,577      | )          
|Net decrease in cash and cash equivalents                                                                         |                                                                                       |                                       | (1,643,425                                                                   | )           |                 |            | (3,296,310      | )          
|Cash and cash equivalents  beginning of period                                                                   |                                                                                       |                                       | 2,704,161                                                                    |             |                 |            | 5,339,689       |            
|                                                                                                                  |                                                                                       |                                       |                                                                              |             |                 |            |                 |            
|Cash and cash equivalents  end of period                                                                         |                                                                                       | $                                     | 1,060,736                                                                    |             |                 | $          | 2,043,379       |            
|                                                                                                                  |                                                                                       |                                       |                                                                              |             |                 |            |                 |            

See accompanying notes.





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##### Table of Contents



SHOLODGE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)



|A. |  | BASIS OF PRESENTATION                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 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 Managements opinion, the information and amounts furnished in this report
reflect all adjustments which are necessary for the fair presentation of the
financial position and results of operations for the periods presented. All
adjustments are of a normal and recurring nature. These financial statements
should be read in conjunction with the Companys Annual Report on Form 10-K for
the fiscal year ended December 30, 2001.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|  
|   |  | The fiscal year consists of a 52/53 week year ending the last Sunday of the
year. The Companys fiscal quarters have 16, 12, 12, and 12 weeks in the
first, second, third and fourth quarters, respectively, in each fiscal year.
When the 53rd week occurs in a fiscal year, it is added to the fourth fiscal
quarter, making it 13 weeks in length.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|  
|   |  | The Company has historically reported lower earnings in the first and fourth
quarters of the year due to the seasonality of the Companys business. The
results of operations for the quarters ended October 6, 2002 and October 7,
2001 are not necessarily indicative of the operating results for the entire
year.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|  
|B. |  | EXCHANGE AND SALE OF PROPERTIES                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|  
|   |  | The Company opened a new AmeriSuites hotel in October 2001 and another in
February 2002. In accordance with the July 2000 agreement in which the Company
sold its operating interests in 27 AmeriSuites hotels, the Company was
obligated to exchange either one or both of the AmeriSuites hotels with the
purchaser, at its landlords option, for one or two specific existing hotels of
the same brand and number of rooms previously operated by the Company prior to
July 2000. The exchange option was exercised on both hotels, and the exchanges
were completed in the first quarter of 2002. The two hotels received in the
exchanges were recorded at the historical cost basis of each of the two new
AmeriSuites hotels less the previously deferred gain on sale/leaseback.                                                                                                                                                                                   
|  
|   |  | The Company sold one hotel in Sugar Land, Texas, and a parcel of undeveloped
land in the second quarter ended July 14, 2002. The sale of land resulted in
the recognition of $301,557 in gains on sales of properties. Cumulative sales
prices for the hotel and land were $5,315,043, of which $1,863,082 was cash
proceeds. Operating earnings or losses and the gain on the sale of $331,073
have been eliminated from continuing operations for all periods presented and
reflected as discontinued operations, net of income tax effect. Balance sheet
reclassifications as of December 30, 2001 were not made because of the
insignificance of such amounts to the consolidated amounts: At December 30,
2001, this hotel had $63,812 in current assets, $4,442,462 in property and
equipment (net of accumulated depreciation), $22,921 in other assets, $137,135
in current liabilities, $7,182,419 due to related parties, and $2,790,359 in
stockholders deficit.





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##### Table of Contents





|   |  | In the third quarter of 2002, the Company also sold two restaurants for cash to
their operators who previously leased them from the Company. The two sales
resulted in the recognition of $454,597 in gains on sale of properties.                                                                                                                                                                                                                                                          
|-- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | The Company sold two hotel and three restaurant properties in the first quarter
ended April 22, 2001, resulting in the recognition of $3,606,717 in gain on
sale of properties, and the deferral of an additional $717,941 to be recognized
in future periods under the installment method of accounting. The restaurant
properties were leased to third parties prior to the sales. Cumulative sales
prices for the five properties were $9,590,606, of which $2,258,102 was cash
proceeds.
|  
|C. |  | EARNINGS PER SHARE                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|  
|   |  | Earnings per share was computed by dividing net income by the weighted average
number of common shares outstanding. The following table reconciles earnings
and weighted average shares used in the earnings per share calculations for the
fiscal quarters and fiscal year-to-date periods ended October 6, 2002, and
October 7, 2001:                                                                                                                                                     

|                                   |                                                                  |  |                |            |                |  |            |           |            |  |   |            |   |  |   |           | 
|---------------------------------- | ---------------------------------------------------------------- |  | -------------- | ---------- | -------------- |  | ---------- | --------- | ---------- |  | - | ---------- | - |  | - | --------- | 
|                                   |                                                                  |  | 12 WEEKS ENDED |            | 40 WEEKS ENDED
|                                   |                                                                  |  |                |            |               
|                                   |                                                                  |  | October 6,     |            | October 7,     |  | October 6, |           | October 7,
|                                   |                                                                  |  | 2002           |            | 2001           |  | 2002       |           | 2001      
|                                   |                                                                  |  |                |            |                |  |            |           |           
|Basic:                             |                                                                  |  |                |            |                |  |            |           |            |  |   |            |   |  |   |          
|                                   | (Loss) earnings from continuing operations                       |  | $              | (1,471,436 | )              |  | $          | 77,673    |            |  | $ | (1,302,619 | ) |  | $ | 1,659,851 | 
|                                   | (Loss) earnings from discontinued operations                     |  |                | (25,044    | )              |  |            | 14,055    |            |  |   | 164,990    |   |  |   | 70,833    | 
|                                   |                                                                  |  |                |            |                |  |            |           |            |  |   |            |   |  |   |          
|                                   | Net (loss) earnings applicable to common stock                   |  | $              | (1,496,480 | )              |  | $          | 91,728    |            |  | $ | (1,137,629 | ) |  | $ | 1,730,684 | 
|                                   |                                                                  |  |                |            |                |  |            |           |            |  |   |            |   |  |   |          
|Shares:                            |                                                                  |  |                |            |                |  |            |           |            |  |   |            |   |  |   |          
|                                   | Weighted average common shares outstanding                       |  |                | 5,118,778  |                |  |            | 5,521,873 |            |  |   | 5,112,506  |   |  |   | 5,533,792 | 
|                                   |                                                                  |  |                |            |                |  |            |           |            |  |   |            |   |  |   |          
|Basic (loss) earnings per share:   |                                                                  |  |                |            |                |  |            |           |            |  |   |            |   |  |   |          
|                                   | Continuing operations                                            |  | $              | (0.29      | )              |  | $          | 0.01      |            |  | $ | (0.25      | ) |  | $ | 0.30      | 
|                                   | Discontinued operations                                          |  |                | 0.00       |                |  |            | 0.01      |            |  |   | 0.03       |   |  |   | 0.01      | 
|                                   |                                                                  |  |                |            |                |  |            |           |            |  |   |            |   |  |   |          
|                                   | Net (loss) earnings                                              |  | $              | (0.29      | )              |  | $          | 0.02      |            |  | $ | (0.22      | ) |  | $ | 0.31      | 
|                                   |                                                                  |  |                |            |                |  |            |           |            |  |   |            |   |  |   |          
|Diluted:                           |                                                                  |  |                |            |                |  |            |           |            |  |   |            |   |  |   |          
|                                   | (Loss) earnings from continuing operations                       |  | $              | (1,471,436 | )              |  | $          | 77,673    |            |  | $ | (1,302,619 | ) |  | $ | 1,659,851 | 
|                                   | (Loss) earnings from discontinued operations                     |  |                | (25,044    | )              |  |            | 14,055    |            |  |   | 164,990    |   |  |   | 70,833    | 
|                                   |                                                                  |  |                |            |                |  |            |           |            |  |   |            |   |  |   |          
|                                   | Net (loss) earnings applicable to common stock                   |  |                | (1,496,480 | )              |  |            | 91,728    |            |  |   | (1,137,629 | ) |  |   | 1,730,684 | 
|                                   | Dilutive effect of 7.5% convertible debentures                   |  |                |           |                |  |            |          |            |  |   |           |   |  |   |          | 
|                                   |                                                                  |  |                |            |                |  |            |           |            |  |   |            |   |  |   |          
|                                   | Numerator for diluted (loss) earnings per share                  |  | $              | (1,496,480 | )              |  | $          | 91,728    |            |  | $ | (1,137,629 | ) |  | $ | 1,730,684 | 
|Shares:                            |                                                                  |  |                |            |                |  |            |           |            |  |   |            |   |  |   |          
|                                   | Weighted average common shares outstanding                       |  |                | 5,118,778  |                |  |            | 5,521,873 |            |  |   | 5,112,506  |   |  |   | 5,533,792 | 
|                                   | Effect of dilutive securities (options)                          |  |                |           |                |  |            | 82,143    |            |  |   |           |   |  |   | 71,819    | 
|                                   | Effect of dilutive securities (7.5% convertible debentures)      |  |                |           |                |  |            |          |            |  |   |           |   |  |   |          | 
|                                   |                                                                  |  |                |            |                |  |            |           |            |  |   |            |   |  |   |          
|                                   | Weighted average common and common equivalent
shares outstanding |  |                | 5,118,778  |                |  |            | 5,604,016 |            |  |   | 5,112,506  |   |  |   | 5,605,611 | 
|                                   |                                                                  |  |                |            |                |  |            |           |            |  |   |            |   |  |   |          
|Diluted (loss) earnings per share: |                                                                  |  |                |            |                |  |            |           |            |  |   |            |   |  |   |          
|                                   | Continuing operations                                            |  | $              | (0.29      | )              |  | $          | 0.01      |            |  | $ | (0.25      | ) |  | $ | 0.30      | 
|                                   | Discontinued operations                                          |  |                | 0.00       |                |  |            | 0.01      |            |  |   | 0.03       |   |  |   | 0.01      | 
|                                   |                                                                  |  |                |            |                |  |            |           |            |  |   |            |   |  |   |          
|                                   | Net (loss) earnings                                              |  | $              | (0.29      | )              |  | $          | 0.02      |            |  | $ | (0.22      | ) |  | $ | 0.31      | 
|                                   |                                                                  |  |                |            |                |  |            |           |            |  |   |            |   |  |   |          





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##### Table of Contents





|D. |  | OPERATING SEGMENT INFORMATION                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | The Companys significant operating segments are hotel operations,
franchising, management and reservation services, and construction
and development. None of the Companys segments conduct foreign
operations. Operating profit includes the operating revenues and
expenses directly identifiable with the operating segment.
Identifiable assets are those used directly in the operations of
each segment. A summary of the Companys operations by segment
follows (in thousands of dollars):

|                               |                                                  |                                                  |                |                                     |        |                |        |                |        |         |       |         |         |        |         |         |        |        |        |  
|------------------------------ | ------------------------------------------------ | ------------------------------------------------ | -------------- | ----------------------------------- | ------ | -------------- | ------ | -------------- | ------ | ------- | ----- | ------- | ------- | ------ | ------- | ------- | ------ | ------ | ------ | -
|                               |                                                  |                                                  |                |                                     |        | 12 WEEKS ENDED |        | 40 WEEKS ENDED
|                               |                                                  |                                                  |                |                                     |        |                |        |               
|                               |                                                  |                                                  |                |                                     |        | Oct. 6,        |        | Oct. 7,        |        | Oct. 6, |       | Oct. 7,
|                               |                                                  |                                                  |                |                                     |        | 2002           |        | 2001           |        | 2002    |       | 2001   
|                               |                                                  |                                                  |                |                                     |        |                |        |                |        |         |       |        
|Revenues:                      |                                                  |                                                  |                |                                     |        |                |        |                |        |         |       |         |         |        |         |        
|                               | Hotel revenues                                   |                                                  | $              | 4,405                               |        |                | $      | 3,852          |        |         | $     | 14,791  |         |        | $       | 13,424  |       
|                               | Franchising, management and reservation services |                                                  |                | 1,773                               |        |                |        | 1,379          |        |         |       | 5,715   |         |        |         | 4,043   |       
|                               | Construction and development                     |                                                  |                | 3,067                               |        |                |        | 12,583         |        |         |       | 9,642   |         |        |         | 29,262  |       
|                               | Elimination of intersegment revenue              |                                                  |                | (560                                | )      |                |        | (5,148         | )      |         |       | (4,094  | )       |        |         | (12,791 | )     
|                               |                                                  |                                                  |                |                                     |        |                |        |                |        |         |       |         |         |        |         |        
|                               |                                                  |                                                  | Total revenues |                                     | $      | 8,685          |        |                | $      | 12,666  |       |         | $       | 26,054 |         |         | $      | 33,938 |       
|                               |                                                  |                                                  |                |                                     |        |                |        |                |        |         |       |         |         |        |         |        
|Operating loss:                |                                                  |                                                  |                |                                     |        |                |        |                |        |         |       |         |         |        |         |        
|                               |                                                  | Hotel                                            |                | $                                   | 252    |                |        | $              | 521    |         |       | $       | 2,093   |        |         | $       | 2,349  |       
|                               |                                                  | Franchising, management and reservation services |                |                                     | (1,546 | )              |        |                | (1,113 | )       |       |         | (11,531 | )      |         |         | (4,195 | )     
|                               |                                                  |                                                  |                |                                     |        |                |        |                |        |         |       |         |         |        |         |        
|                               |                                                  | Construction and development                     |                |                                     | (101   | )              |        |                | 520    |         |       |         | (1,156  | )      |         |         | 1,352  |       
|                               |                                                  |                                                  |                |                                     |        |                |        |                |        |         |       |         |         |        |         |        
|                               |                                                  |                                                  |                | Total operating loss                |        | $              | (1,395 | )              |        | $       | (72   | )       |         | $      | (10,594 | )       |        | $      | (494   | )
|                               |                                                  |                                                  |                |                                     |        |                |        |                |        |         |       |         |         |        |         |        
|Capital expenditures:          |                                                  |                                                  |                |                                     |        |                |        |                |        |         |       |         |         |        |         |        
|                               |                                                  | Hotel                                            |                | $                                   | 488    |                |        | $              | 4,916  |         |       | $       | 4,196   |        |         | $       | 11,978 |       
|                               |                                                  | Franchising, management and reservation services |                |                                     | 205    |                |        |                | 534    |         |       |         | 822     |        |         |         | 2,061  |       
|                               |                                                  | Construction and development                     |                |                                     | 26     |                |        |                | 72     |         |       |         | 1,867   |        |         |         | 72     |       
|                               |                                                  |                                                  |                |                                     |        |                |        |                |        |         |       |         |         |        |         |        
|                               |                                                  |                                                  |                | Total capital expenditures          |        | $              | 719    |                |        | $       | 5,522 |         |         | $      | 6,885   |         |        | $      | 14,111 |  
|                               |                                                  |                                                  |                |                                     |        |                |        |                |        |         |       |         |         |        |         |        
|Depreciation and amortization: |                                                  |                                                  |                |                                     |        |                |        |                |        |         |       |         |         |        |         |        
|                               |                                                  | Hotel                                            |                | $                                   | 783    |                |        | $              | 737    |         |       | $       | 2,673   |        |         | $       | 2,584  |       
|                               |                                                  | Franchising, management and reservation services |                |                                     | 220    |                |        |                | 232    |         |       |         | 665     |        |         |         | 814    |       
|                               |                                                  | Construction and development                     |                |                                     | 14     |                |        |                | 13     |         |       |         | 45      |        |         |         | 44     |       
|                               |                                                  |                                                  |                |                                     |        |                |        |                |        |         |       |         |         |        |         |        
|                               |                                                  |                                                  |                | Total depreciation and amortization |        | $              | 1,017  |                |        | $       | 982   |         |         | $      | 3,383   |         |        | $      | 3,442  |  
|                               |                                                  |                                                  |                |                                     |        |                |        |                |        |         |       |         |         |        |         |        

|              |                                                  |              |   |         |         |              |   |         |         | 
|------------- | ------------------------------------------------ | ------------ | - | ------- | ------- | ------------ | - | ------- | ------- | 
|              |                                                  |              |   | As of   |         | As of       
|              |                                                  |              |   | Oct. 6, |         | December 30,
|              |                                                  |              |   | 2002    |         | 2001        
|              |                                                  |              |   |         |         |             
|Total assets: |                                                  |              |   |         |         |              |   |        
|              | Hotel                                            |              | $ | 146,460 |         |              | $ | 152,142 |        
|              | Franchising, management and reservation services |              |   | 37,994  |         |              |   | 44,500  |        
|              | Construction and development                     |              |   | 9,296   |         |              |   | 9,945   |        
|              |                                                  |              |   |         |         |              |   |        
|              |                                                  | Total assets |   | $       | 193,750 |              |   | $       | 206,587 | 
|              |                                                  |              |   |         |         |              |   |        





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##### Table of Contents





|E. |  | CONTINGENCIES                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|-- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | The Company is a party to legal proceedings incidental to its
business. In the opinion of management, any ultimate liability with
respect to these actions will not materially affect the consolidated
financial position or results of operations of the Company.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|  
|   |  | The construction of a hotel was completed for a third party during
2001 and a balance of approximately $2,000,000 remains uncollected.
The Company had a lien against the property and filed an arbitration
claim against the owner. The arbitration hearing was originally
scheduled for July 22, 2002, but was rescheduled for August 12,
2002, and began on that date. Final arguments were deferred to
September 30, 2002, and were held on that date. On October 30,
2002, the Company was awarded substantially all of its claim, to be
paid within 30 days of the award.                                                                                                                                                                                                                                                                                                                                                                  
|  
|   |  | On June 28, 2001, the Company filed an arbitration proceeding
against Prime Hospitality Corp., seeking $20,000,000 in monetary
damages related to the non-use of the Companys reservation center
as agreed. The arbitration hearing was held during the week of
April 15, 2002. The results of the arbitration proceeding were
released on June 28, 2002. The Arbitrator ruled that Primes
material breach of contract caused the Company to lose $8.9 million
in anticipated profit under the terms of the Agreement. The
Arbitrator accordingly awarded the Company its full damages of $8.9
million, to be paid within 30 days of the award. Prime paid the
award by wire transfer to an escrow account on August 1, 2002. The
escrow agent wired the funds to the Company, and the Company
received the $8.9 million on August 2, 2002. The Company recorded
the $8.9 million receivable and earnings in its second fiscal
quarter of 2002.
|  
|F. |  | RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|  
|   |  | In June 2001, the Financial Accounting Standards Board (FASB) issued
SFAS No. 141, Business Combinations, (SFAS No. 141) and SFAS No.
142, Goodwill and Other Intangible Assets(SFAS No. 142). SFAS
No. 141 was effective July 1, 2001, and SFAS No. 142 was effective
January 1, 2002. Under the new rules in SFAS No. 142, goodwill and
indefinite lived intangible assets are no longer amortized effective
January 1, 2002, but are subject to annual impairment tests. Other
intangible assets will continue to be amortized over their useful
lives.                                                                                                                                                                                                                                                                                                                                                                                   
|  
|   |  | The Company has applied the new rules on accounting for goodwill and
intangible assets beginning in the first quarter of 2002. The
Company has completed the required transitional impairment tests,
and the results of the tests had no effect on operations or
financial position of the Company. As discussed in Note H, events
that occurred in the second quarter of 2002 caused certain
intangible assets to become worthless and be written off.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          





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| |  | A reconciliation of previously reported net income to the pro forma
amounts adjusted for the exclusion of goodwill and indefinite lived
intangible assets amortization, net of related income tax effect,
follows:
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                                                   |  |                |            |                |  |            |         |            |  |   |            |   |  |   |           | 
|------------------------------------------------------------------ |  | -------------- | ---------- | -------------- |  | ---------- | ------- | ---------- |  | - | ---------- | - |  | - | --------- | 
|                                                                   |  | 12 WEEKS ENDED |            | 40 WEEKS ENDED
|                                                                   |  |                |            |               
|                                                                   |  | October 6,     |            | October 7,     |  | October 6, |         | October 7,
|                                                                   |  | 2002           |            | 2001           |  | 2002       |         | 2001      
|                                                                   |  |                |            |                |  |            |         |           
|Reported net (loss) earnings                                       |  | $              | (1,496,480 | )              |  | $          | 91,728  |            |  | $ | (1,137,629 | ) |  | $ | 1,730,684 | 
|Add: Goodwill and indefinite lived
assets amortization, net of tax |  |                |           |                |  |            | 60,190  |            |  |   |           |   |  |   | 200,646   | 
|                                                                   |  |                |            |                |  |            |         |            |  |   |            |   |  |   |           | 
|Pro forma adjusted net earnings                                    |  | $              | (1,496,480 | )              |  | $          | 151,918 |            |  | $ | (1,137,629 | ) |  | $ | 1,931,330 | 
|                                                                   |  |                |            |                |  |            |         |            |  |   |            |   |  |   |           | 



| |  | In August 2001, the FASB issued SFAS No. 144, Accounting for
the Impairment or Disposal of Long-Lived Assets(SFAS No. 144),
which supercedes SFAS No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of,
(SFAS No. 121), and the accounting and reporting provisions of APB
Opinion No. 30, Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions. SFAS No. 144 removes goodwill from its
scope and clarifies other implementation issues related to SFAS No.
121. SFAS No. 144 also provides a single framework for evaluating
long-lived assets to be disposed of by sale. The provisions of this
statement were adopted at the beginning of fiscal 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | In April 2002, the FASB issued SFAS No. 145, Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13,
and Technical Corrections.SFAS No. 145 rescinds Statement 4, which
required all gains and losses from extinguishment of debt to be
aggregated and, if material, classified as an extraordinary item,
net of related income tax effect. Since the issuance of Statement
4, the use of debt extinguishment has become part of the risk
management strategy of many companies, including the Company. These
debt extinguishments do not meet the criteria for classification as
extraordinary items in APB Opinion No. 30, Reporting the Results of
Operations  Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions, and therefore, should not be classified as
extraordinary after the adoption of SFAS No. 145. Adoption of SFAS
No. 145 is required for fiscal years beginning after May 15, 2002,
but earlier application is encouraged. The Company elected to adopt
the provisions of SFAS No. 145 at the beginning of fiscal 2002. The
extraordinary gain on extinguishment of debt of $591,694 for the 12
weeks ended October 7, 2001, and $847,859 for the 40 weeks ended
October 7, 2001, previously classified as an extraordinary item in
prior periods has been reclassified to conform with the provisions
of Statement 145.





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|G. |  | GUESTHOUSE FRANCHISE ACQUISITION                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|-- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | On May 3, 2002, the Company acquired all of the common stock of
GuestHouse International Franchise Systems, Inc. (GuestHouse) for
$1.6 million of cash and incurred $100,000 transaction costs. The
estimated fair values of assets acquired were $184,000 for accounts
receivable, $750,000 for franchise rights with an estimated useful
life of three years, and $766,000 for goodwill. The gross carrying
amount of franchise rights was $750,000 as of October 6, 2002, and
accumulated amortization was $108,000. Amortization expense for the
12 weeks and 40 weeks ended October 6, 2002, was $57,000 and
$108,000, respectively. Franchise rights will be amortized in the
amounts of $166,000 in 2002, $250,000 in 2003, $250,000 in 2004, and
$84,000 in 2005. All goodwill is in the franchising and management
segment. The results of operations of GuestHouse are included in
the consolidated statement of earnings from the acquisition date
forward. GuestHouse is the exclusive franchisor of the GuestHouse
Inns & Suites hotel brand, consisting of 71 properties open and
operating (including 11 converted from Shoneys Inns). As a result
of the acquisition, the Company will now be in charge of the
operation and growth of the GuestHouse brand, and expects the
transaction to be accretive to earnings beginning with the fiscal
year ending December 29, 2002. On May 21, 2002, the Company
announced its plan to convert the name of the Shoneys Inns and
Shoneys Inns & Suites hotel chain to GuestHouse International Inns
& Suites as soon as practical. Seven of the Company-owned Shoneys
Inns have thus far been converted to the GuestHouse brand, three of
which were converted in the third quarter ended October 6, 2002.
Four franchised Shoneys Inns were converted to the GuestHouse brand
in the third quarter. The following pro forma information reflects
the operations of GuestHouse in 2002 and 2001, as if the transaction
had occurred as of the first day of the period reported on (in
thousands, except per share data):

|                                           |         |   |                |       |                |   |        |       |   |  |         |  |         |   |        |       |   |   |        |      |  |  |  |  | 
|------------------------------------------ | ------- | - | -------------- | ----- | -------------- | - | ------ | ----- | - |  | ------- |  | ------- | - | ------ | ----- | - | - | ------ | ---- |  |  |  |  | 
|                                           |         |   | 12 Weeks Ended |       | 40 Weeks Ended
|                                           |         |   |                |       |               
|                                           |         |   | Oct. 6,        |       | Oct. 7,        |   |        |       |   |  | Oct. 6, |  | Oct. 7, |   |        |       |  
|                                           |         |   | 2002           |       | 2001           |   |        |       |   |  | 2002    |  | 2001    |   |        |       |  
|                                           |         |   |                |       |                |   |        |       |   |  |         |  |         |   |        |       |  
|Net operating revenue                      |         | $ | 8,685          |       |                | $ | 13,113 |       |   |  |         |  |         | $ | 26,550 |       |   | $ | 35,206 |     
|Earnings (loss) from
continuing
operations |         |   | (1,471         | )     |                |   | (194   | )     |   |  |         |  |         |   | (1,443 | )     |   |   | 499    |     
|Net income (loss)                          |         |   | (1,496         | )     |                |   | (180   | )     |   |  |         |  |         |   | (1,278 | )     |   |   | 570    |     
|Earnings (loss) per share:                 |         |   |                |       |                |   |        |       |   |  |         |  |         |   |        |       |   |   |        |     
|                                           | Basic   |   | $              | (0.29 | )              |   | $      | (0.03 | ) |  |         |  |         |   | $      | (0.25 | ) |   | $      | 0.10 | 
|                                           | Diluted |   | $              | (0.29 | )              |   | $      | (0.03 | ) |  |         |  |         |   | $      | (0.25 | ) |   | $      | 0.10 | 



| |  | The pro forma results of operations do not purport to represent what
the Companys results would have been had such transaction, in fact,
occurred at the beginning of the periods presented or to project the
Companys results of operations in any future period.
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------





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|H. |  | WRITE-OFF OF INTANGIBLE ASSETS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | The Company sold its interests in 27 Sumner Suites hotels in 2000 to
Prime Hospitality Corp., who subsequently converted all of them to
their AmeriSuites hotel brand. The Company continued to hold the
Sumner Suites trademark with the possibility of using it to brand
future hotels it might develop or acquire. In the second quarter of
2002, management made the decision to abandon the trademark since
the use of the name by the Company in the future is highly unlikely.
Consequently, the remaining balance of $376,256 for the Sumner
Suites trademark, which was included in the franchising and
management segment, was written off in the second quarter.                                                                                                                                                                                                                                                                                                                                                 
|  
|   |  | The Company carried intangible assets (deferred charges of
$4,045,279 and goodwill of $2,387,100) related to the acquisition
and modifications of the franchising rights for Shoneys Inns and
Shoneys Inns & Suites at $6,432,379, which was included in the
franchising and management segment. The Company has been
unsuccessful in its efforts to sell new franchises for at least a
year, and existing franchises have exited the Shoneys Inn system
for several years. In the second quarter of 2002, the Company
acquired the exclusive franchising rights for the GuestHouse
International Inns & Suites brand. The Company has decided to
convert all existing Shoneys Inns to the GuestHouse brand and to
franchise only the GuestHouse brand in the future. No more attempts
will be made to franchise the Shoneys Inn brand. As a result, the
value of the Shoneys Inn franchising rights has been determined to
be worthless. Consequently, the balance of $6,432,379 was written
off in the second quarter.
|  
|I. |  | RELATED PARTY TRANSACTION                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|  
|   |  | The president and chief executive officer renewed his non-interest
bearing, unsecured, full-recourse promissory note in the amount of
$937,500 that came due on February 11, 2002 with the Company for one
year at an interest rate of prime plus 250 basis points.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           





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##### Table of Contents



ShoLodge, Inc. and Subsidiaries
Managements Discussion and Analysis of Financial
Condition and Results of Operations

Overview

The following discussion should be read in conjunction with the Companys
condensed consolidated financial statements and notes thereto appearing
elsewhere in this quarterly report.

The Company is an operator and the exclusive franchisor of Shoneys Inns.
As of October 6, 2002, the Shoneys Inn lodging system consists of 64 Shoneys
Inns containing 5,921 rooms of which 5 containing 585 rooms are owned and
operated by the Company. Shoneys Inns are currently located in 15 states with
a concentration in the Southeast. Shoneys Inns operate in the upper economy
limited-service segment and are designed to appeal to both business and leisure
travelers, with rooms usually priced between $40 and $65 per night. The
typical Shoneys Inn includes 60 to 120 rooms and, in most cases, meeting
rooms.

On May 2, 2002, the Company became the exclusive franchisor of GuestHouse
Inns & Suites, which as of October 6, 2002, consisted of 69 properties
containing 4,945 rooms open and operating in 20 states, including nine states
in which Shoneys Inns operate. GuestHouse Inns & Suites operate in the
mid-market limited service segment, with rooms typically priced between $50 and
$70 per night. The properties range in size from 21 to 180 rooms, and in most
cases, contain meeting rooms. They are designed to appeal to both business and
leisure travelers.

The Company plans to convert the name of the Shoneys Inn chain to the
GuestHouse brand as soon as practical. Seven of the GuestHouse Inns & Suites
containing 788 rooms included above as of October 6, 2002, were Company-owned
Shoneys Inns & Suites prior to their conversion to the GuestHouse brand in the
second and third quarters of this year.

The Companys operations have been supplemented by contract revenues from
construction and development of hotels for third parties. Revenues from these
activities have varied widely from period to period, depending upon whether the
Companys construction and development activities were primarily focused on its
own facilities or on outside projects. Construction revenues are recognized on
the percentage of completion basis.

The Company has historically reported lower earnings in the first and
fourth quarters of the year due to the seasonality of the Companys business.
The results of operations for the quarters ended October 6, 2002 and October 7,
2001 are not necessarily indicative of the operating results for the entire
year.





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Results of Operations

For the Fiscal Quarters and Fiscal Year-to-date Periods Ended October 6, 2002
and October 7, 2001

Total operating revenues for the quarter ended October 6, 2002, were $8.7
million, or 31.4% less than the total operating revenues of $12.7 million
reported for the third quarter of 2001. For the fiscal year-to-date period
ended October 6, 2002, total operating revenues were $26.1 million, or 23.2%
less than the total operating revenues of $33.9 million for the comparable
period of 2001. The decreases were due to a decrease in construction and
development revenues of $5.0 million and $10.9 million in the third quarter and
in the first three quarters, respectively.

Revenues from hotel operations in the third fiscal quarter increased by
$615,000, or 21.2%, from the $2.9 million reported for the same period last
year. For the 11 same hotels opened for all of both quarterly periods, a
decrease of 3.4% in average daily room rates, from $51.59 in the third quarter
of 2001 to $49.85 in the third quarter of 2002, and a decrease in average
occupancy rates on these hotels from 52.0% to 43.7% this year, were the primary
causes of a decrease in same hotel revenues of 20.2% from $2.9 million in the
third quarter of 2001 to $2.3 million in the third quarter of 2002. The
Company sold two Shoneys Inns in April of 2001 and one Shoneys Inn in June of
2002, acquired a Baymont Inn & Suites in November of 2001, and opened two
AmeriSuites hotels  one in October of 2001 and one in February of 2002. The
revenue effects of the Shoneys Inn sold in June of 2002 is reflected in
discontinued operations. The three hotels added since the second quarter of
2001 contributed $1.2 million to hotel revenues in the third quarter of 2002.

Revenues from hotel operations in the first three quarters increased by
$1.4 million, or 14.2%, from the $10.1 million reported for the same period
last year. For the 11 same hotels opened for all of both year-to-date periods,
a decrease of 1.4% in average daily room rates, from $50.70 in 2001 to $50.00
in 2002, and a decrease in average occupancy rates on these hotels from 51.8%
to 45.3% this year, were the primary causes of a decrease in same hotel
revenues of 14.8% from $9.5 million in the first three fiscal quarters of 2001
to $8.1 million in the first three fiscal quarters of 2002. The two Shoneys
Inns sold in the second quarter of 2001 contributed $638,000 to 2001
year-to-date hotel revenues. The three hotels added since the second quarter of
2001 contributed $3.5 million to hotel revenues in the first three quarters of
2002.

The Company owns and operates primarily Shoneys Inns (in the process of
being converted to GuestHouse Inns & Suites). RevPAR (revenue per available
room) for all Company-owned Shoneys Inns (including the seven already
converted to GuestHouse Inns & Suites during the second and third quarters of
this year) decreased from $26.82 in the third quarter of 2001 to $21.80 in the
third quarter of 2002. These RevPARs also represent the 11 Shoneys Inns /
GuestHouse same-hotels RevPAR. For the first three quarters of this year,
RevPAR for all Company-owned Shoneys Inns (including the





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seven converted to GuestHouse Inn & Suites) decreased from $26.22 in the first
three quarters of 2001 to $22.66 in the first three quarters of 2002. The 11
Shoneys Inns / GuestHouse same-hotels RevPAR decreased from $26.24 in the
first three quarters of 2001 to $22.66 in the first three quarters of 2002.

Franchising, management and reservation service revenues increased by
$417,000, or 39.4%, in the third quarter of 2002 from the third quarter of
2001. Initial and termination franchise fees decreased by $34,000, royalty
fees increased by $200,000, management fees decreased by $394,000 and
reservation fees increased by $645,000 from the third quarter of last year due
to a significant increase in the number of hotel properties served by the
reservation center. Initial franchise and termination fee revenue varies from
quarter to quarter depending on the level of franchise sales activities and
terminations. Franchising, management and reservation service revenues
increased by $1.8 million, or 59.9%, in the first three quarters of 2002 from
the first three quarters of 2001. Initial and termination franchise fees
decreased by $31,000, royalty fees increased by $320,000, management fees
decreased by $842,000 and reservation fees increased by $2.3 million from the
first three quarters of last year. Management fee revenues on 16 hotel
management contracts which became effective April 20, 2001, have not been
accrued nor collected in 2002, but were accrued in the third quarter of 2001
and in the first three quarters of 2001 in the amount of $391,000 and $835,000,
respectively. The management fee revenue on these 16 management contracts will
be recorded in the future only as payments are received.

Revenues from construction and development activities were $2.9 million in
the third quarter of 2002 and $7.1 million in the first three quarters of 2002
on three third party construction contracts in progress, versus $7.9 million
and $18.0 million in the third quarter and first three quarters of 2001,
respectively, on six third party construction contracts in progress. Revenues
from construction and development can vary widely from period to period
depending upon the volume of outside contract work and the timing of those
projects. The events of September 11, 2001, have had a significantly negative
impact on the Companys construction and development opportunities.

Rent income in the third quarter of 2002 decreased by $22,000, to
$778,000, from $800,000, in the third quarter of 2001. Rent income in the first
three quarters of 2002 decreased by $53,000, to $2.6 million, from $2.7
million, in the first three quarters of 2001. The primary source of rent income
is from the lease of three AmeriSuites hotels which are being operated by
Prime Hospitality Corp. The decrease in year-to-date rent income was due to
the sale of some restaurants to the lessees.

Operating expenses from hotel operations for the third quarter of 2002
increased by $788,000, or 33.5%, from $2.4 million in the third quarter of
2001. Hotel operating expenses on the 11 same-hotels were $2.3 million in the
third quarter of 2002 compared to the same amount in the third quarter of 2001.
The operating expenses as a percentage of operating revenues for this activity
increased from 81.0% in the third quarter of 2001 to 89.2% in the third quarter
of 2002; operating expenses as a percentage of operating





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revenues on the 11 same-hotels increased from 80.5% in the third quarter of
2001 to 99.7% in the third quarter of 2002. Hotel operating expenses on
same-hotels were not reduced as much as the decline in hotel revenues, thus
reducing gross operating profit margin on these hotels.

Operating expenses from hotel operations for the first three quarters of
2002 increased by $1.5 million, or 19.3%, from $7.8 million in the first three
quarters of 2001. Hotel operating expenses on the 11 same-hotels were $7.1
million in the first three quarters of 2002 compared to $7.3 million in the
first three quarters of 2001. The operating expenses as a percentage of
operating revenues for this activity increased from 77.4% in the first three
quarters of 2001 to 80.9% in the first three quarters of 2002; operating
expenses as a percentage of operating revenues on the 11 same-hotels increased
from 77.3% in the first three quarters of 2001 to 87.4% in the first three
quarters of 2002. Hotel operating expenses on same-hotels were not reduced as
much as the decline in hotel revenues, thus reducing gross operating profit
margin on these hotels.

Franchising, management and reservation service operating expenses
increased by $664,000, or 134.2%, from the third quarter of 2001 to the third
quarter of 2002, and by $1.7 million, or 116.1%, from the first three quarters
of 2001 to the first three quarters of 2002. The increases were primarily in
reservation center expenses incurred in order to support the additional
revenues earned from services provided to additional chains and independent
hotel properties since the third quarter of 2001.

Construction and development costs in the third quarter of 2002 were $3.1
million on the three third party construction contracts in progress versus $7.4
million in the third quarter of 2001 on the six third party construction
contracts in progress at that time. Construction and development costs in the
first three quarters of 2002 were $8.3 million on the three third party
construction contracts in progress versus $16.8 million in the first three
quarters of 2001 on the six third party construction contracts in progress at
that time.

Rent expense increased by $5,000 in the third quarter of this year from
last years third quarter, and in the first three quarters of this year from
last years first three quarters. The Company leased only one hotel property
in both years.

General and administrative expenses increased by $224,000, or 16.9%, from
the third quarter of 2001, and increased by $867,000, or 19.6%, from the first
three quarters of 2001. The increases were due primarily to increased
professional fees and insurance costs. The increase in professional fees was
due primarily to legal fees incurred in the arbitration proceeding against
Prime Hospitality Corp. (see discussion of arbitration award below).

Depreciation and amortization expense increased by $34,000, or 3.5%, from
the third quarter of 2001. A reduction of $97,000 was due to the adoption of
Statement of Financial Accounting Standard No. 142, Goodwill and Other
Intangible Assetseffective





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with the 2002 fiscal year. Increases in depreciation of $139,000 was due
to the three hotels added since the third quarter of 2001. Depreciation of the
11 hotels owned and operated for all of both quarterly periods decreased by
$94,000, and depreciation increased by $86,000 due to other net additions to
depreciable assets other than hotels.

Depreciation and amortization expense decreased by $59,000, or 1.7%, from
the first three quarters of 2001. A reduction of $324,000 was due to the
adoption of Statement of Financial Accounting Standard No. 142, Goodwill and
Other Intangible Assetseffective with the 2002 fiscal year. Further
reductions of $118,000 were due to the sale of the two hotels in the first
quarter of 2001, offset with increases in depreciation of $476,000 due to the
three hotels added since the third quarter of 2001. Depreciation of the 11
hotels owned and operated for all of both quarterly periods decreased by
$267,000, and depreciation increased by $174,000 due to other net additions to
depreciable assets other than hotels.

The Company sold its interests in 27 Sumner Suites hotels in 2000 to Prime
Hospitality Corp., who subsequently converted all of them to their AmeriSuites
hotel brand. The Company continued to hold the Sumner Suites trademark with
the possibility of using it to brand future hotels it might develop or acquire.
In the second quarter of 2002, management made the decision to abandon the
trademark since the use of the name by the Company in the future is highly
unlikely. Consequently, the remaining balance of $376,000 for the Sumner
Suites trademark was written off in the second quarter. The Company carried
intangible assets (deferred charges and goodwill) related to the acquisition
and modifications of the franchising rights for Shoneys Inns and Shoneys Inns
& Suites at $6.4 million. The Company has been unsuccessful in its efforts to
sell new franchises for at least a year, and existing franchises have exited
the Shoneys Inn system for several years. In the second quarter of 2002, the
Company acquired the exclusive franchising rights for the GuestHouse
International Inns & Suites brand. The Company has decided to convert all
existing Shoneys Inns to the GuestHouse brand and to franchise only the
GuestHouse brand in the future. No more attempts will be made to franchise the
Shoneys Inn brand. As a result, the value of the Shoneys Inn franchising
rights has been determined to be worthless. Consequently, the balance of $6.4
million was written off in the second quarter.

The gain of $450,000 recognized on sale of property in the third quarter
of 2002 was primarily from the sale of two restaurants in the quarter to the
operator/lessees. The net gain recognized on sale of property in the first
three quarters of 2002 totaled $597,000, primarily from the sale of the two
restaurants and excess land, partially offset by a loss of $265,000 due to
costs incurred on an exchange of two hotels related to the sale of leasehold
interests in fiscal 2000. The gain recognized on the sales of property in the
first three quarters of 2001 totaled $3.8 million and was primarily from the
Companys sale of two hotels and three restaurants, a portion of which the gain
was deferred on one of the hotels and two of the restaurants and which is being
recognized on the installment method of accounting until full accrual
accounting is warranted.





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In the third quarter of 2002, the Company sold all of its
available-for-sale securities, recognizing a gain of $315,000.

Pursuant to a plan adopted in 1999 to repurchase a portion of the
Companys outstanding subordinated indebtedness in the open market and in
negotiated transactions, the Company repurchased $550,000 of its 7.50%
subordinated debentures in the third quarter of 2002 at a discount, recognizing
a gain of $101,000, and in the first three quarters of 2002, the Company
repurchased $1.6 million of its 7.50% subordinated debentures at a discount,
recognizing a gain of $389,000. In the third quarter of 2001, the Company
repurchased $2.1 million of these debentures at a discount, recognizing a gain
of $592,000, and in the first three quarters of 2001, the Company repurchased
$2.9 million of its 7.50% subordinated debentures at a discount, recognizing a
gain of $848,000. Additionally, in the second quarter of 2002, the Company, in
a negotiated transaction, exchanged $8.2 million face value of its previously
repurchased senior subordinated notes for $7.5 million of its outstanding 7.50%
subordinated debentures, recognizing a gain of $2.2 million. The Company
adopted Statement of Financial Accounting Standards No. 145 at the beginning of
fiscal 2002. Accordingly, gains and losses from debt extinguishments are no
longer classified in the statement of earnings as extraordinary items. See
further discussion in Liquidity and Capital Resources below.

Interest expense increased by $492,000, or 29.1%, while interest income
decreased by $127,000, or 9.4%, from the third quarter of 2001. For the first
three quarters of 2002, interest expense increased by $901,000, or 15.0%, while
interest income decreased by $840,000, or 16.5%, from the first three quarters
of 2001. The increase in interest expense was due primarily to higher levels
of borrowing on the Companys bank credit facilities in the first three
quarters of 2002 than in the first three quarters of 2001. Interest income
increased due to seller financing of a portion of the sales price of two
Shoneys Inns sold to franchisees in April of 2001, and one Shoneys Inn sold
in June of 2002, but was more than offset by decreases in the interest rates
charged on other notes receivable due to the general decline in interest rates
and the interest rate terms of those notes.

The Company had filed an arbitration claim against Prime Hospitality Corp.
in June of 2001 seeking monetary damages related to the non-use of the
Companys reservation center as agreed. In June of 2002, the Arbitrator ruled
that Primes material breach of contract caused the Company to lose $8.9
million in anticipated profit under the terms of the agreement, and accordingly
awarded the Company its full damages of $8.9 million. Prime paid the award to
the Company on August 1, 2002.

The effective tax rate differs from the federal and state statutory rates
as a result of interest on deferred gains and the non-deductibility of the
write-off of certain intangible assets in the first three quarters of this
year.

Discontinued operations resulted from the sale of one hotel in the second
quarter of 2002. The effect of this hotels operations and the gain on the
sale of the hotel has





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been removed from operating earnings and from the gain on
sale of property and leasehold
interests in accordance with Statement of Financial Accounting Standards
No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets.

Liquidity and Capital Resources

The Companys cash flows used in operating activities were $1.9 million in
the first three quarters of 2002, compared with $1.6 million used in operating
activities in the first three quarters of 2001.

The Companys cash flows used in investing activities were $2.0 million in
the first three quarters of 2002, compared with $367,000 for the comparable
period in 2001. The Companys capital expenditures are principally for the
construction and acquisition of new lodging facilities and the purchase of
equipment and leasehold improvements. Capital expenditures for such purposes
were $6.9 million in the first three quarters of 2002 and $14.1 million in the
first three quarters of 2001. Proceeds from the sale of property and leasehold
interests were $2.8 million in the first three quarters of 2002 versus $2.9
million for the comparable period in 2001. Proceeds from the sale of
available-for-sale investment securities were $428,000 in the first three
quarters of 2002.

Net cash provided by financing activities was $2.3 million in the first
three quarters of 2002 compared with $1.4 million used in financing activities
in the first three quarters of 2001. Borrowings, net of repayments, on
long-term debt and capitalized lease obligations were $3.0 million in the first
three quarters of 2002 versus $975,000 repayments in excess of borrowings in
the first three quarters of 2001. Borrowings in the first three quarters of
2002 include the re-issuance at a discount from face value (in a negotiated
transaction) of $8.2 million of long-term debt previously repurchased in the
open market or in privately negotiated transactions. The repayments in the
first three quarters of 2002 and the first three quarters of 2001 include $9.1
million and $2.9 million, respectively, of long-term debt repurchased in the
open market or in privately negotiated transactions. In the first three
quarters of 2002, the Company repurchased 25,000 shares of its common stock for
$148,000 pursuant to a plan to repurchase up to $23.0 million of the Companys
outstanding common stock; in the first three quarters of 2001, the Company
repurchased 52,000 shares of its common stock for $270,000.

The Company established a three-year credit facility with a financial
institution effective August 27, 1999. An amendment to the credit facility
became effective October 3, 2001, which, among other changes, extended the
maturity to September 30, 2004. The credit facility is for $30 million (a $10
million term loan and a $20 million revolving line of credit), secured by a
pledge of certain promissory notes payable to the Company received in
connection with the sale of 16 of the Companys lodging facilities in the third
quarter of 1998. The borrowing base is the lower of (a) 85% of the outstanding
principal amount of the pledged notes, (b) 65% of the appraised market value of
the underlying real property collateral securing the pledged notes, or (c) $30
million. Effective October 3, 2001, the interest rate on the term loan is at
the lenders base rate plus 100 basis points,





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and the interest rate on the
revolving line of credit is at the lenders base rate plus 250 basis points,
with a floor of 7.00% on both portions of the facility. The Company is to
pay commitment fees on the unused portion of the facility at .50% per annum.
The credit facility also contains covenants which limit or prohibit the
incurring of certain additional indebtedness in excess of a specified debt to
total capital ratio, prohibit additional liens on the collateral, restrict
mergers and the payment of dividends and restrict the Companys ability to
place liens on unencumbered assets. The credit facility contains financial
covenants as to the Companys minimum net worth. As of October 6, 2002, the
Company had $18 million in borrowings outstanding under this credit facility,
consisting of the $10 million term loan and $8 million on the revolving line of
credit.

The Company also maintains a $1 million unsecured line of credit with
another bank, bearing interest at the lenders prime rate, maturing May 31,
2003. As of October 6, 2002, the Company had no borrowings outstanding under
this credit facility.

The Company opened one new hotel in the first three quarters of 2002 and
one in the first three quarters of 2001. As of the end of the third fiscal
quarter of 2002, no Company-owned hotels were under construction. There are no
plans to develop or operate additional Company-owned hotels in the near term.
This decision was based on current market conditions, rooms supply in certain
areas, capital availability, and the sale of leasehold interests in 2000.

The Companys Board of Directors has previously authorized the use of up
to $23.0 million for the repurchase of shares of the Companys common stock.
The purchases, including block purchases, are to be made from time to time in
the open market at prevailing market prices, or in privately negotiated
transactions at the Companys discretion. No time limit has been placed on the
duration of the stock repurchase plan, and the Company may discontinue the plan
at any time. As of the end of the third fiscal quarter of 2002, approximately
3.6 million shares had been repurchased at a cost of $20.5 million.

The Company is investigating various alternatives to maximize shareholder
value. These alternatives could include, without limitation, the franchising
and operation of additional GuestHouse Inns & Suites, a sale of the remaining
Company-owned Inns, negotiating new credit arrangements, developing hotels for
other owners, the repurchase of additional shares of the Companys common stock
or outstanding debt securities, or any combination of these or other
strategies. On August 27, 2002, the Company filed a registration statement with
the Securities and Exchange Commission (an exchange offer and consent
solicitation) regarding the senior subordinated notes which, if consummated,
would allow the Company more flexibility in purchasing its outstanding debt and
common stock. In response to comments from the Securities and Exchange
Commission, Amendment No.1 to the registration statement was filed on October
29, 2002. The Company believes that a combination of existing cash, the
collection of notes receivable, net cash provided by operations, proceeds from
the sale of properties, and borrowings under existing credit facilities or
mortgage debt, will be sufficient to fund its capital





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expenditures, stock repurchase plan, debt repayments and operations for at
least the next twelve months.

The Company holds first mortgage notes receivable totaling $58.1 million
that are due in July 2003. These notes originated from the Companys sale in
July 1998 of 15 Shoneys Inn hotels. The notes contain cross-collateralization
and cross-default provisions. Repayment of the notes by the owners of the
properties is expected to come from either refinancing by the owners, or more
likely, relinquishment of the properties to the Company by the owners. In the
event the Company resumes title to the properties, they are expected to be held
for sale. In the event the fair value of the underlying assets were to be less
than the balances of the first mortgage notes, the notes receivable could be
under-collateralized.

Market Risk

There have been no material changes in the Companys exposure to market
risk in the third fiscal quarter ended October 6, 2002.

Forward-looking Statement Disclaimer

The statements appearing in this report which are not historical facts are
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of
1934, as amended, and are subject to risks and uncertainties that could cause
actual results to differ materially from those set forth in the forward-looking
statements, including delays in concluding or the inability to conclude
transactions, the establishment of competing facilities and services,
cancellation of leases or contracts, changes in applicable laws and regulation,
in margins, demand fluctuations, access to debt or equity financing, adverse
uninsured determinations in existing or future litigation or regulatory
proceedings and other risks.




PART I

Item 4. Controls and Procedures

(a)  Within the ninety day period prior to the date of this report, we
carried out an evaluation, under the supervision and with the participation of
our management, including our principal executive officer and our principal
financial officer, of the effectiveness of the design and operation of our
disclosure controls and procedures (as defined in Rules 13a-14(c) and 15d-14(c)
under the Securities Exchange Act of 1934). Based upon that evaluation, our
management, including our principal executive officer and our principal
financial officer, concluded that the designed and operation of these
disclosure controls and procedures were effective to timely alert them to any
material information relating to the company (including its consolidated
subsidiaries) that must be included in our periodic SEC filings.

(b)  There have been no significant changes in our internal controls or in
other factors that could significantly affect internal controls subsequent to
the date we carried out this evaluation.





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##### Table of Contents






PART II  OTHER INFORMATION

|        |  |                                                                                                                         
|------- |  | ------------------------------------------------------------------------------------------------------------------------
|Item 1. |  | No material developments occurred during the third quarter
ended October 6, 2002 with respect to any pending litigation.
|Item 4. |  | Submission of Matters to a vote of Security Holders                                                                     
|        |  | Not applicable                                                                                                          
|Item 6. |  | Exhibits and Reports on Form 8-K                                                                                        
|        |  | 6(a) Exhibits -                                                                                                         
|        |  | Exhibit 99.1  Certifications required by Sections 302 and 906 of the Sarbanes-Oxley Act of 2002.                       
|        |  | 6(b) Reports on Form 8-K                                                                                                
|        |  | No reports on Form 8-K were filed by the Company during the
fiscal quarter ended October 6, 2002.                       




SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly
caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.

|                        |  |                                                                                                                                          
|----------------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------
|                        |  | ShoLodge, Inc.                                                                                                                           
|                       
|                        |  |                                                                                                                                          
|                       
|Date: November 15, 2002 |  | S/ Leon MooreLeon Moore
President, Chief Executive Officer,
Principal Executive Officer,
Director                                        
|                       
|                        |  |                                                                                                                                          
|                       
|Date: November 15, 2002 |  | S/ Bob MarloweBob Marlowe
Secretary, Treasurer, Chief Accounting Officer,
Principal Accounting Officer,
Chief Financial Officer,
Director





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##### Table of Contents






CERTIFICATION

I, Leon Moore, certify that:

1.     I have reviewed this quarterly report on Form 10-Q of ShoLodge, Inc.

2.     Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;

3.     Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;

4.     The registrants other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;

b) evaluated the effectiveness of the registrants disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the Evaluation Date); and

c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;

5.     The registrants other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrants auditors and the audit
committee of registrants board of directors (or persons performing the
equivalent functions);

a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrants ability to record,
process, summarize and report financial data and have identified for the
registrants auditors any material weaknesses in internal controls; and

b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrants internal controls;
and

6.     The registrants other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal controls or
in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions
with regard to significant deficiencies and material weaknesses.

|                         |  |                                                               
|------------------------ |  | --------------------------------------------------------------
|Dated: November 15, 2002 |  | /s/ Leon Moore[signature]                                     
|                        
|                         |  |                                                               
|                        
|                         |  | President, Chief Executive Officer,Principal Executive Officer



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CERTIFICATION

I, Bob Marlowe, certify that:

1.     I have reviewed this quarterly report on Form 10-Q of ShoLodge, Inc.

2.     Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;

3.     Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;

4.     The registrants other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;

b) evaluated the effectiveness of the registrants disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the Evaluation Date); and

c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;

5.     The registrants other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrants auditors and the audit
committee of registrants board of directors (or persons performing the
equivalent functions);

a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrants ability to record,
process, summarize and report financial data and have identified for the
registrants auditors any material weaknesses in internal controls; and

b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrants internal controls;
and

6.     The registrants other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal controls or
in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions
with regard to significant deficiencies and material weaknesses.

|                         |  |                                                                                                     
|------------------------ |  | ----------------------------------------------------------------------------------------------------
|Dated: November 15, 2002 |  | /s/ Bob Marlowe[signature]                                                                          
|                        
|                         |  |                                                                                                     
|                        
|                         |  | Secretary, Treasurer, Chief Accounting Officer,
Principal Accounting Officer,Chief Financial Officer

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