The general equation of a circle is:
\[
(x - h)^2 + (y - k)^2 = r^2
\]
where \( (h, k) \) is the center of the circle and \( r \) is its radius. Given that the circle touches the x-axis, the radius of the circle is equal to the y-coordinate of its center, i.e., \( k = r \).
Since the center lies on the line \( x + y = 3 \), we have:
\[
h + k = 3 \quad \text{or} \quad h = 3 - k.
\]
We are also given that the circle passes through the point \( (1, 1) \). Substituting this point into the equation of the circle, we get:
\[
(1 - h)^2 + (1 - k)^2 = r^2.
\]
Now, substitute \( h = 3 - k \) and \( r = k \) into the above equation:
\[
(1 - (3 - k))^2 + (1 - k)^2 = k^2.
\]
Simplifying:
\[
(1 - 3 + k)^2 + (1 - k)^2 = k^2 \quad \Rightarrow \quad (k - 2)^2 + (1 - k)^2 = k^2.
\]
Expanding:
\[
(k^2 - 4k + 4) + (1 - 2k + k^2) = k^2 \quad \Rightarrow \quad 2k^2 - 6k + 5 = k^2.
\]
Solving for \( k \):
\[
k^2 - 6k + 5 = 0.
\]
Using the quadratic formula:
\[
k = \frac{-(-6) \pm \sqrt{(-6)^2 - 4(1)(5)}}{2(1)} = \frac{6 \pm \sqrt{36 - 20}}{2} = \frac{6 \pm \sqrt{16}}{2} = \frac{6 \pm 4}{2}.
\]
So, \( k = 5 \) or \( k = 1 \).
Since the circle is in the first quadrant, we take \( k = 1 \), and therefore \( h = 3 - k = 2 \).
Now, the equation of the circle is:
\[
(x - 2)^2 + (y - 1)^2 = 1^2 \quad \Rightarrow \quad (x - 2)^2 + (y - 1)^2 = 1.
\]
Expanding:
\[
(x^2 - 4x + 4) + (y^2 - 2y + 1) = 1 \quad \Rightarrow \quad x^2 + y^2 - 4x - 2y + 5 = 1 \quad \Rightarrow \quad x^2 + y^2 - 4x - 2y + 4 = 0.
\]
Thus, the correct equation is:
\[
x^2 + y^2 - 4x - 2y + 4 = 0.
\]
Hence, the correct answer is (B).