<PAGE>   1
                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-Q
                                 ---------------



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

                    FOR THE QUARTER ENDED SEPTEMBER 30, 1996

                                       OR
/ /      TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
         EXCHANGE ACT OF 1934
             FOR THE TRANSITION PERIOD FROM            TO

                         COMMISSION FILE NUMBER 0-26304


                         SUNSTONE HOTEL INVESTORS, INC.
             (Exact name of registrant as specified in its charter)
                              --------------------


         MARYLAND                                          52-1891908
   (State or Other Jurisdiction of                      (I.R.S. Employer
   Incorporation or Organization)                      Identification No.)

           115 CALLE DE INDUSTRIAS, SUITE 201, SAN CLEMENTE, CA 92672
               (Address of Principal Executive Offices) (Zip Code)

                                 (714) 361-3900
              (Registrant's Telephone Number, Including Area Code)

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



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 that 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
                                              ---     ---

As of November 14, 1996, there were 10,932,250 shares of Common Stock
outstanding.

-------------------------------------------------------------------------------
<PAGE>   2
                         SUNSTONE HOTEL INVESTORS, INC.

                       SEPTEMBER 30, 1996 QUARTERLY REPORT

                                TABLE OF CONTENTS




                         PART I -- FINANCIAL INFORMATION

<TABLE>
<CAPTION>
<S>                                                                                                             <C>
ITEM 1.      FINANCIAL STATEMENTS

   Introduction to the Financial Statements.....................................................................  3

Sunstone Hotel Investors, Inc.

   Consolidated Balance Sheets as of September 30, 1996 and December 31, 1995...................................  4

   Consolidated Statements of Income for the Three Months and Nine Months
       Ended September 30, 1996 and September 30, 1995..........................................................  5

   Consolidated Statement of Cash Flows for the Nine Months Ended
       September 30, 1996,......................................................................................  6

   Notes to Consolidated Financial Statements...................................................................  7



Sunstone Hotel Properties, Inc. (the Lessee)

   Balance Sheets as of September 30, 1996 and December 31, 1995................................................  9

   Statement of Operations for the Three Months and Nine Months ended September 30, 1996........................ 10

   Statement of Cash Flows for the Nine Months ended September 30, 1996......................................... 11

   Notes to Financial Statements................................................................................ 12



ITEM 2.      MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
             RESULTS OF OPERATIONS.............................................................................. 13


                                            PART II -- OTHER INFORMATION


ITEM 6.      EXHIBITS AND REPORTS ON FORM 8-K................................................................... 19
</TABLE>


                                        2
<PAGE>   3
                         SUNSTONE HOTEL INVESTORS, INC.

                    INTRODUCTION TO THE FINANCIAL STATEMENTS



ITEM 1 - FINANCIAL STATEMENTS

           The consolidated financial statements included herein have been
prepared by Sunstone Hotel Investors, Inc. (the "Company"), without audit,
pursuant to the rules and regulations of the Securities and Exchange Commission.
Disclosures normally included in the notes to the financial statements prepared
in accordance with generally accepted accounting principles have been omitted
pursuant to such rules and regulations. The Company believes that the
disclosures are adequate to make the information presented not misleading when
read in conjunction with the financial statements included in the Company's
Annual Report on Form 10-K for the period August 16 (inception) to December 31,
1995.

           The financial information presented herein reflects all adjustments,
consisting only of normal recurring accruals, which are, in the opinion of
management, necessary for a fair presentation of the results for the interim
periods presented. The results for interim periods are not necessarily
indicative of the results to be expected for the full year.


                                        3
<PAGE>   4
                         SUNSTONE HOTEL INVESTORS, INC.

                           CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                      September 30,     December 31,
                                                          1996              1995
                                                      ------------       -----------
<S>                                                   <C>                <C>
ASSETS:
Investment in hotel properties, net                   $104,301,000       $49,926,000
Mortgage notes receivable                                2,850,000
Cash                                                     2,022,000         5,222,000
Rent receivable-- Lessee                                 2,908,000           646,000
Prepaid expenses and other assets, net                   1,266,000         1,442,000
                                                      ------------       -----------

                                                      $113,347,000       $57,236,000
                                                      ============       ===========


LIABILITIES AND STOCKHOLDERS' EQUITY:
Revolving line of credit                              $ 17,780,000       $ 8,400,000
Mortgage notes payable                                   3,003,000
Accounts payable and other accrued expenses              1,930,000         1,346,000
Dividends and distributions payable                                        1,764,000
                                                      ------------       -----------
                                                        22,713,000        11,510,000
                                                      ------------       -----------


Minority interest                                       10,840,000         8,231,000
                                                      ------------       -----------

Stockholders' equity:
Common stock, $.01 par value, 50,000,000
   authorized; 10,923,500 and 6,322,000 issued
   and outstanding as of September 30, 1996 and
   December 31, 1995, respectively                         109,000            63,000
Preferred stock, $.01 par value, 10,000,000
   authorized, no shares issued or outstanding
Additional paid-in capital                              79,079,000        37,432,000
Retained earnings                                          606,000
                                                      ------------       -----------
                                                        79,794,000        37,495,000
                                                      ------------       -----------

                                                      $113,347,000       $57,236,000
                                                      ============       ===========
</TABLE>

   The accompanying notes are an integral part of these financial statements.

                                       4
<PAGE>   5
                         SUNSTONE HOTEL INVESTORS, INC.

                        CONSOLIDATED STATEMENTS OF INCOME

<TABLE>
<CAPTION>
                                                  Three Months Ended                 Nine Months Ended
                                                     September 30,                      September 30,
                                                 1996             1995             1996             1995
                                                Actual         Pro Forma          Actual          Pro Forma
                                              ----------       ----------       -----------       ----------
<S>                                           <C>              <C>              <C>               <C>
REVENUES:
   Lease revenue                              $4,252,000       $2,726,000       $10,407,000       $7,432,000
   Interest income                                81,000           13,000           141,000           13,000
                                              ----------       ----------       -----------       ----------

          Total revenues                       4,333,000        2,739,000        10,548,000        7,445,000
                                              ----------       ----------       -----------       ----------


EXPENSES:
   Real estate related depreciation
     and amortization                          1,211,000          528,000         3,057,000        1,561,000
   Interest expense and amortization
     of financing costs                          218,000                          1,029,000
   Real estate, personal property taxes
     and insurance                               191,000          255,000           757,000          637,000
   General and administrative                    426,000          104,000           707,000          312,000
                                              ----------       ----------       -----------       ----------

          Total expenses                       2,046,000          887,000         5,550,000        2,510,000
                                              ----------       ----------       -----------       ----------

Income before minority interest                2,287,000        1,852,000         4,998,000        4,935,000
Minority interest                                332,000          323,000           829,000          861,000
                                              ----------       ----------       -----------       ----------

          NET INCOME                          $1,955,000       $1,529,000       $ 4,169,000       $4,074,000
                                              ==========       ==========       ===========       ==========


NET INCOME PER SHARE                          $     0.23       $     0.24       $      0.59       $     0.64

Weighted average number of shares              8,590,190        6,322,000         7,078,063        6,322,000
</TABLE>

   The accompanying notes are an integral part of these financial statements.


                                        5
<PAGE>   6
                         SUNSTONE HOTEL INVESTORS, INC.

                      CONSOLIDATED STATEMENT OF CASH FLOWS

                  FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996

<TABLE>
<CAPTION>
<S>                                                           <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
   Net income                                                 $  4,169,000
   Adjustments to reconcile net income to net
     cash provided by operating activities:
     Minority interest                                             829,000
     Depreciation                                                3,057,000
     Amortization of financing costs                               170,000
     Changes in assets and liabilities:
          Rent receivable-Lessee                                (2,262,000)
          Prepaids and other assets, net                             6,000
          Accounts payable and accrued expenses                    584,000
                                                              ------------

              Net cash provided by operating activities          6,553,000
                                                              ------------

CASH FLOWS FROM INVESTING ACTIVITIES:
   Acquisition, improvements and additions
       to hotel properties                                     (61,382,000)
   Proceeds from sale of hotel properties                        1,100,000
                                                              ------------
              Net cash used in investing activities            (60,282,000)
                                                              ------------

CASH FLOWS FROM FINANCING ACTIVITIES:
   Net proceeds from stock offering                             42,747,000
   Borrowings on revolving line of credit                       30,580,000
   Principal repayments on revolving line of credit            (21,200,000)
   Borrowings on mortgage notes payable                          3,025,000
   Principal repayments on mortgage notes                          (22,000)
   Dividends and distributions paid                             (5,327,000)
   Issuance of partnership units                                   816,000
   Redemption of partnership units                                 (90,000)
                                                              ------------
              Net cash provided by financing activities         50,529,000
                                                              ------------

              Net change in cash                                (3,200,000)
Cash, beginning of period                                        5,222,000
                                                              ------------
Cash, end of period                                           $  2,022,000
                                                              ============
</TABLE>

   The accompanying notes are an integral part of these financial statements.

                                        6
<PAGE>   7
                         SUNSTONE HOTEL INVESTORS, INC.

             NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS



1.  ORGANIZATION AND INITIAL PUBLIC OFFERING

       Sunstone Hotel Investors, Inc. (the "Company"), a Maryland corporation,
was formed on September 21, 1994, as a real estate investment trust ("REIT").
The Company completed an initial public offering (the "Offering") of 5,910,000
shares of its common stock on August 16, 1995. An additional 404,500 shares of
common stock were issued by the Company on September 3, 1995 upon a partial
exercise of the underwriters' over-allotment option. The offering price of all
shares sold in the Offering was $9.50 per share, resulting in gross proceeds of
approximately $60.0 million and net proceeds (less the underwriters' discount
and offering expenses) of approximately $53.0 million.

       The Company contributed all of the net proceeds of the Offering to
Sunstone Hotel Investors, L.P. (the "Partnership") in exchange for an
approximately 82.5% aggregate equity interest in the Partnership. The Company
conducts all its business through and is the sole general partner of the
Partnership (hereafter referred to as the "Company").

       In connection with the Offering, the Company acquired seven hotels (the
"Sunstone Hotels") from seven entities controlled by officers and a director of
the Company and acquired the three additional hotels (the "Acquisition Hotels"
and together, the "Initial Hotels") from unrelated third parties in exchange for
(I) 1,288,500 units ("Units") in the Partnership (representing the remaining
17.5% of equity interest in the Partnership) which are exchangeable for a like
number of shares of the common stock of the Company and (ii) the payment of
mortgage indebtedness for the Sunstone Hotels of approximately $23.5 million and
other obligations relating to the Sunstone Hotels and (iii) payment of
approximately $25.8 million to purchase the Acquisition Hotels.

       The Company owns, as of September 30, 1996, 20 hotels (the "Hotels") and
leases them to Sunstone Hotel Properties, Inc. (the "Lessee") under operating
leases (the "Percentage Leases") providing for the payment of base and
percentage rent. The Lessee is owned by Robert A. Alter, Chairman and President
of the Company (80%), and Charles L. Biederman, Director and Executive Vice
President of the Company (20%). The Lessee has entered into a management
agreement pursuant to which all of the Hotels are managed by Sunstone Hotel
Management, Inc. (the "Management Company"), of which Mr. Alter is the sole
shareholder.

Basis Of Presentation:

       For accounting purposes, the Company exercises unilateral control over
the Partnership; hence, the financial statements of the Company and the
Partnership are consolidated. All significant intercompany transactions and
balances have been eliminated.

2.  NET INCOME PER SHARE AND PARTNERSHIP UNITS

       Net income per share is based on the weighted average number of common
and equivalent shares outstanding during the period. Outstanding options are
included as common equivalent shares using the treasury stock method when the
effect is dilutive. The weighted average number of shares used in determining
net income per share were 8,590,190 and 6,322,000 for the three months ended
September 30, 1996 and 1995, respectively. At September 30, 1996, a total of
12,382,300 partnership units were issued and outstanding. The weighted average
number of units outstanding for the three months ended September 30, 1996 was
10,048,990.



                                        7
<PAGE>   8
3.  RECENTLY ISSUED ACCOUNTING STANDARDS:

       In March 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standard No 121, "Accounting for the Impairment of Long
Lived Assets and for Long Lived Assets to be Disposed Of." This statement shall
be effective for financial statements for fiscal years beginning after December
15, 1995. Management has elected early adoption of this statement, which should
not have a material impact on the financial statements.

       In October 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standard No. 123, "Accounting for Stock-Based
Compensation" which shall be effective for financial statements for fiscal years
beginning after December 15, 1995. Management intends to adopt the disclosure
method and, accordingly, there will be no impact on the Company's financial
position or results of operations.

4.  SUBSEQUENT EVENTS AND SIGNIFICANT ACQUISITIONS

       On October 29, 1996, the Company acquired the 246-room Holiday Inn in
Mesa, Arizona, the 156-room Holiday Inn in Flagstaff, Arizona and the 125-room
Hampton Inn in Tucson, Arizona, for $27.8 million, for consideration consisting
of $3.6 million in cash, the assumption of $16.8 million in debt and the
issuance of $7.4 million in partnership units at $10.52 per unit. Upon 
completion of the acquisition, the Company's total assets, market capitalization
and debt were $138.7 million, $183.6 million, and $39.6 million, respectively.

       On August 13, 1996, the Company issued 4,000,000 shares of its common
stock at a price of $10.00 per share. The net proceeds of $36.8 million were
used as follows: (i) approximately $20.8 million to repay outstanding borrowings
under the line of credit, $8.2 million of which was borrowed to acquire the
188-room Holiday Inn in Renton, Washington on June 28, 1996; and (ii)
approximately $16.0 million to purchase the 155-room Comfort Suites in South San
Francisco, California and a 151-room nationally franchised hotel in Price, Utah.
On September 10, 1996, the underwriters exercised a 30-day option and purchased
an additional 600,000 shares of common stock at a price of $10.00 per share
generating an additional $5.6 million net proceeds for the Company.



                                        8
<PAGE>   9
                         SUNSTONE HOTEL PROPERTIES, INC.

                                 BALANCE SHEETS


<TABLE>
<CAPTION>
                                                                     September 30,      December 31,
                                                                         1996               1995
                                                                     -----------        -----------
<S>                                                                  <C>                <C>
ASSETS:

    Cash                                                             $ 1,025,000        $   800,000
    Receivables, net                                                   1,147,000            466,000
    Inventories                                                           80,000            125,000
    Prepaid expenses and other assets                                  2,046,000             70,000
                                                                     -----------        -----------

                                                                      $4,298,000        $ 1,461,000
                                                                     ===========        ===========


LIABILITIES AND SHAREHOLDERS' DEFICIT:

    Rent payable - REIT                                              $ 2,908,000        $   645,000
    Accounts payable, trade                                              692,000            294,000
    Advanced deposits                                                     69,000            199,000
    Sales taxes payable                                                  312,000            225,000
    Accrued payroll                                                      306,000            242,000
    Accrued vacation                                                     100,000             82,000
    Management and accounting fees payable                               118,000            104,000
    Other accrued expenses                                               560,000            416,000
                                                                     -----------        -----------

                                                                       5,065,000          2,207,000
                                                                     -----------        -----------

    Shareholders' Deficit:

    Common stock, no par value, 100,000 shares authorized;
      125 shares issued and outstanding
    Shareholders' deficit                                               (767,000)          (746,000)
                                                                     -----------        -----------

                                                                     $ 4,298,000        $ 1,461,000
                                                                     ===========        ===========
</TABLE>

   The accompanying notes are an integral part of these financial statements.

                                        9
<PAGE>   10
                         SUNSTONE HOTEL PROPERTIES, INC.

                            STATEMENTS OF OPERATIONS


<TABLE>
<CAPTION>
                                            Three Months Ended   Nine Months Ended
                                            September 30, 1996  September 30, 1996
                                            ------------------  ------------------
<S>                                            <C>                 <C>
REVENUES:

    Room                                       $  9,961,000        $ 23,717,000
    Food and beverage                               845,000           1,503,000
    Other                                           526,000           1,242,000
                                               ------------        ------------

                  Total revenues                 11,332,000          26,462,000
                                               ------------        ------------


EXPENSES:

    Room                                          2,291,000           5,741,000
    Food and beverage                               619,000           1,297,000
    Other                                           434,000             773,000
    Property and administrative                     841,000           1,590,000
    Franchise costs                                 407,000             863,000
    Advertising and promotion                     1,036,000           2,436,000
    Repairs and maintenance                         455,000           1,151,000
    Utilities                                       641,000           1,279,000
    Management fees                                 256,000             529,000
                                               ------------        ------------

                  Net operating income            4,352,000          10,803,000

    Corporate general and administrative             75,000             393,000
    Rent - REIT                                   4,252,000          10,407,000
                                               ------------        ------------

                  Net income                   $     25,000        $      3,000
                                               ============        ============
</TABLE>


   The accompanying notes are an integral part of these financial statements.

                                       10
<PAGE>   11
                         SUNSTONE HOTEL PROPERTIES, INC.

                             STATEMENT OF CASH FLOWS

                            FOR THE NINE MONTHS ENDED

                               SEPTEMBER 30, 1996

<TABLE>
<CAPTION>
<S>                                                                           <C>
Cash flows from operating activities:
    Net income                                                                  $   3,000

    Adjustments to reconcile net loss to net cash provided by operating
        activities:

           Changes in assets and liabilities:
           Receivables, net                                                      (681,000)
           Inventories                                                             45,000
           Prepaid expenses and other assets                                     (758,000)
           Rent payable - REIT                                                  2,262,000
           Accounts payable, trade                                                398,000
           Advanced deposits                                                     (130,000)
           Sales taxes payable                                                     87,000
           Accrued payroll                                                         64,000
           Accrued vacation                                                        18,000
           Management and accounting fees payable                                  14,000
           Other accrued expenses                                                 145,000
                                                                              -----------
                  Cash provided by operating activities                         1,467,000
                                                                              -----------
Cash flows from investing activities:
    Capitalized construction costs                                             (1,242,000)
                                                                              -----------
                  Cash used in investing activities                            (1,242,000)
                                                                              -----------
    Net change in cash                                                            225,000

Cash, beginning of period                                                         800,000
                                                                              -----------
Cash, end of period                                                           $ 1,025,000
                                                                              ===========
</TABLE>


   The accompanying notes are an integral part of these financial statements.

                                       11
<PAGE>   12
                         SUNSTONE HOTEL PROPERTIES, INC.

                     NOTES TO COMBINED FINANCIAL STATEMENTS



1.  ORGANIZATION:

    Sunstone Hotel Properties, Inc. (the "Lessee") was incorporated in Colorado
in August 1995 and commenced operations effective with the completion of an
initial public stock offering (the "Offering") by Sunstone Hotel Investors, Inc.
(the "REIT") on August 16, 1995. The Lessee leases hotel properties primarily
located in the western United States from the REIT pursuant to long term leases.

                                       12
<PAGE>   13
ITEM 2.         MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
                RESULTS OF OPERATIONS.

SUMMARY OVERVIEW

                On August 16, 1995, the Company completed a $60 million initial
public offering ("IPO") and contributed all of the net proceeds of the IPO to
the Partnership in exchange for an approximately 82.5% aggregate equity interest
in the Partnership. The Company used the proceeds of the IPO to fund the
purchase of three of its hotels and repay indebtedness incurred in connection
with the acquisition of the Sunstone Initial Hotels. On August 13, 1996, the
Company contributed an additional $36.8 million of net proceeds to the
Partnership from the proceeds of a secondary offering. On September 10, 1996,
the Company sold an additional 600,000 shares of its common stock at a price of
$10.00 per share to cover over-allotments in connection with the August 1996
secondary offering. The company contributed net proceeds of $5.6 million to the
Partnership, increasing its interest in the Partnership to approximately 88.2%.
The Company owns as of November 14, 1996, 23 hotels with an aggregate of 3,139
rooms in seven states, including Arizona (4), California (5), Colorado (6), New
Mexico (1), Utah (2), Oregon (2), and Washington (3), has more than doubled the
number of hotels in its portfolio in the 13 months since the IPO and has
increased the number of rooms by 136.4% since the IPO.

                Since the IPO, the Company has implemented its growth strategy
by (i) acquiring under performing hotels and redeveloping and repositioning
seven of such hotels into nationally franchised upscale and mid-price hotels and
(ii) enhancing the operating performance of its hotels through selective
renovation and improved management and marketing by the Lessee. Additionally,
the Company has significantly increased its franchise and geographic
diversification within the western United States and expanded its ability to
finance future growth, through increased borrowing capacity on its line of
credit.

                The Company has implemented its external growth strategy by (i)
acquiring twelve hotels for purchase prices aggregating $71.7 million, and
thereby increasing the number of rooms in its portfolio by 136.4% since the IPO,
(ii) constructing a Residence Inn for approximately $5.4 million, which opened
during the third quarter of 1996 ,and (iii) entering into a letter of intent to
acquire a 166-room full-service convention hotel for $8.4 million upon
completion of construction by an unaffiliated developer, which is expected to
occur in 1997. As of November 14, 1996, the date of this report, the company's
total assets and market capitalization were $138.7 million and $183.6 million,
respectively.

                The Company has implemented its internal growth strategy by (i)
completing an aggregate of $11.6 million in redevelopment and significant
renovations to seven of its hotels, representing an additional investment in
those hotels of 36.5% of the aggregate acquisition price; (ii) commencing
budgeted redevelopment of approximately $8.0 million to six recently acquired
hotels; (iii) increasing revenue per available room (REVPAR) for the seven
hotels that were owned by the Company or its predecessors for the entire nine
months ended September 30, 1995 and 1996 (and which were not undergoing
redevelopment or significant renovation) by 6.5%, from $39.17 to $41.70.
Management believes that the increases in REVPAR for these hotels resulted
primarily from the success of the Company's renovation and redevelopment
program, from improvements in management and marketing by the Lessee and from
increases in demand for upscale and mid-price hotel rooms throughout the United
States.

                Additionally, the Company has increased availability under its
line of credit from $30 million to $50 million, reduced its borrowing rate from
LIBOR plus 2.75% to LIBOR plus 1.90%, with additional reductions to LIBOR plus
1.75% upon meeting certain other financial conditions, and has applied for a
$9.9 million 10-year fixed-rate term loan which will be secured by two of its
hotels.


                                       13
<PAGE>   14
                The following tables summarize average occupancy, average daily
rate ("ADR") and REVPAR on a same-unit-sales (2,612 rooms) basis for the hotels.


                         SELECTED FINANCIAL INFORMATION
<TABLE>
<CAPTION>
                              Three Months Ended             Nine Months Ended
                                 September 30,                 September 30,
                              1996           1995            1996         1995
                             Actual        Pro Forma        Actual      Pro Forma
                             ------        ---------        ------      ---------
<S>                          <C>            <C>            <C>           <C>
ALL HOTELS:
Occupancy                      71.4%          75.9%          66.5%         69.9%
ADR                          $63.52         $58.59         $62.40        $58.74
REVPAR                       $45.38         $44.48         $41.51        $41.08
REVPAR Growth                   2.0%                         (1.0)%

NON-RENOVATION HOTELS:
Occupancy                      76.3%          77.0%          72.2%         73.1%
ADR                          $63.02         $57.38         $63.20        $58.39
REVPAR                       $48.08         $44.19         $45.62        $42.68
REVPAR Growth                   8.8%                          6.9%

RENOVATION HOTELS:
Occupancy                      60.7%          73.5%          57.3%         64.8%
ADR                          $64.91         $61.38         $60.77        $59.39
REVPAR                       $39.37         $45.13         $34.83        $38.49
REVPAR Growth                 (12.8)%                        (9.5)%
</TABLE>

RESULTS OF OPERATIONS OF THE COMPANY

Comparison of the three months ended September 30, 1996 to September 30, 1995 --
Actual versus Pro Forma Operations

       The Company's three most recently acquired hotels in South San Francisco,
California, Renton, Washington, and Price, Utah led the Company's strong third
quarter performance with better than expected results. These three hotels
provided an 18.2% increase in REVPAR in the third quarter of 1996 when compared
with the corresponding period in 1995. The increase, which is representative of
the Company's results for newly acquired hotels in their first few months of
operations, continues to indicate the Company's ability to identify
significantly under performing hotels with turn-around potential. On average,
for the ten hotels acquired since the IPO through September 30, 1996, the
Company has been able, through the efforts of its Lessee's sales and marketing
program, to achieve 18.9% REVPAR growth in the first two months of operations
immediately following acquisition and before any redevelopment or renovation
activity has commenced.

       Revenues were also improved in the third quarter of 1996 when compared to
the corresponding quarter of 1995 by the results of operations from recently
redeveloped and renovated hotels. Results of operations has been positive for
those hotels in which redevelopment has been completed when the hotel has
resumed normalized operations. For the Holiday Inn in Steamboat Springs,
Colorado, in its first month of normalized operations since redevelopment,
REVPAR growth was 31.8%, and, for the Hampton Inn in Oakland, California, REVPAR
growth was 10.6% during that same period.

       During the entire third quarter of 1996, all of the remaining Cypress Inn
hotels purchased in February of 1996 were undergoing significant redevelopment.
The 114-room hotel in Clackamas, Oregon, one of six Cypress Inn hotels acquired
by the Company in February of 1996 for $15 million, was renovated and re-flagged
as a Hampton Inn in September 1996. Two additional Cypress Inn hotels also
reopened with new flags in September: the 122-room hotel in Kent, Washington as
a Holiday Inn and Suites and a 63-room hotel in Poulsbo, Washington as a Holiday
Inn Express. The final Cypress Inn hotel located in Portland, Oregon reopened as
a Holiday Inn Express in October 1996.

                                       14
<PAGE>   15
       (The Company disposed of the remaining two Cypress Inn hotels in May
1996, without any gain at a sale price of $4 million.) The four retained
properties were redeveloped with capital improvements costing $5.5 million for a
total net cost of $16.5 million, or $43,000 per room, significantly below
replacement costs. In October 1996, the first month of normalized operations for
the three hotels reopening in September, REVPAR gains were 13.6%. The overall
16.5% average REVPAR growth for the Company's portfolio of six redeveloped
hotels in the first month of normalized operations indicates the potential for
REVPAR gains for the Company in future periods.

       The Company also opened in September of 1996 the newly-developed, 78-room
Residence Inn in Highlands Ranch, Colorado at a cost of $5.4 million. In its
first month of normalized operations (October 1996), 70.1% occupancy was
achieved with an ADR of $90.23.

       REVPAR for the seven hotels that were owned by the Company or its
predecessor for the entire third quarter of 1995 and 1996 (and which were not
undergoing redevelopment or significant renovation) increased 6.0%, from $42.73
to $45.31 during such periods. With respect to the Company's fourteen hotels not
undergoing redevelopment or renovation during this period, (i.e., all hotels
except the Doubletree-Santa Fe, New Mexico hotel, the Hampton Inn-Oakland,
California hotel, and the four Cypress Inn hotels located in Washington and
Oregon), REVPAR rose 8.8% from the third quarter of 1996, as compared to the
corresponding period in 1995, from $44.19 to $48.08.

       REVPAR for the six hotels undergoing redevelopment or renovation
(including the Holiday Inn in Steamboat Springs, Colorado; the Doubletree Hotel
in Santa Fe, New Mexico and the Cypress Inn hotels as discussed above but, not
including the Residence Inn in Highlands Ranch, Colorado which was under
construction) decreased 12.8% from $45.13 to $39.37, for the third quarter of
1996 as compared to the corresponding period in 1995. The Company's strong
portfolio performance was also impacted by less than satisfactory results from
the Company's Doubletree hotel in Santa Fe, New Mexico. The Santa Fe market has
experienced a recent down turn which resulted in a 17.1% decrease in REVPAR for
this property for the third quarter of 1996 in comparison to the same period of
1995. However, such renovations are expected to generate increased revenue at
these hotels beginning in the fourth quarter of 1996; and indeed, REVPAR gains
for the Santa Fe property were 8.8% in October of 1996 due to the increased
marketing efforts of the Lessee.

       Overall, comparing actual results for the third quarter of 1996 to pro
forma results for the third quarter of 1995, revenues increased 59.3% from $2.7
million to $4.3 million and net income increased 33.3%, from $1.5 million to
$2.0 million as a result of the Company's internal and external growth
strategies, despite the fact that six hotels were undergoing redevelopment or
renovation during the third quarter of 1996. Actual results for the third
quarter of 1996 include the results of the ten hotels acquired by the Company in
connection with its IPO in August 1995, plus the ten hotels subsequently
acquired through September 30, 1996. Pro forma results for 1995 include the
results of the ten hotels acquired by the Company in connection with the IPO.

SEASONALITY AND DIVERSIFICATION

       Demand is affected by normally recurring seasonal patterns. Historically,
the Company's portfolio of hotels as a whole has performed better in the first
and third quarters due to the positive and negative effects of the winter
season. Future acquisitions may further affect the seasonality of the Company's
current portfolio.

       The Company has implemented a business strategy of franchise and
geographic diversification. The following tables summarize certain information
for the Company's hotels with respect to franchise affiliations and distribution
of hotels throughout the western United States for the nine months ended
September 30, 1996.


                                       15
<PAGE>   16
                             FRANCHISE AFFILIATIONS
                           (As of September 30, 1996)


<TABLE>
<CAPTION>
                                       Percentage                     Percentage of
Franchise System            Rooms       Of Rooms     Gross Revenues  Gross Revenues
---------------------       -----        -----        -----------     -------------
<S>                         <C>          <C>          <C>                <C>
Courtyard by Marriott         279         10.7%       $ 2,679,000         10.2%
Comfort Suites                165          6.3            602,000          2.3
Hampton Inns                  939         31.6         12,193,000         46.0
Holiday Inns                  938         25.6          8,862,000         33.5
Residence Inns                 78          3.0             28,000           .1
Doubletree Hotels             213          8.1          2,098,000          7.9
                            -----        -----        -----------        -----
                            2,612        100.0%       $26,462,000        100.0%
                            =====        =====        ===========        =====

<CAPTION>

                           GEOGRAPHIC DIVERSIFICATION
                           (As of September 30, 1996)


                               Percentage                           Percentage of
State              Rooms        Of Rooms       Gross Revenues          Revenues
----------         -----         -----          -----------         -------------
<S>                <C>           <C>            <C>                    <C>
Arizona              118           4.5%         $ 1,791,000              6.8%
California           727          27.8            6,647,000             25.1
Colorado             753          28.8            9,510,000             35.9
New Mexico           213           8.2            2,097,000              7.9
Oregon               199           7.6            1,583,000              6.0
Utah                 229           8.8            1,456,000              5.5
Washington           373          14.3            3,378,000             12.8
                   -----         -----          -----------            -----

Total              2,612         100.0%         $26,462,000            100.0%
                   =====         =====          ===========            =====

<CAPTION>

                           GEOGRAPHIC DIVERSIFICATION
                            (As of October 31, 1996)


                               Percentage
State              Rooms        Of Rooms
----------         -----         -----
<S>                <C>           <C>
Arizona              645          20.5%
California           727          23.2
Colorado             753          24.0
New Mexico           213           6.8
Oregon               199           6.3
Utah                 229           7.3
Washington           373          11.9
                   -----         -----
Total              3,139         100.0%
                   =====         =====
</TABLE>



                                       16
<PAGE>   17
LIQUIDITY AND CAPITAL RESOURCES

       Cash Flows Provided by Operating Activities. The Company's operating
activities provide the principal source of cash to fund the Company's operating
expenses, interest expense, recurring capital expenditures and dividend
payments. The Company anticipates that its cash flow provided by leasing the
hotels to the Lessee will provide the necessary funds on a short and long term
basis to meet its operating cash requirements. The Company is required under the
Percentage Leases to make available to the Lessee for the repair, replacement
and refurbishment of furniture, fixtures and equipment an amount equal to 4% of
the room revenue per quarter on a cumulative basis, provided that such amount
may be used for capital expenditures made by the Company with respect to the
hotels. The Company expects that this amount will be adequate to fund such
periodic repairs, replacements and refurbishments.

       For the nine months ended September 30, 1996, capital redevelopment and
renovation expenditures made by the Company amounted to $8.4 million, or 35.4%
of room revenues totaling $23.7 million for the same period. Management
estimates that recurring capital expenditures for its continuously owned and
acquired hotels that have been recently redeveloped will be significantly less
than 4% of room revenues in the next 12 months. Since inception, the Company has
paid dividends and distributions totaling $6.1 million representing $0.23 per
share on a quarterly basis. On October 18, 1996, the Company increased its
regular quarterly dividend to $0.25 per share, an 8.7% increase. The dividend
was declared payable on November 15, 1996 to shareholders of record on November
1, 1996.

       Cash flows from Investing and Financing Activities. Additionally, the
Company intends to finance the acquisition of additional hotels, hotel
renovations and non-recurring capital improvements principally through the line
of credit with Bank One of Arizona, N.A. (the "Line of Credit") and, when market
conditions warrant, to issue additional equity or debt securities. As of
November 14, 1996, the Company had $25.7 million available on its $50 million
line of credit. Interest accrues on advances under the Line of Credit at a rate
equal to LIBOR plus 1.90%, and reduced to LIBOR plus 1.75% if the Company
satisfies certain financial requirements. The Line of Credit provides for a $5
million working capital subfacility and a $5 million construction subfacility.
The Company has the option each year to extend the two-year revolving term
period by an additional year upon the payment of a 0.375% extension fee and
certain other conditions. Upon termination of the revolving term period, the
Company may under certain conditions, including payment of a 1% fee, convert the
outstanding balance into a three-year term loan.

       The Line of Credit is guaranteed by Mr. Alter, Mr. Biederman and certain
other individuals and is secured by first mortgages on 18 of its 23 hotels and
may be secured by currently unencumbered or additional hotels acquired by the
Company in the future. However, the Company has the option of owning hotels not
subject to the lien securing the Line of Credit so long as no proceeds under the
Line of Credit are used with respect to such hotels and any other lender loaning
against such hotels limit its liens to only those hotels. This feature of the
Line of Credit gives the Company the ability to separately finance on a
long-term basis certain of its hotels. The Company has applied for a $9.9
million, 10-year fixed rate loan to be secured by the Hampton Inns in Denver,
Colorado, and Mesa, Arizona. The Line of Credit may be retired in whole or in
part from the proceeds of public or private issuances of equity or debt
securities by the Company and may be refinanced in whole or in part with
fixed-rate financing. However, because Messrs. Alter and Biederman and certain
affiliates would suffer adverse tax consequences if the Company's mortgage
indebtedness were reduced below $8.4 million, the Company does not anticipate
reducing its mortgage indebtedness below this amount.

       The Company continues to pursue its strategy of redeveloping, renovating
and repositioning under performing hotels. During the first three quarters of
1996, redevelopment and renovation work has substantially been completed at
seven hotels at a cost of $11.6 million. The Company expects that redevelopment
of six recently acquired hotels will be completed in 1997 for an amount up to
approximately $8.0 million. The redevelopment and renovation program is expected
to be funded entirely by excess operating cash flows and borrowings under the
Line of Credit.

       Since the IPO, the Company has expended over $71.7 million in acquiring
hotel assets. As part of its investment strategy, the Company plans to acquire
additional hotels. Future acquisitions are expected to be funded through the use
of the Line of Credit or other borrowing and the issuance of additional equity
or debt securities. The Company's Articles of Incorporation limits consolidated
indebtedness to 50% of the Company's investment in hotel properties, at cost on
a consolidated basis, after giving effect to the Company's use of proceeds from
any indebtedness. Management believes that it will have access to capital
resources sufficient to satisfy the Company's cash requirements and to expand
and develop its business in accordance with its strategy for future growth.

                                       17
<PAGE>   18
         Inflation. Operators of hotels in general possess the ability to adjust
room rates quickly. However, competitive pressures may limit the Lessee's
ability to raise room rates in the face of inflation.

FUNDS FROM OPERATIONS (FFO).

Management believes that FFO is one measure of financial performance of an
equity REIT such as the Company. On a pro forma basis, FFO (as defined by the
National Association of Real Estate Investment Trusts) (1) for the third quarter
of 1996 grew by 47.0% from $2.4 million to $3.5 million, as indicated in the
following table:

<TABLE>
<CAPTION>
                                                  Three Months Ended                     Nine Months Ended
                                                     September 30,                         September 30,
                                               1996                1995                1996              1995
                                              Actual            Pro Forma             Actual           Pro Forma
                                           -----------          ----------          ----------         ----------
<S>                                        <C>                  <C>                 <C>                <C>
  Income before minority interest          $ 2,287,000          $1,852,000          $4,998,000         $4,935,000
  Real estate related depreciation           1,211,000             528,000           3,057,000          1,561,000
                                           -----------          ----------          ----------         ----------
        Funds from operations              $ 3,498,000          $2,380,000          $8,055,000         $6,496,000
                                           ===========          ==========          ==========         ==========

  Weighted average number of units          10,048,990           7,659,500           8,513,217          7,659,500

Dividends (2)                              $ 2,512,248          $6,075,099
FFO Payout Ratio                                  71.8%               75.4%
FAD Payout Ratio                                  81.1%               85.5%
</TABLE>


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

(1)    With respect to the presentation of FFO, management elected early
       adoption of the "new definition" as recommended in the March 1995 NAREIT
       White Paper on Funds From Operations beginning January 1, 1995.
       Management and industry analysts generally consider funds from operations
       to be one measure of the financial performance of an equity REIT that
       provides a relevant basis for comparison among REITS and it is presented
       to assist investors in analyzing the performance of the Company. Funds
       From Operations is defined as income before minority interest (computed
       in accordance with generally accepted accounting principles), excluding
       gains (losses) from debt restructuring and sales of property and real
       estate related depreciation and amortization (excluding amortization of
       financing costs). Funds From Operations does not represent cash generated
       from operating activities in accordance with generally accepted
       accounting principles and is not necessarily indicative of cash available
       to fund cash needs. Funds From Operating should not be considered an
       alternative to net income as an indication of the Company's financial
       performance or as an alternative to cash flows from operating activities
       as a measure of liquidity.

(2)    Based on weighted average units outstanding. During the third quarter of
       1996, the Company issued 4.6 million shares of common stock at $10.00 per
       share in a secondary public offering. The actual cash dividends and
       distributions to be paid on November 15, 1996, is $3,097,013 based on
       12,388,050 million shares and units outstanding immediately after the
       secondary offering.




The Lessee

       For a discussion of the Lessee's operations and a comparison of the
quarter ended September 30, 1996 and September 30, 1995, see "Results of
Operations of the Company." For the third quarter of 1996, the Lessee reported
income of $25,000. For the nine months ended September 30, 1996, the total 
amount paid to the Lessee by the REIT in terms of net income earned by the
Lessee, including the 2% management fee paid to the Management Company, was
$526,000 which represented 2.0% of total revenues of $26.5 million for the
period. Offsetting the $526,000, the Lessee expended $1.2 million for
capitalized costs incurred by the Lessee during redevelopment of certain hotels
during this nine month period.

                                       18
<PAGE>   19

                                    
ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K.

  (a)  Exhibits:



<TABLE>
<CAPTION>
 Exhibit
   No.                                     Description
-------------------------------------------------------------------------------------------------------------    
 <S>                 <C>
 3.1                 Amended Articles of Incorporation of the Company, as further  amended by the Articles of
                     Amendment  of  the Company,  as  filed  with the  State  Department  of  Assessments and
                     Taxation  of  Maryland on  November 9,  1994,  filed  as Exhibit  3.1  to the  Company's
                     Registration Statement No. 33-84346 and incorporated herein by this reference.

 3.2                 Bylaws of  the Company, as currently  in effect, filed  as Exhibit 3.2 to  the Company's
                     Registration Statement No. 33-84346 and incorporated herein by this reference.

 3.3                 Articles of Amendment of the Company,  as filed with the State Department of Assessments
                     and  Taxation  of Maryland  on June  19,  1995, filed  as Exhibit  3.3 to  the Company's
                     Registration Statement No. 33-84346 and incorporated herein by this reference.

 10.1                Form of First Amended and Restated Agreement of Limited  Partnership of the Partnership,
                     filed  as  Exhibit  10.1  to  the  Company's  Registration  Statement No.  33-84346  and
                     incorporated herein by this reference.

 10.1.1              First Amendment to First Amended and Restated Agreement of  Limited Partnership dated as
                     of December 12,  1995, filed as Exhibit 10.36 to the Company's Annual Report on Form 10-
                     K for  the year ended  December 31, 1995  (the "1995  10-K") and incorporated herein  by
                     this reference.

 10.1.2              Second Amendment  to First Amended  and Restated Agreement of  Limited Partnership dated
                     as of  December  28, 1995,  filed as  Exhibit  10.1.2 to  the  Company's 1995  10-K  and
                     incorporated herein by this reference.

 10.1.3              Third Amendment to First Amended  and Restated Agreement of Limited Partnership dated as
                     of March 17, 1996, filed  as Exhibit 10.1.3 to the Company's Registration  Statement No.
                     333-07685 and incorporated herein by this reference.
</TABLE>




<PAGE>   20
<TABLE>
<CAPTION>
 Exhibit
   No.                                     Description
------------------------------------------------------------------------------------------------------------- 
 <S>                 <C>
 10.1.4              Fourth Amendment  to First Amended  and Restated Agreement of  Limited Partnership dated
                     as of  March 28, 1996, filed as  Exhibit 10.1.4 to the  Company's Registration Statement
                     No. 333-07685 and incorporated herein by this reference.

 10.1.5              Fifth Amendment to First Amended  and Restated Agreement of Limited Partnership dated as
                     of July 31,  1996, filed as Exhibit  10.1.5 to the Company's  Registration Statement No.
                     333-07685 and incorporated herein by this reference.

 10.1.6*             Sixth Amendment to First Amended  and Restated Agreement of Limited Partnership dated as
                     of August 10, 1996.

 10.1.7*             Seventh Amendment to First Amended  and Restated Agreement of Limited  Partnership dated
                     as of September 10, 1996.

 10.2                Form  of Percentage Lease, filed as Exhibit 10.2 to the Company's Registration Statement
                     No. 33-84346 and incorporated herein by this reference.

 10.2.1              Lease  Agreement dated as  of August 16,  1995 by and between  Sunstone Hotel Investors,
                     L.P., as lessor,  and Sunstone Hotel  Properties, Inc., as  lessee, for the  Hampton Inn
                     Hotel located in  Denver S.E., Colorado, filed as  Exhibit 10.2.1 to the  Company's 1995
                     10-K and incorporated herein by this reference.

 10.2.2              Lease  Agreement dated as  of August 16, 1995  by and between  Sunstone Hotel Investors,
                     L.P., as lessor,  and Sunstone Hotel  Properties, Inc., as  lessee, for the Hampton  Inn
                     Hotel located in Pueblo, Colorado,  filed as Exhibit 10.2.2  to the Company's 1995  10-K
                     and incorporated herein by this reference.

 10.2.3              Lease  Agreement dated as of  August 16, 1995  by and between  Sunstone Hotel Investors,
                     L.P.,  as lessor, and Sunstone  Hotel Properties, Inc., as lessee,  for the Courtyard By
                     Marriott Hotel located in  Fresno, California, filed as Exhibit 10.2.3 to  the Company's
                     1995 10-K and incorporated herein by this reference.

 10.2.4              Lease Agreement  dated as of  August 16, 1995  by and between  Sunstone Hotel Investors,
                     L.P., as lessor,  and Sunstone Hotel Properties,  Inc., as lessee,  for the Hampton  Inn
                     Hotel located in Mesa,  Arizona, filed As Exhibit 10.2.4 to the Company's  1995 10-K and
                     incorporated herein by this reference.
</TABLE>





                                       3
<PAGE>   21
<TABLE>
<CAPTION>
 Exhibit
   No.                                     Description
-------------------------------------------------------------------------------------------------------------
 <S>                 <C>
 10.2.5              Lease Agreement  dated as of  August 16, 1995  by and between  Sunstone Hotel Investors,
                     L.P., as  lessor, and Sunstone Hotel  Properties, Inc., as  lessee, for the  Holiday Inn
                     Hotel located in Steamboat Springs, Colorado, filed  as Exhibit 10.2.5 to the  Company's
                     1995 10-K and incorporated herein by this reference.

 10.2.6              Lease  Agreement dated as  of August 16,  1995 by and between  Sunstone Hotel Investors,
                     L.P., as lessor,  and Sunstone Hotel  Properties, Inc., as  lessee, for the  Holiday Inn
                     Hotel  located in Craig,  Colorado, filed as Exhibit  10.2.6 to the  Company's 1995 10-K
                     and incorporated herein by this reference.

 10.2.7              Lease  Agreement dated as  of August 16, 1995  by and between  Sunstone Hotel Investors,
                     L.P., as lessor,  and Sunstone Hotel  Properties, Inc., as  lessee, for the Holiday  Inn
                     Hotel located in Provo, Utah,   filed as Exhibit  10.2.7 to the Company's 1995  10-K and
                     incorporated herein by this reference.

 10.2.8              Lease  Agreement dated as of  August 16, 1995  by and between  Sunstone Hotel Investors,
                     L.P. as  lessor, and  Sunstone Hotel Properties,  Inc., as lessee,  for the  Hampton Inn
                     Hotel located in Silverthorne, Colorado, filed as  Exhibit 10.2.7 to the Company's  1995
                     10-K and incorporated herein by this reference.

 10.2.9              Lease Agreement  dated as of  August 16, 1995  by and between  Sunstone Hotel Investors,
                     L.P., as lessor,  and Sunstone Hotel  Properties, Inc.,  as lessee,  for the  Doubletree
                     Hotel located  in Santa Fe,  New Mexico, filed as  Exhibit 10.2.9 to  the Company's 1995
                     10-K and incorporated herein by this reference.

 10.2.10             Lease Agreement  dated as of  August 16, 1995  by and between Sunstone  Hotel Investors,
                     L.P., as lessor, and  Sunstone Hotel Properties,  Inc., as lessee,  for the Hampton  Inn
                     Hotel  located in  Arcadia, California, filed  as Exhibit 10.2.10 to  the Company's 1995
                     10-K and incorporated herein by this reference.

 10.2.11             Lease Agreement dated  as of December 13, 1995 by and  between Sunstone Hotel Investors,
                     L.P., as  lessor, and Sunstone  Hotel Properties, Inc.,  as lessee, for  the Hampton Inn
                     Hotel located  in Oakland, California, filed  as Exhibit 10.2.11  to the  Company's 1995
                     10-K and incorporated herein by this reference.
</TABLE>





                                       4
<PAGE>   22
<TABLE>
<CAPTION>
 Exhibit
   No.                                     Description
-------------------------------------------------------------------------------------------------------------   
 <S>                 <C>
 10.2.12             Lease Agreement  dated February 2, 1996  by and between Sunstone  Hotel Investors, L.P.,
                     as lessor,  and Sunstone Hotel Properties,  Inc., as lessee,  for the Cypress  Inn hotel
                     located in  Clackamas, Oregon, filed as  Exhibit 10.2.12 to the  Company's First Quarter
                     1996 10-Q/A and incorporated herein by this reference.

 10.2.13             Lease Agreement  dated February 2, 1996  by and between Sunstone  Hotel Investors, L.P.,
                     as lessor, and  Sunstone Hotel Properties,  Inc., as lessee,  for the Cypress  Inn hotel
                     located in  Kent, Washington, filed  as Exhibit  10.2.13 to the  Company's First Quarter
                     1996 10-Q/A and incorporated herein by this reference.

 10.2.14             Lease Agreement  dated February 2, 1996  by and between Sunstone  Hotel Investors, L.P.,
                     as lessor, and  Sunstone Hotel Properties,  Inc., as lessee,  for the Cypress Inn  hotel
                     located  in Poulsbo, Washington, filed as Exhibit 10.2.14 to the Company's First Quarter
                     1996 10-Q/A and incorporated herein by this reference.

 10.2.15             Lease Agreement  dated February 2, 1996  by and between Sunstone  Hotel Investors, L.P.,
                     as lessor, and  Sunstone Hotel Properties,  Inc., as lessee, for  the Cypress Inn  hotel
                     located in  Portland, Oregon, filed as  Exhibit 10.2.15 to  the Company's  First Quarter
                     1996 10-Q/A and incorporated herein by this reference.

 10.2.16             Lease Agreement dated  March 28, 1996 by and between  Sunstone Hotel Investors, L.P., as
                     lessor, and  Sunstone Hotel Properties, Inc.,  as lessee, for the  Courtyard By Marriott
                     Hotel  located in  Riverside,  California, filed  as  Exhibit 10.2.16  to  the Company's
                     Registration Statement No. 333-07685 and incorporated herein by this reference.

 10.2.17             Lease Agreement dated  June 28, 1996 by  and between Sunstone Hotel Investors,  L.P., as
                     lessor,  and Sunstone  Hotel  Properties, Inc.,  as  lessee  for the  Holiday  Inn Hotel
                     located in Renton, Washington,  filed as Exhibit 10.2.17  to the Company's  Registration
                     Statement No. 333-07685 and incorporated herein by this reference.

 10.2.18**           Lease Agreement dated August 13, 1996 by and between Sunstone Hotel Investors,  L.P., as
                     lessor, and Sunstone  Hotel Properties, Inc., as lessee, for  the Days Inn Hotel located
                     in Price, Utah.
</TABLE>





                                       5




<PAGE>   23
<TABLE>
<CAPTION>
 Exhibit
   No.                                     Description
-------------------------------------------------------------------------------------------------------------
 <S>                 <C>
 10.2.19**           Lease Agreement dated September 20,  1996 by and between Sunstone Hotel Investors, L.P.,
                     as lessor, and Sunstone Hotel Properties, Inc.,  as lessee, for the Residence Inn  Hotel
                     located in Highlands Ranch, Colorado.

 10.2.20**           Lease Agreement dated August 13, 1996 by and between  Sunstone Hotel Investors, L.P., as
                     lessor,  and Sunstone  Hotel Properties, Inc.,  as lessee, for the  Comfort Suites Hotel
                     located in South San Francisco, California.

 10.3                Form of  Right of First  Refusal and  Option to Purchase,  filed as Exhibit 10.3  to the
                     Company's  Registration  Statement  No.   33-84346  and  incorporated  herein   by  this
                     reference.

 10.4                Form of Alter Employment Agreement,  filed as Exhibit 10.4 to the Company's Registration
                     Statement No. 33-84346 and incorporated herein by this reference.

 10.5                Form  of  Biederman  Employment Agreement,  filed  as  Exhibit  10.5  to  the  Company's
                     Registration Statement No. 33-84346 and incorporated herein by this reference.

 10.6                Form of Indemnification Agreement to be  entered into with officers and directors of the
                     Company, filed as Exhibit 10.6 to the Company's Registration  Statement No. 33-84346 and
                     incorporated herein by this reference.

 10.7                1994 Stock  Incentive  Plan,  filed  as  Exhibit  10.7  to  the  Company's  Registration
                     Statement No. 33-84346 and incorporated herein by this reference.

 10.8                Form of  Notice of  Grant of  Stock  Option and  Form of  Stock Option   Agreement  (and
                     Addendum  thereto) to  be generally  used  in connection  with the  Discretionary Option
                     Grant Program of the 1994 Stock Incentive Plan,  filed as Exhibit 10.8 to the  Company's
                     Registration Statement No. 33-84346 and incorporated herein by this reference.

 10.9                Form  of  Stock  Purchase  Agreement  to  be  generally  used  in  connection  with  the
                     Discretionary Option  Grant Program of the  1994 Stock Incentive Plan,  filed as Exhibit
                     10.9 to the  Company's Registration  Statement No. 33-84346 and  incorporated herein  by
                     this reference.
</TABLE>





                                       6


<PAGE>   24
<TABLE>
<CAPTION>
 Exhibit
   No.                                     Description
-------------------------------------------------------------------------------------------------------------   
 <S>                 <C>
 10.10               1994 Directors Plan, filed as  Exhibit 10.10 to the Company's Registration Statement No.
                     33-84346 and incorporated herein by this reference.

 10.11               Form of  Notice of Grant of  Automatic Stock Option,  Automatic Stock  Option Agreement,
                     Stock Purchase  Agreement and Automatic Direct Stock Issuance  Agreement to be generally
                     used  in  connection  with the  1994  Directors  Plan,  filed as  Exhibit  10.11 to  the
                     Company's   Registration  Statement  No.  33-84346  and   incorporated  herein  by  this
                     reference.

 10.12               Agreement of Purchase  and Sale between the  Partnership and FBA Hotel  Venture dated as
                     of  September 23, 1994, filed as  Exhibit 10.12 to  the Company's Registration Statement
                     No. 33-84346 and incorporated herein by this reference.

 10.13               Agreement of Purchase and  Sale between the Partnership  and M R C Hotel Partners,  Ltd.
                     dated as  of September 23, 1994, filed  as Exhibit 10.13  to the  Company's Registration
                     Statement No. 33-84346 and incorporated herein by this reference.

 10.14               Agreement  of  Purchase  and Sale  between  the  Partnership  and  Arapahoe South  Hotel
                     Partnership dated as  of September 23, 1994,  filed as  Exhibit 10.14  to the  Company's
                     Registration Statement No. 33-84346 and incorporated herein by this reference.

 10.15               Agreement of Purchase and  Sale between the Partnership and C  and R Hotel Venture dated
                     as  of  September 23,  1994, filed  as  Exhibit  10.15  to  the  Company's  Registration
                     Statement No. 33-84346 and incorporated herein by this reference.

 10.16               Agreement  of Purchase and Sale between the Partnership and Craig Hotel Partners Limited
                     Liability Co.  dated as of September 23,  1994, filed as Exhibit  10.16 to the Company's
                     Registration Statement No. 33-84346 and incorporated herein by this reference.

 10.17               Agreement  of Purchase and Sale between the Partnership and Provo Hotel Partners Limited
                     Liability Co.  dated as of September 23, 1994,  filed as Exhibit 10.17  to the Company's
                     Registration Statement No. 33-84346 and incorporated herein by this reference.
</TABLE>





                                       7


<PAGE>   25
<TABLE>
<CAPTION>
 Exhibit
   No.                                     Description
-------------------------------------------------------------------------------------------------------------   
 <S>                 <C>
 10.18               Agreement of  Purchase and  Sale between the  Partnership and  Steamboat Hotel Partners,
                     Ltd.  dated  as  of  September 23,  1994,  filed  as  Exhibit  10.18  to  the  Company's
                     Registration Statement No. 33-84346 and incorporated herein by this reference.

 10.19               Hotel Sale  Agreement between the Management Company and  Western Hospitality Group, LLC
                     dated  as of  June  14, 1995,  filed  as  Exhibit 10.19  to the  Company's  Registration
                     Statement No. 33-84346 and incorporated herein by this reference.

 10.20               Real Property  Purchase and  Sale Agreement  and Joint  Escrow Instructions  between the
                     Management Company and Hampton Inns, Inc.,  dated as of June 19, 1995, filed as  Exhibit
                     10.20  to the Company's Registration  Statement No. 33-84346  and incorporated herein by
                     this reference.

 10.21               Hotel  Sale Agreement between the Management Company and Sunworld Properties dated as of
                     June 19, 1995, filed  as Exhibit 10.21 to  the Company's Registration Statement No.  33-
                     84346 and incorporated herein by this reference.

 10.22               First Amendment to  Agreement of Purchase and Sale between the Partnership and FBA Hotel
                     Venture dated as of  June 19, 1995, filed as Exhibit 10.22 to the Company's Registration
                     Statement No. 33-84346 and incorporated herein by this reference.

 10.23               First Amendment  to Agreement  of Purchase and  Sale between the  Partnership and  M R C
                     Hotel Partners, Ltd. dated as of June 19, 1995, filed as Exhibit 10.23  to the Company's
                     Registration Statement No. 33-84346 and incorporated herein by this reference.

 10.24               First Amendment to Agreement  of Purchase and Sale between the Partnership  and Arapahoe
                     South  Hotel  Partnership dated  as of  June  19, 1995,  filed as  Exhibit 10.24  to the
                     Company's  Registration  Statement   No.  33-84346  and  incorporated  herein   by  this
                     reference.

 10.25               First Amendment to Agreement of  Purchase and Sale between  the Partnership and C  and R
                     Hotel Venture  dated  as of  June 19,  1995, filed  as Exhibit  10.25  to the  Company's
                     Registration Statement No. 33-84346 and incorporated herein by this reference.
</TABLE>





                                       8



<PAGE>   26
<TABLE>
<CAPTION>
 Exhibit
   No.                                     Description
-------------------------------------------------------------------------------------------------------------   
 <S>                 <C>
 10.26               First Amendment  to Agreement  of Purchase  and Sale  between the Partnership  and Craig
                     Hotel Partners  Limited Liability Co. dated as of  June 19, 1995, filed as Exhibit 10.26
                     to the  Company's Registration Statement No.  33-84346 and  incorporated herein by  this
                     reference.

 10.27               First Amendment  to Agreement  of Purchase and  Sale between the  Partnership and  Provo
                     Hotel Partners Limited Liability  Co. dated as of June 19, 1995, filed  as Exhibit 10.27
                     to the  Company's Registration  Statement No. 33-84346  and incorporated  herein by this
                     reference.

 10.28               First Amendment to Agreement of Purchase and Sale between  the Partnership and Steamboat
                     Hotel Partners, Ltd.  dated as of June 19, 1995, filed as Exhibit 10.28 to the Company's
                     Registration Statement No. 33-84346 and incorporated herein by this reference.

 10.29               Form of  Agreement Respecting Lessee Unit Purchase between the Company, the Partnership,
                     the  Lessee,  Robert A.  Alter and  Charles  Biederman, filed  as Exhibit  10.29  to the
                     Company's  Registration   Statement  No.  33-84346  and   incorporated  herein  by  this
                     reference.

 10.30               Form of Third Party Pledge Agreement among the Partnership, Robert A. Alter and  Charles
                     Biederman, filed as  Exhibit 10.30 to the Company's Registration  Statement No. 33-84346
                     and incorporated herein by this reference.

 10.30.1             Amendment Number One to Third  Party Pledge Agreement effective as of December 13, 1995,
                     filed  as  Exhibit 10.34  to the  Company's 1995  10-K and  incorporated herein  by this
                     reference.

 10.30.2             Amendment  Number Two to Third Party Pledge Agreement  effective as of February 2, 1996,
                     filed  as  Exhibit 10.30.2  to the  Company's Registration  Statement No.  333-07685 and
                     incorporated herein by this reference.

 10.30.3             Amendment Number  Three to Third  Party Pledge Agreement  effective as of May  30, 1996,
                     filed  as Exhibit  10.30.3 to  the Company's  Registration  Statement No.  333-07685 and
                     incorporated herein by this reference.
</TABLE>





                                       9



<PAGE>   27
<TABLE>
<CAPTION>
 Exhibit
   No.                                     Description
-------------------------------------------------------------------------------------------------------------   
 <S>                 <C>
 10.30.4             Amendment Number  Four to Third  Party Pledge Agreement  effective as of  June 28, 1996,
                     filed  as Exhibit  10.30.4 to  the Company's  Registration Statement  No.  333-07685 and
                     incorporated herein by this reference.

 10.30.5*            Amendment Number Five to Third Party Pledge Agreement effective as of August 13, 1996.

 10.31               First  Amendment to  Hotel Sale  Agreement between the  Management Company  and Sunworld
                     Properties, filed  as Exhibit 10.31 to the Company's Registration Statement No. 33-84346
                     and incorporated herein by this reference.

 10.32               First  Amendment to  Hotel Sale  Agreement between  the  Management Company  and Western
                     Hospitality Group, LLC, filed as  Exhibit 10.32 to the Company's  Registration Statement
                     No. 33-84346 and incorporated herein by this reference.

 10.33               Commitment Letter  for Revolving Line of Credit issued by Bank One, Arizona, NA in favor
                     of the  Company dated  as of  July 20, 1995,  filed as  Exhibit 10.33  to the  Company's
                     Registration Statement No. 33-84346 and incorporated herein by this reference.

 10.34               Hampton  Inn Oakland  Contribution Agreement  dated as  of December  13, 1995,  filed as
                     Exhibit 10.35 to the Company's 1995 10-K and incorporated herein by this reference.

 10.35               Loan  Agreement by  and between  the Company  and Bank  One, Arizona,  N.A. dated  as of
                     October  25, 1995, filed  as Exhibit 10.38 to  the Company's 1995  10-K and incorporated
                     herein by this reference.

 10.35.1             Amended  and Restated  Loan  Agreement by  and  between  the Partnership  and  Bank One,
                     Arizona, N.A.  dated as  of June  21, 1996,  filed as  Exhibit 10.35.1 to  the Company's
                     Registration Statement No. 333-07685 and incorporated herein by this reference.

 10.36               Purchase and  Sale Agreement  and  Joint Escrow  Instructions  dated December  20,  1995
                     between the Partnership and  HL Project I Limited Liability Company, a  Delaware limited
                     liability company,  filed as Exhibit 10.36  to the Company's  First Quarter  1996 10-Q/A
                     and incorporated herein by this reference.
</TABLE>





                                       10



<PAGE>   28
<TABLE>
<CAPTION>
 Exhibit
   No.                                     Description
-------------------------------------------------------------------------------------------------------------   
 <S>                 <C>
 10.37               Purchase and Sale Agreement dated  May 28, 1996 between the Partnership and Renton Joint
                     Venture,  a  Washington  joint  venture,  filed  as   Exhibit  10.37  to  the  Company's
                     Registration Statement No. 333-07685 and incorporated herein by this reference.

 10.38               Capital  Contribution  Agreement  dated  March  28,  1996  between  the  Partnership and
                     Riverside Hotel Partners,  Inc., filed  as Exhibit 10.38 to  the Company's  Registration
                     Statement No. 333-07685 and incorporated herein by this reference.

 10.39               Purchase  and Sale Agreement  dated July 11,  1996 between the Partnership  and Bay City
                     Hospitality, Inc., a  California corporation,  filed as Exhibit  10.39 to  the Company's
                     Registration Statement No. 333-07685 and incorporated herein by this reference.

 10.40               Purchase  and Sale  Agreement dated  July  11, 1996  between the  Partnership  and Price
                     Hospitality,  Inc.,  a Utah  corporation,  filed  as  Exhibit  10.40  to  the  Company's
                     Registration Statement No. 333-07685 and incorporated herein by this reference.

          
--------------------
</TABLE>

*  Filed herewith; All other exhibits previously filed.
** Substantially identical to Exhibit 10.2; full text omitted pursuant to
   Instruction 2 to Item 601 of Regulation S-K.  The material differences
   between this Exhibit and Exhibit 10.2 are set forth in the schedule filed
   under this Exhibit.


      (a)   Exhibit 27 - Financial Data Schedule


      (b)   Reports on Form 8-K:

            A Current Report on Form 8-K (the "8-K") dated August 13, 1996, was
filed in the quarter ended September 30, 1996, with disclosure under Item 2.





                                       11
                                       
                                       
<PAGE>   29
                                   SIGNATURES

         Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of San
Clemente, State of California, on November 14, 1996.

                         SUNSTONE HOTEL INVESTORS, INC.



                         By:  /s/ Robert A. Alter
                              ----------------------------------
                              Robert A. Alter
                              President, Chief Financial Officer, Secretary and
                              Chairman of the Board of Directors

                                       20