UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

SCHEDULE 14A

(Rule 14a-101)

SCHEDULE 14A INFORMATION

Proxy Statement Pursuant to Section 14(a) of the

Securities Exchange

Act of 1934

(Amendment No.    )

Filed by the Registrantx                            Filed by a Party other than the Registrant¨

Check the appropriate box:

Sunstone Hotel Investors, Inc.

(Name of Registrant as Specified In Its Charter)

(Name of Person(s) Filing Proxy Statement, if other than the Registrant)

Payment of Filing Fee (Check the appropriate box):

Sunstone Hotel Investors, Inc.

903 Calle Amanecer, Suite 100

San Clemente, California 92673

Notice of 20072008 Annual Meeting

It is a pleasure to invite you to the 20072008 annual meeting of stockholders of Sunstone Hotel Investors, Inc. (“Sunstone”), or Sunstone, a Maryland corporation, to be held at the Renaissance Long BeachEmbassy Suites Hotel, 111 E. Ocean Boulevard, Long Beach,4550 La Jolla Village Drive, San Diego, California on Tuesday,Wednesday, May 1, 20077, 2008 at 1:00 p.m. local time, for the following purposes:

Only stockholders of record of shares of Sunstone common stock, par value $.01 per share, and Series C cumulative convertible redeemable preferred stock, par value $.01 per share, at the close of business on March 19, 200725, 2008 are entitled to notice of and to vote at the 20072008 annual meeting or any adjournment or postponement of the meeting.

Whether you own a few or many shares and whether or not you plan to attend in person, it is important that your shares be voted on matters that come before the meeting. You may be able to authorize a proxy to votecan ensure that your shares are voted at the meeting by using a toll-free telephone number orsubmitting your instructions by completing, signing, dating and returning the Internet. Instructions for using these convenient services are provided on theenclosed proxy card and in the attached proxy statement. If you prefer, you may still authorize a proxy to vote your shares by marking your votes on the proxy card, signing and dating it, and mailing itform in the envelope provided. If your proxy card is signed and returned without specifying your choices, your shares will be voted on each proposal in accordance with our board’s recommendations.

By Order of the Board of Directors

March 30, 2007Christopher M. Lal

Senior Vice President,

General Counsel and Secretary

April 7, 2008

Proxy Statement

Table of Contents

Sunstone Hotel Investors, Inc.

903 Calle Amanecer, Suite 100

San Clemente, California 92673

Proxy Statement

Your vote is very important. For this reason, our Board of Directors is soliciting the enclosed proxy to allow your shares of common stock, par value $.01 per share, and Series C cumulative convertible redeemable preferred stock, par value $.01 per share, (Seriesor Series C preferred stock),stock, to be represented and voted, as you direct, by the proxy holders named in the enclosed proxy card at the 20072008 annual meeting of stockholders of Sunstone Hotel Investors, Inc., a Maryland corporation, to be held on Tuesday,Wednesday, May 1, 2007,7, 2008, at 1:00 p.m. local time. “We,” “our”, “the Company” and “Sunstone” refer to Sunstone Hotel Investors, Inc. This proxy statement, the enclosed proxy card and our Annual Report to stockholders for the year ended December 31, 2006 (Annual Report),2007, or our Annual Report, are being mailed to stockholders entitled to vote beginning on or about April 2, 2007.7, 2008.

Information About the Meeting and Voting

What am I voting on?

The Board of Directors is soliciting your vote:

1. To elect 7six directors to serve until the next annual meeting and until their successors are elected and qualify;qualified;

2. To consider and vote upon ratification of the Audit Committee’s appointment of Ernst & Young LLP to act as the independent registered public accounting firm for the fiscal year ending December 31, 2007;2008; and

3. To consider and vote upon the approval of an amendment to our 2004 long-term incentive plan to provide for an increase in the number of authorized shares to be issued under the 2004 long-term incentive plan.Sunstone Hotel Investors, Inc. Executive Incentive Plan.

With respect to any other matter that properly comes before the meeting or any adjournment or postponement thereof, the representatives holding proxies will vote as recommended by the Board of Directors, or if no recommendation is given, in their own discretion.

Who is entitled to vote?

Stockholders of record of our common stock and Series C preferred stock as of the close of business on March 19, 2007 (record date)25, 2008, or the record date, are entitled to vote on matters that properly come before the meeting. Shares of common stock or Series C preferred stock can be voted only if the stockholder is present in person or is represented by proxy. At the close of business on the record date, there were 58,453,16658,735,197 shares of common stock and 4,102,564 shares of Series C preferred stock outstanding and entitled to vote. The holders of common stock and Series C preferred stock will vote together as a single class on all matters that properly come before the meeting.

How many votes do I have?

Each share of common stock has one vote. Each share of Series C preferred stock has one vote for each share of common stock into which it is convertible. As of the record date, each share of Series C preferred stock was convertible into one share of common stock and thus has one vote.

How do I vote?

You can ensure that your shares are voted at the meeting by submitting your instructions by completing, signing, dating and returning the enclosed proxy form in the envelope provided.

If you own your shares through a bank or broker, you may be eligible to authorize a proxy to vote your shares electronically over the Internet or by telephone. A large number of banks and brokerage firms are participating in the ADP Investor Communication Services, (“ADP”)or ADP, online program. This program provides eligible stockholders who receive a paper copy of the Annual Report and Proxy Statementproxy statement the opportunity to authorize a proxy to vote via the Internet or by telephone. If your bank or brokerage firm is participating in ADP’s online program, your voting form will provide instructions. The Internet and telephone proxy facilities will close at 11:59 p.m. E.S.T. on April 30, 2007. Stockholders who authorize a proxy to vote through the Internet or telephone should be aware that a proxy may incur costs to access the Internet, such as usage charges from telephone companies or Internet service providers, and that these costs must be borne by the stockholder. Stockholders who authorize a proxy to vote by Internet or telephone need not return a proxy card by mail. If your voting form does not reference Internet or telephone information, please complete and return the paper Proxyproxy card in the self-addressed postage paid envelope provided.

If you attend the annual meeting in person, you may request a ballot when you arrive. If your shares are held in the name of your bank, broker or other nominee, prior to attending the meeting you need to request a legal proxy from your bank, broker or nominee as indicated on the back of the Voter Information form you received with your proxy material. The legal proxy must be presented to vote these shares in person at the annual meeting. If you have previously authorized a proxy, you may still vote in person at the annual meeting, which will serve as a revocation of your previous proxy.

Does Sunstone have a policy for confidential voting?

Sunstone has a confidential voting policy. All proxies and other materials, including telephone and Internet proxy authorization, are kept confidential and are not disclosed to third parties. Such voting documents are available for examination by the inspector of election and certain personnel associated with processing proxy cards and tabulating the vote. We plan to appoint one independent inspector of election, a representative of our transfer agent, American Stock Transfer and Trust, to review and confirm the tabulation of votes at the annual meeting.

What if I return my proxy but do not mark it to show how I am voting?

If your proxy card is signed and returned without specifying your choices, your shares will be voted as recommended by the Board of Directors.

What are the Board of Directors’ recommendations?

The Board of Directors recommends that you vote FOR each of the nominees for Director;director; FOR Proposal 2 to ratify the Audit Committee’s appointment of Ernst & Young LLP to act as the independent registered public accounting firm for the fiscal year ending December 31, 2007;2008; and FOR Proposal 3 to approve an amendment to our 2004 long-term incentive plan to increase the number of authorized shares to be issued under the 2004 long-term incentive plan.Sunstone Hotel Investors, Inc. Executive Incentive Plan.

What vote is required to approve each proposal?

Election of Directors: There is no cumulative voting in the election of Directors.directors. The 7 Directorssix directors are elected by a plurality of votes cast at a meeting at which a quorum is present. Any shares not voted (whether by abstention, “broker non-vote” (i.e., shares held by a broker or nominee which are represented at the meeting, but with respect to which such broker or nominee is not instructed to vote and has not voted on a particular proposal), withholding or otherwise) have no impacteffect on the vote.

Ratification of Appointment of Independent Registered Public Accounting Firm: This proposal requires the affirmative vote of a majority of the votes cast at a meeting at which a quorum is present. Any shares not voted (whether by abstention, broker non-vote, or otherwise) have no impacteffect on the vote.

Approval of Amendment to 2004 Long-TermSunstone Hotel Investors, Inc. Executive Incentive Plan: This proposal requires the affirmative vote of a majority of the votes cast at a meeting at which a quorum is present; provided thatpresent. Any shares not voted (whether by abstention, broker non-vote, or otherwise) have no effect on the total votes cast represent overvote.

What constitutes a quorum?

The presence of the owners of at least a majority (greater than 50% in interest) of allthe aggregate number of shares of common stock and Series C preferred stock (calculated on an “as converted to common stock” basis) entitled to vote at the annual meeting constitutes a quorum. Presence may be in person or by proxy. You will be considered part of the quorum if you return a signed and dated proxy card, if you authorize a proxy to vote by telephone or the Internet, or if you attend the annual meeting.

Abstentions and broker “non-votes” are counted as present and entitled to vote for purposes of determining a quorum. A “broker non-vote” occurs when the broker or other entity is unable to vote on a proposal because the proposal is non-routine and the owner does not provide instructions. Rules of the New York Stock Exchange, or NYSE, determine whether proposals presented at stockholder meetings are “routine” or “non-routine.” If a proposal is routine, a broker or other entity holding shares for an owner in street or beneficial name may vote on the proposal atwithout voting instructions from the annual meeting. For purposes of thisowner. If a proposal abstentions andis non-routine, the broker non-votes will have the same effect as votes cast against the proposal, unless holders of more than 50% in interest of all shares entitled toor other entity may vote on the proposal cast votes.only if the owner has provided voting instructions. Each of Proposals 1, 2 and 3 are routine proposals under the rules of the NYSE. As a result, brokers or other entities holding shares for an owner in street name may vote on Proposals 1, 2 and 3 even if no voting instructions are provided by the owner.

What if other items come up at the annual meeting and I am not there to vote?

We are not now aware of any matters to be presented at the annual meeting other than those described in this proxy statement. When you return a signed and dated proxy card or provide your voting instructions by telephone or the Internet, you give the proxy holders (the names of whom are listed on your proxy card) the discretionary authority to vote on your behalf on any other matter that is properly brought before the annual meeting.

Can I change my vote?

You can change your vote by revoking your proxy at any time before it is exercised in one of four ways:

What does it mean if I receive more than one proxy card?

Some of your shares are likely registered differently or are in more than one account. You should vote each of your accounts by telephone or the Internet or mail. If you mail proxy cards, please sign, date and return each proxy card to guaranteeensure that all of your shares are voted.

If you hold your shares in registered form and wish to combine your stockholder accounts in the future, you should contact our transfer agent, American Stock Transfer and Trust, at 1-800-937-5449. Combining accounts reduces excess printing and mailing costs, resulting in savings for Sunstone that benefit you as a stockholder.

What if I receive only one set of proxy materials although there are multiple stockholders at my address?

If you and other residents at your mailing address own shares in street name, your broker or bank may have sent you a notice that your household will receive only one Annual Report and proxy statement for each company in which you hold shares through that broker or bank. This practice of sending only one copy of proxy materials is known as “householding.” If you did not respond that you did not want to participate in householding, you were deemed to have consented to the process. If the foregoing procedures apply to you, your broker has sent one copy of our Annual Report and proxy statement to your address. You may revoke your consent to householding at any time by contacting your broker or bank. The revocation of your consent to householding will be effective 30 days following its receipt. In any event, if you did not receive an individual copy of this proxy statement or our Annual Report, we will send a copy to you if you address your written request to Sunstone Hotel Investors, Inc., 903 Calle Amanecer, Suite 100, San Clemente, California 92673-6212, Attention: Secretary.

What constitutes a quorum?

The presence of the owners of at least a majority (greater than 50%) of the aggregate number of shares of common stock and Series C preferred stock (calculated on an “as converted to common stock” basis) entitled to vote at the annual meeting constitutes a quorum. Presence may be in person or by proxy. You will be considered part of the quorum if you return a signed and dated proxy card, if you authorize a proxy to vote by telephone or the Internet, or if you attend the annual meeting.

Abstentions and broker “non-votes” are counted as present and entitled to vote for purposes of determining a quorum. A “broker non-vote” occurs when the broker or other entity is unable to vote on a proposal because the proposal is non-routine and the owner does not provide instructions. Rules of the New York Stock Exchange (“NYSE”) determine whether proposals presented at stockholder meetings are “routine” or “non-routine.” If a proposal is routine, a broker or other entity holding shares for an owner in street or beneficial name may vote on the proposal without voting instructions from the owner. If a proposal is non-routine, the broker or other entity may vote on the proposal only if the owner has provided voting instructions. Proposals One and Two—the proposals to elect directors and to ratify the audit committee’s appointment of our independent registered public accounting firm each are routine proposals under the rules of the NYSE. As a result, brokers or other entities holding shares for an owner in street name may vote on Proposal One and Proposal Two, even if no voting instructions are provided by the owner. Proposal Three—the proposal to approve the amendment to our 2004 long-term incentive Plan is a non-routine proposal under the rules of the NYSE. As a result, brokers or other entities holding shares for an owner in street name may vote on Proposal Three only if voting instructions are provided by the owner. If you do not provide your broker with voting instructions for Proposal Three, your shares will not be counted as shares voted with respect to the vote required for these proposals.

If a broker holds your shares, this proxy statement and a proxy card have been sent to the broker. You may have received this proxy statement directly from your broker, together with instructions as to how to direct the broker to vote your shares. If you desire to have your vote counted, it is important that you return your voting instructions to your broker.

How do I access proxy materials on the Internet?

Stockholders can access our notice of annual meeting and proxy statement and Annual Report in the Investor Relations section of our website at www.sunstonehotels.com.

How do I submit a stockholder proposal for inclusion in the proxy statement for next year’s annual meeting?

Stockholder proposals may be submitted for inclusion in our 20082009 annual meeting proxy statement after the 20072008 annual meeting, but must be received no later than December 1, 2007.8, 2008. Proposals should be sent via registered, certified, or express mail to: Kenneth E. Cruse, Chief Financial OfficerChristopher M. Lal, General Counsel and Secretary, Sunstone Hotel Investors, Inc., 903 Calle Amanecer, Suite 100, San Clemente, California 92673-6212. See also “Stockholder Proposals for the 20072009 Annual Meeting” later in this proxy statement.

What do I need to do to attend the annual meeting?

If you are a holder of record, you should indicate on your proxy card that you plan to attend the meeting by marking the box on the proxy card provided for that purpose.

For the safety and comfort of our stockholders, admission to the annual meeting will be restricted to:

*

Financial analysts with proper credentials; and

Please note that space limitations may make it necessary to limit attendance. Admission to the meeting will be on a first-come, first-served basis. No more than two representatives of any corporate or institutional stockholder will be admitted to the meeting.

You may obtain directions to the Embassy Suites Hotel in the Investor Relations section of our website at www.sunstonehotels.com or by calling us at 949-369-4204.

If you attend the meeting, you may be asked to present valid government-issued photo identification, such as a driver’s license or passport, before being admitted. Cameras, recording devices, and other electronic devices will not be permitted, and attendees may be subject to security inspections or other security precautions.

IMPORTANT INFORMATION REGARDING THE AVAILABILITY OF PROXY MATERIALS FOR THE STOCKHOLDER MEETING TO BE HELD ON MAY 7, 2008

This proxy statement and our Annual Report are available at our Investor Relations website at http://www.sunstonehotels.com/proxy.

Proposal 1:

Election of Directors

Board of Directors

The business and affairs of Sunstone are managed under the direction of our Board of Directors. Our Board of Directors has responsibility for establishing broad corporate policies and for the overall performance of Sunstone, rather than for day-to-day operating details. Our Board of Directors currently consists of 7six directors. The entire Board of Directors consists of seven directors, so this election will result in one vacancy due to the departure of Steven R. Goldman, our former Chief Executive Officer, or CEO, and director, and because a nominee to fill his position on the Board of Directors has not yet been selected. It is intended that once a permanent Chief Executive Officer has been selected, this individual will be appointed to the Board of Directors to fill the vacancy. In the alternative, the Board of Directors may reduce the size of the Board of Directors to six.

The proxy holders named on the proxy card intend to vote for the election of the sevensix nominees listed below. The Nominating and Corporate Governance Committee selected these nominees, which selection was ratified by the Board.Board of Directors. If you do not wish your shares to be voted for particular nominees, please identify the exceptions in the designated space provided on the proxy card or, if you are authorizing a proxy to vote by telephone or the Internet, follow the instructions provided when you access the telephone or Internet proxy facilities. Directors will be elected by a plurality of the votes cast. Any votes that are withheld and any shares not voted, whether by abstention, broker non-vote, or otherwise, will have no impact on the vote.

If at the time of the meeting one or more of the nominees have become unable to serve, shares represented by proxies will be voted for the remaining nominees and for any substitute nominee or nominees designated by the Nominating and Corporate Governance Committee. If one or more nominees have become unable to serve, the Board of Directors may, in accordance with the Bylaws,our bylaws, reduce the size of the Board of Directors or may leave a vacancy until a nominee is identified. The Nominating and Corporate Governance Committee knows of no reason why any of the nominees will be unable to serve.

Directors elected at the annual meeting will hold office until the next annual meeting and until their successors have been elected and qualified. For each nominee, there follows a brief listing of principal occupation for at least the past five years, other major affiliations, and age as of MarchApril 1, 2007.2008. Each of the nominees other than Steven Goldman, is currently a director of the Company.

Nominees for Election as Directors

Mr. Alter served as our Chief Executive OfficerCEO from our formation on October 26, 2004 through March 19, 2007 when he became our Executive Chairman. On March 4, 2008, the Board of Directors appointed Mr. Alter our interim CEO, effective March 21, 2008. Prior to our formation, Mr. Alter served from November 1999 through our initial public offering in 2004 as Chief Executive Officer of one of our predecessor companies formed in 1985, which became a public company in August 1995. The public company, Sunstone Hotel Investors, Inc., commenced doing business in August 1995 upon its initial public offering. In November 1999, Mr. Alter participated in a management-led buyout to take that company private. He has been an owner of hotels since 1976 and is a past president of the Holiday Inn Franchise Association and a member of the Marriott Franchise board. Mr. Alter holds a B.S. degree in Hotel Administration from Cornell University.

Mr. Wolff has served as our Chairman since our formation on October 26, 2004, and since March 19, 2007, he has served as our Co-Chairman. Mr. Wolff has been Chairman of Wolff Urban Development, LLC since 1980.1980 and is also its Chief Executive Officer. Wolff Urban Development, LLC is a real estate acquisition, investment,

development and management firm. Mr. Wolff is also a co-founder and, since 1994, has served as Chairman of Maritz, Wolff & Co., a privately held hotel investment group that owns top-tier luxury hotels. From 1999 to 2004, Mr. Wolff also served as Co-Chairman of Fairmont Hotels & Resorts, a hotel management company formed by Fairmont Hotel Management Company and Canadian Pacific Hotels & Resorts, Inc. In addition, Mr. Wolff acquired ownership of Major League Baseball’s Oakland Athletics in April 2005. Mr. Wolff also serves on the boards of Grill

Concepts, Inc., First Century Bank and Maguire Properties, Inc. Mr. Wolff holds a B.A. degree in Business Administration from the University of Wisconsin, Madison, and an M.B.A. degree from Washington University in St. Louis, Missouri.

Ms. Behar has served as a Directordirector since our formation on October 26, 2004. Since October 2005, Ms. Behar has been Managing Director, Real Estate & Alternative Investments, for General Motors Investment Management Corporation, or GMIMCo. From 1986 through October 2005, Ms. Behar was a Portfolio Manager with GMIMCo. She manages GMIMCo clients’ real estate investment portfolios, including both private market and publicly-tradedpublicly traded security investments, as well as their alternative investment portfolios, totaling $9.5approximately $10.5 billion. She is a member of GMIMCo’s Management CouncilCommittee and Investment Committee, and is Vice Chairman of the GMIMCo Real Estate & Alternative Investment Approval Committee. Ms. Behar is a member of the Board of Directors of Desarrolladora Homex, S.A. de C.V., a publicly-listedpublicly listed home development company located in Mexico (and for which she also serves on the audit committee), and serves on the advisory boards of several domestic and international private real estate investment entities. Ms. Behar holds a B.S.E. degree from The Wharton School of the University of Pennsylvania, and an M.B.A. degree from the Columbia University Graduate School of Business. Ms. Behar is a Chartered Financial Analyst.Business, and the CFA charter.

Mr. Lewis has served as a Directordirector since May 2, 2006. Mr. Lewis is Chief Executive Officer of Realty Income Corporation, a NYSE listed real estate investment trust. He is also Vice Chairman of the Board of Directors of Realty Income Corporation and has been a member of its Board of Directors since September 1993. He joined Realty Income Corporation in 1987 and served in a variety of executive positions, including Vice President, Capital Markets until 1997, when he was named Chief Executive Officer. In 2000 and 2001 he also held the position of President.

Mr. Locker has served as a Directordirector since May 2, 2006. Since September 2003, Mr. Locker has been Chief Executive Officer and President of Inlet Capital LLC, an investment and asset management firm focused on the commercial real estate industry. In addition, since February 2003, Mr. Locker has been President of Global Capital Resources LLC and GCR Advisors Inc., which fund various types of mortgages. Mr. Locker was previously a Managing Director in the Real Estate Investment Banking Group at Deutsche Bank Securities, Inc. from September 2000 to February 2003. Prior to joining Deutsche Bank in 2000, Mr. Locker was Senior Managing Director at Bear, Stearns & Co. Inc., responsible for Real Estate Investment Banking. Mr. Locker earned a B.S./B.A. from Boston University School of Management in 1983 and an M.B.A. from the Wharton School in 1988. Mr. Locker is a Director of IVP Securities, LLC and Trustee of the National Jewish Center. He is also a member of NAREIT, Urban Land Institute, Commercial Mortgage Securities Association, International Council of Shopping Centers, The Wharton School Zell-Lurie Real Estate Center, Fisher Center for Real Estate and Urban Economics and numerous philanthropic and community organizations.

Mr. Russell has served as a Directordirector since our formation on October 26, 2004. Since June 2001, Mr. Russell has been President of Russell Financial, Inc., a strategic and financial consulting firm serving businesses and high net worth individuals. Mr. Russell is retired as the Chairman of Mellon West and the Vice Chairman of

Mellon Financial Corporation, in which capacities he served from May 1996 until March 2001. From September 1991 through April 1996, Mr. Russell served in various positions at Mellon, including Vice Chairman and Chief Risk Officer of Mellon Bank Corporation and Chairman of Mellon Bank Corporation’s Credit Policy Committee. From 1983 to 1991, Mr. Russell served as President and Chief Operating Officer, and a director, of Glenfed/Glendale Federal Bank. Mr. Russell also serves on the Boards of Directors of Nationwide Health Properties, Inc. (for which he also serves as chair of the audit committee and a member of the nominating and governance committee) and Countrywide Financial Corporation.Corporation (for which he also serves as chair of the credit committee and a member of the finance committee, audit and ethics committee and the special oversight committee). Mr. Russell holds a B.A. degree in Economics from the University of Washington and an M.A. degree in Economics from Northwestern University.

Steven R. Goldman		Age: 45		Nominee

Mr. Goldman is our Chief Executive Officer, effective as of March 19, 2007. Prior to joining the Company, Mr. Goldman served as Executive Vice President of Acquisitions and Development for Global Hyatt Corporation, where he was responsible for hotel development and oversight of Hyatt’s capital investments in hotel assets. Prior to joining Hyatt, from 1996 to 2003, Mr. Goldman was also Executive Vice President in a similar company for Starwood Hotels and Resorts and held various positions with Starwood Capital Group prior to that. Mr. Goldman holds a B.S. degree from the Cornell University School of Hotel Administration and an M.B.A. degree with a concentration in Finance from the University of Chicago.

The Board of Directors recommends a vote FOR each of the nominees.

Proposal 2:

Ratification of the Audit Committee’s Appointment of

Independent Registered Public Accounting Firm

The Audit Committee has selected and appointed the firm of Ernst & Young LLP to act as our independent registered public accounting firm for the year ending December 31, 2007.2008. Ernst & Young LLP audited the financial statements for us for the yearyears ended December 31, 2007 and 2006 and for the period October 26, 2004 through December 31, 2005 and for our predecessor for the period January 1, 2004 through October 25, 2004 and for the year ended December 31, 2003. Ratification of the appointment of Ernst & Young LLP requires a majority of the votes cast. Any shares not voted, whether by abstention, broker non-vote, or otherwise, have no impact on the vote.

Although stockholder ratification of the appointment of our independent auditor is not required by our bylaws or otherwise, we are submitting the selection of Ernst & Young LLP to our stockholders for ratification as a matter of good corporate governance practice. Even if the selection is ratified, the Audit Committee in its discretion may select a different independent registered public accounting firm at any time if it determines that such a change would be in the best interests of Sunstone. If our stockholders do not ratify the Audit Committee’s selection, the Audit Committee will take that fact into consideration, together with such other factors it deems relevant, in determining its next selection of our independent registered public accounting firm.

Representatives of Ernst & Young LLP are expected to be present at the annual meeting. These representatives will have an opportunity to make a statement if they so desire and will be available to respond to appropriate questions.

Audit, Audit-Related, Tax and Other Fees

The aggregate fees billed for professional services provided by Ernst & Young LLP for 20062007 and 20052006 were as follows:

In the above table, in accordance with the definitions of the Securities and Exchange Commission, or the SEC, “audit fees” are fees paid by us to Ernst & Young LLP for the audit of our consolidated financial statements included in itsour annual report on Form 10-K and review of the unaudited financial statements included in itsour quarterly reports on Form 10-Q or for services that are normally provided by the accountant in connection with statutory and regulatory filings or engagements, including in connection with public offerings of securities. “Audit fees” also include fees paid by us to Ernst & Young LLP for itsthe audit of our internal control over financial reporting. In 2007, audit fees consisted primarily of $800,000 for both the full-year audit and the audit of our internal control over financial reporting and $80,445 for services related to public offerings. In 2006, audit fees consisted primarily of $750,000 for both the full-year audit and the audit of our internal control over financial reporting and $98,645 for services related to public offerings. In 2005, audit fees consisted primarily of $847,500 for both the full-year audit and the audit of our internal control over financial reporting, $701,947 for services related to public offerings and $5,978 for accounting consultations.

“Audit-related Fees” are fees billed by Ernst & Young LLP for assurance and related services that are reasonably related to the performance of the audit or review of our financial statements. In 2007, audit-related fees consisted of an audit for each of four hotels. In 2006, audit-related fees consisted of an audit of aone hotel. In 2005, audit-related fees consisted of fees for the audit of an acquisition.

“Tax Fees” are fees billed by Ernst & Young LLP that relate to tax consulting and advisory services.

“All Other Fees” are fees billed by Ernst & Young LLP to us for any services not included in the first three categories.

PreapprovalPre-approval Policies and Procedures

Our Audit Committee has adopted a pre-approval policy requiring that the Audit Committee pre-approve all audit and permissible non-audit services to be performed by Ernst & Young LLP. Any proposed service that has received pre-approval but which will exceed pre-approved cost limits will require separate pre-approval by the Audit Committee. The Audit Committee has delegated to its ChairmanChair the authority to grant the required approvals for all audit and permissible non-audit services to be performed by Ernst & Young LLP that do not exceed $75,000 for any one project, provided that the ChairmanChair reports the details of the exercise of any such delegated authority at the next meeting of the Audit Committee. All services performed by the independent registered public accounting firm in 20062007 were approved by the Audit Committee pursuant to its pre-approval policy.

The Board of Directors recommends that Sunstone stockholdersa vote FOR ratification of the appointment of Ernst & Young LLP.

Proposal 3:

Increase in Authorized Shares to beApproval of the Sunstone Hotel Investors, Inc.

Issued Under the 2004 Long-TermExecutive Incentive Plan

General

Upon the recommendation of our Compensation Committee, our Board of Directors unanimously approved the adoption of the Executive Incentive Plan, subject to approval by our stockholders at the annual meeting. If the Executive Incentive Plan is not approved by stockholders, no amounts will be payable under the Executive Incentive Plan.

The Executive Incentive Plan is being submitted to stockholders for their approval so that payments of cash bonuses or grants of equity awards under the Executive Incentive Plan would be tax-deductible as “qualified performance-based compensation,” as defined in Section 162(m) of the Internal Revenue Code of 1986, as amended, or the Code. Section 162(m) of the Code limits the deductibility of compensation in excess of $1 million paid by a publicly traded corporation to certain “covered employees” in any taxable year, unless the compensation is “qualified performance-based compensation.” Notwithstanding the adoption of the Executive Incentive Plan and its submission to stockholders, Sunstone reserves the Compensation Committee have determined that it isright to pay or grant equity awards to its employees, including participants in the best interestExecutive Incentive Plan, amounts which may or may not be deductible under Section 162(m) of the Company and its stockholders to amend the Company’s 2004 long-term incentive plan (the “LTIP”) to increase the number of shares of Common Stock available for issuance from 2,100,000 to 3,850,000 (the “LTIP Amendment”). The Board of Directors and the Compensation Committee believe that this increase is desirable to accomplish the objectivesCode or other provisions of the LTIP discussed below. The Board of Directors and the Compensation Committee have approved the LTIP Amendment to be effective asCode.

Summary of the date of approval by the Company’s stockholders. Executive Incentive Plan

The LTIP Amendment will not become effective unless stockholder approval is obtained at the 2007 annual general meeting of stockholders. The principal featuresfollowing summary of the LTIP are summarized below and arematerial terms of the Executive Incentive Plan is qualified in theirits entirety by reference to the fullcomplete text of the LTIP a copy ofExecutive Incentive Plan, which is attached hereto as amended assuming stockholder approvalAnnex A.

Overview. The intent of the LTIP Amendment, has been filed electronically with the SEC as an exhibit to the proxy statement and may be obtained by writing to Sunstone Hotel Investors, Inc. at our principal executive office: 903 Calle Amanecer, Suite 100, San Clemente, California 92673-6212, Attention: Secretary.

Description of Plan. We adopted the LTIP and it became effective in October 2004 upon completion of our initial public offering. The purpose of the LTIPExecutive Incentive Plan is to attract, retain and retain our directors,motivate selected executive officers of Sunstone and its affiliates in order to promote Sunstone’s long-term growth and profitability, while at the same time resulting in “performance-based compensation” under Section 162(m) of the Code to the covered employees. Individuals will be designated as participants in the Executive Incentive Plan for a performance period, which can be one full fiscal year and/or portions of fiscal years (each a “performance period”). As discussed in greater detail below, executive officers who are designated as participants in the Executive Incentive Plan will be paid a cash bonus or granted an equity award based upon the level of attainment of pre-established, objective performance goals during the performance period, subject to the Compensation Committee’s right to reduce the amount of such cash bonus or equity award even if the performance goals have been attained.

Administration. The LTIP isExecutive Incentive Plan generally will be administered by the Compensation Committeea committee of the Board of Directors which has broad powers to interpret and implement the plan.

Typesmade up of Awards. The LTIP provides for grantsat least two directors, each of incentive stock options (withinwhom is an “outside director” within the meaning of Section 422162(m) of the Code. Unless otherwise determined by the Board of Directors, our Compensation Committee will administer the Executive Incentive Plan.

The Board of Directors (or a duly authorized committee) may, at any time, terminate or amend the Executive Incentive Plan, except that any amendment that would require stockholder approval in order for any cash bonus to be paid or any equity award to be granted under the Executive Incentive Plan to qualify as “performance-based compensation” under Section 162(m) of the Code will not be effective without the approval of stockholders. In addition, no cash bonuses will be paid and no equity awards will be granted under the Executive Incentive Plan with respect to performance periods that begin after December 31, 2012, unless the stockholders re-approve the plan.

Eligibility and Participation. The Compensation Committee may designate executive officers of Sunstone and its affiliates as participants in the Executive Incentive Plan for any performance period. Subject to the approval of the Executive Incentive Plan by our stockholders at the annual meeting, the Compensation

Committee designated the interim CEO, the CFO and certain other officers who are likely to be the three next highest paid executive officers to participate in the Executive Incentive Plan for the initial performance period, which began on January 1, 2008 and will end on December 31, 2008. In connection with the commencement of each subsequent performance period, the Compensation Committee will designate participants in the Executive Incentive Plan.

In its discretion, the Compensation Committee may add participants to, or remove participants from, the Executive Incentive Plan at any time during a performance period or otherwise, except that no participant may be added after the 90th day after the beginning of a performance period (or otherwise at a time that is not consistent with Treasury Regulations under Section 162(m) of the Code), nonqualified.

Performance Goals. The Compensation Committee will establish the objective performance goals for each performance period. At the same time the performance goals are established, the Compensation Committee will prescribe a formula to determine the amount of the cash bonus which may be payable or the amount of the potential equity grant based upon the level of attainment of the performance goals during the performance period.

The performance goals will be based on one or more of the following business criteria with regard to Sunstone and its affiliates (or a subsidiary, division, other operational unit or administrative department of Sunstone) as specified by the Compensation Committee:

In addition, performance goals may be based upon the attainment of specified levels of Sunstone’s or its affiliates’ (or subsidiary, division, other operational unit or administrative department of Sunstone) performance under one or more of the measures described above relative to the performance of other entities. To the extent

permitted under Section 162(m) of the Code, the Compensation Committee may: (i) designate additional business criteria on which the performance goals may be based; or (ii) adjust, modify or amend the aforementioned business criteria.

Bonus Awards and Equity Awards. Following the completion of each performance period, the Compensation Committee will calculate each participant’s cash bonus amount and equity award amount based on the level of attainment of the performance goals and the pre-set formula. The Compensation Committee may reduce, but not increase, the cash bonus payable or equity award grant to any participant as it deems appropriate in its discretion regardless of the level of attainment of the performance goals. In no event will any participant be paid a cash bonus or be granted an equity award greater than the following amounts in any performance period: (i) for cash-based awards, no more than $5,000,000; and (ii) for equity-based awards, no more than 250,000 shares of Sunstone common stock underlying stock options, stock appreciation rights dividend equivalent rights, restricted stock, restricted stock unitsor a combination thereof and other stock-based awards such as performance shares.

Shares Subject to the LTIP; Other Limitations on Awards. At the time of our initial public offering, we established the maximum number ofno more than 250,000 shares of Sunstone common stock issuable under the LTIP at 2,100,000. As of March 19, 2007, there were 901,635 shares of common stock available under the LTIP for future grants to directors, officers and employees.underlying performance share awards, performance share unit awards or a combination thereof. In addition, following the completion of each performance period and prior to these shares available for future grants, there were outstanding asany cash bonus payment or any grant of March 19, 2007, 967,375 shares of unvested restricted stock and restricted stock units previously granted to directors, officers and employees between October 26, 2004 and February 7, 2007. Assuming shareholder approval ofan equity award, the proposed LTIP Amendment, there will be a total of 2,651,635 shares available for future grants to directors, officers and employees, and the number of outstanding shares of unvested restricted stock will remain unchanged. Shares that may be issued under the LTIP may be authorized but unissued shares of our common stock or otherwise acquired for the purposes of the LTIP. If any award is forfeited or is otherwise terminated or canceled without the delivery of shares of our common stock, if shares of our common stock are surrendered or withheld from any award to satisfy a recipient’s income tax or other withholding obligations, or if shares of our common stock owned by a recipient are tendered to pay the exercise price of awards, then such shares will again become available under the LTIP. The Compensation Committee will adjustcertify in writing whether the termsperformance goals for such performance period have been met, and if they have, certify the amount of any outstanding awards and the numberapplicable cash bonus or equity award.

The cash bonus portion (if any) of shares of our common stock issuable under the LTIP for any increase or decreasea participant’s award will be paid by March 15^th in the number of issued shares of our common stock resulting from a stock split, reverse stock split, stock dividend, spin-off, combination or reclassification of our common stock, or any other event thatfiscal year after the fiscal year in which the performance period for such award is completed, but not before the Compensation Committee determines affects our capitalization.certifies that the participant’s performance goals for such performance period were met. Any equity-based award under the Executive Incentive Plan will be granted under Sunstone’s 2004 Long-Term Incentive Plan or any successor plan and will be subject to such terms and conditions (including, vesting requirements) as the Compensation Committee (or other appropriate administrative committee) may determine. If a participant’s employment with Sunstone or its affiliates terminates for any reason before the end of a performance period, the participant will not be entitled to any cash bonus or equity award.

Eligibility.New Plan Benefits Awards may

The amount of each participant’s cash bonus or equity award will be madesubject to any director, officer or employee, including any prospective employee, and to any consultant or advisor selectedthe attainment of the performance goals set by the Compensation Committee.

Additional information aboutCommittee and will be subject to the LTIP andCompensation Committee’s right to reduce such amount as described above. As a result, we cannot determine the types of awards provided by the LTIP is providedamount that will be payable under the heading “Executive Officer Compensation—Executive Incentive Plan to any participant for the initial performance period, however such amounts will be no more than $5,000,000 for cash-based awards and 500,000 shares of Sunstone common stock for equity-based awards (no more than 250,000 shares of Sunstone common stock underlying stock options, stock appreciation rights or a combination thereof and no more than 250,000 shares of Sunstone common stock underlying performance share awards, performance share unit awards or a combination thereof).

Moreover, because the Compensation Committee can reduce each participant’s cash bonus or equity award grant determined under the Executive Incentive Plan by any amount in its discretion, we cannot determine the cash bonus or the equity award grant that would have been provided to any person under the Executive Incentive Plan had it been in effect in the 2007 fiscal year. See the “Compensation Discussion and Analysis” in this proxy.for a discussion of how the compensation was determined for 2007 fiscal year for our named executive officers and the “Summary Compensation Table” for the amounts actually paid for 2007 fiscal year to such named executive officers.

Directors’ Recommendation

The Board of Directors unanimously recommends a vote FOR the approval of an amendment to our 2004 long-term incentive plan to increase the number of authorized shares to be issued under the 2004 long-term incentive plan.Executive Incentive Plan.

Corporate Governance

In light of applicable legal requirements, such as the Sarbanes-Oxley Act of 2002 and related rules promulgated by both the NYSE and the Securities and Exchange Commission (“SEC”),SEC, we provide the following discussion to inform you of our efforts to assure that we employ best practices in our corporate governance. A copy of our Corporate Governance Guidelines is available in the Investor Relations section of our website at www.sunstonehotels.com. In addition, a printed copy of the Corporate Governance Guidelines will be provided without charge upon request to Sunstone Hotel Investors, Inc., 903 Calle Amanecer, Suite 100, San Clemente, CA 92673-6212, Attention: Secretary.

We have also established conflict of interest and other policies to serve the long-term interests of our stockholders and further align the interests of our directors and management with our stockholders.

Conflict of Interest Policy

We have adopted a policy which provides that the approval of our Nominating and Corporate Governance Committee is required for any transaction involving us and any of our directors, officers or employees, or any entity in which any of our directors, officers or employees is employed or has an interest of more than 5%.

Code of Business Conduct and Ethics

We have adopted a Code of Business Conduct and Ethics, which provides that directors, officers (including our Chief Executive OfficerCEO and all senior financial officers) and employees owe a duty to us to advance our business interests when the opportunity to do so arises. Among other things, our directors, officers and employees are prohibited from taking (or directing to a third party) a business opportunity that is discovered through the use of corporate property, information or position, unless we have already been offered the opportunity and turned it down, in which case our Nominating and Corporate Governance Committee must in any event approve the director, officer or employee interest therein. More generally, our directors, officers and employees are prohibited from using corporate property, information or position for personal gain. The Code of Business Conduct and Ethics is posted in the Investor Relations section of our website at www.sunstonehotels.com. In addition, a copy of the Code of Business Conduct and Ethics will be provided without charge upon request to Sunstone Hotel Investors, Inc., 903 Calle Amanecer, Suite 100, San Clemente, CA 92673-6212, Attention: Secretary.

Independence of Directors and Committees

The Board of Directors has determined that a majority of the current Board of Directors is independent as defined under the NYSE’s rules and that a majority of the Board of Directors will be independent if the slate of directors up for election in Proposal 1 of this proxy are elected. Directors who serve on the Compensation Committee and the Nominating and Corporate Governance Committee are also subject to these independence requirements. Directors who serve on the Audit Committee are subject to these and additional independence requirements.

To be considered independent under the NYSE’s rules, the Board of Directors must determine that a director does not have a material relationship with Sunstone and/or its consolidated subsidiaries (either directly or as a partner, stockholder or officer of an organization that has a relationship with any of those entities).

The Board of Directors undertook a review of the independence of the directors nominated for election at the upcoming annual meeting. During this review, the Board of Directors considered the transactions and relationships during the prior three years between each director or any member of his or her immediate family and Sunstone and its subsidiaries and affiliates as reported under “Certain Relationships And Related Transactions” below. The Board of Directors also examined transactions and relationships between Directorsdirectors or

their affiliates and members of the senior management or their affiliates. The purpose of this review was to determine whether any such relationships or transactions were inconsistent with a determination that such director is independent.

As a result of this review, the Board of Directors affirmatively determined that Messrs. Wolff, Lewis, Locker and Russell and Ms. Behar are independent of Sunstone and its management under the independence standards of the NYSE.

Director Attendance at Meetings

Each of our directors is expected to attend each annual meeting of stockholders. Although our Board of Directors recognizes that conflicts may occasionally prevent a director from attending a Board of Directors or stockholder meeting, the Board of Directors expects each director to make every possible effort to keep such absences to a minimum. The Board of Directors held eightseven meetings and acted by written consent on three occasions in 2006.2007. During that period, all directors attended at least 75% of the meetings of the Board of Directors and committees of the Board of Directors on which they served. In addition, all of our directors, except for our former director Anthony W. Dona, attended our annual meeting of stockholders in 2006.2007.

Stockholder Communication with the Board and Non-Employee Directors

Stockholders may communicate any matters they wish to raise with the directors by writing to the Board of Directors, Sunstone Hotel Investors, Inc., 903 Calle Amanecer, Suite 100, San Clemente, California 92673-6212, Attn: Secretary. Stockholders should provide proof of sharestock ownership with their correspondence. All communications from verified stockholders will be received and processed by the Secretary and then directed to the appropriate member(s) of the Board of Directors.

In addition, any interested party who wishes to communicate directly with our Non-Employee Directorsnon-employee directors may contact Mr. Wolff, our Co-Chairman, at the mailing address of the Company’s executive offices at 903 Calle Amanecer, Suite 100, San Clemente, California 92673-6212. All communications will be received and processed by the Secretary and then directed to the appropriate Non-Employee Director(s)non-employee director(s).

Committees of the Board of Directors

Committees

Our Board of Directors has established a number of committees, including the Compensation Committee, the Audit Committee and the Nominating and Corporate Governance Committee, each of which is briefly described below. Each of our committees has a charter, current copies of which may be viewed in the Investor Relations section of our website at www.sunstonehotels.com. In addition, printed copies of our committee charters will be provided without charge upon request to Sunstone Hotel Investors, Inc., 903 Calle Amanecer, Suite 100, San Clemente, CA 92673, Attention: Secretary.

Compensation Committee

The Compensation Committee determines compensation and benefits for all executive officers, oversees our equity compensation plans and assists in the establishment of policies applicable to employees generally.

The Compensation Committee may, in its discretion, delegate all or a portion of its duties and responsibilities to a subcommittee of the Compensation Committee. In particular, the Compensation Committee may delegate the approval of certain transactions to a subcommittee consisting solely of members of the Compensation Committee who are (i) “Non-Employee Directors”“non-employee directors” for the purposes of Rule 16b-3 under the Securities Exchange Act of 1934, as in effect from time to time,amended, or the Exchange Act, and (ii) “outside directors” for the purposes of Section 162(m) of the Internal Revenue Code, as in effect from time to time.

The members of the Compensation Committee are independent directors as required by the listing standards and rules of the NYSE and are “nonemployee” directors within the meaning of Section 162(m) of the Internal Revenue Code and the applicable rules of the SEC. None of these directors, nor any of our executive officers, serves as a member of the governing body or Compensation Committee of any entity that has one or more executive officers serving as a member of either the Company’s Board of Directors or Compensation Committee.

Our Compensation Committee is currently comprised of Anthony W. Dona and Lewis N. Wolff.Wolff and Keith P. Russell. Mr. DonaWolff is the chair. The Compensation Committee held threetwo meetings and acted by written consent on one occasion during 2006.2007. The Company expects that after the Annual Meetingannual meeting, the Compensation Committee members will consist of Keith P. Russell and Lewis W. Wolff. Mr. Wolff will beremain the chair.same.

Audit Committee

Our Board of Directors has adopted an Audit Committee charter, which defines the Audit Committee’s purposes to include oversight of:

All of the members of the Audit Committee are financially literate within the meaning of the listing standards and rules of the NYSE. At least one member is an audit committee financial expert as that term is defined by applicable rules of the SEC, and at least one member possesses accounting and financial management expertise within the meaning of the listing standards and rules of the NYSE. The Board of Directors has

determined that each member of the Audit Committee is independent within the meaning of the rules of both the NYSE and the SEC.

Our Audit Committee is currently comprised of Thomas A. Lewis, Keith M. Locker, and Keith P. Russell. Mr. Locker is the chair. The Audit Committee held fivefour meetings during 2006.2007. We expect that after the Annual Meeting, the Audit Committee members will remain the same.

Nominating and Corporate Governance Committee

The Board of Directors has delegated to the Nominating and Corporate Governance Committee the responsibility to select, or to recommend to the Board of Directors, nominees for election at any annual meeting, or any special meeting of stockholders, and any person to be considered to fill a vacancy or a newly created directorship that is the result of any increase in the authorized number of directors. The Nominating and Corporate Governance Committee is also responsible for nominating board committee members, reviewing our corporate governance guidelines, assisting with the annual evaluation of the Board of Directors and approving certain transactions involving a conflict of interest. The Board of Directors has determined that each of the members of the Nominating and Corporate Governance Committee is independent within the meaning of the listing standards of the NYSE.

In connection with its annual process for identifying directors to nominate or renominate, or to be recommended to the Board of Directors for nomination or renomination, the Nominating and Corporate Governance Committee seeks to determine whether the proposed candidate demonstrates an ability and willingness to:

Additionally, in reviewing the qualifications of particular candidates, the Nominating and Corporate Governance Committee may choose to recommend individuals who can contribute an important, special or unique skill, expertise or perspective to the Board of Directors. The Nominating and Corporate Governance Committee also reviews the results of the self-evaluations provided by the directors with respect both to the Board of Directors and the individual directors and considers these results in light of the criteria for individual directors and objectives of the Board of Directors. Based on this process, the Nominating and Corporate Governance Committee is able to recommend, among other things, whether the existing Board of Directors contains the appropriate size, structure and composition, whether some or all of the incumbent directors should be recommended to the Board of Directors for re-nomination, and whether the Board of Directors should be enlarged to include additional directors.

If the Board of Directors determines to seek additional directors for nomination, the Nominating and Corporate Governance Committee will consider as potential director nominees candidates recommended by various sources, including any member of the Board of Directors or senior management. The Nominating and Corporate Governance Committee may also retain a third-party search firm to identify candidates. The

Nominating and Corporate Governance Committee also considers recommendations for nominees that are timely submitted by stockholders and only if such recommendations are delivered in the manner prescribed by the

advance notice provisions contained in Article II, Section 2.11 of our Bylaws for stockholder proposals. (See “Stockholder Proposals For The 2008for the 2009 Annual Meeting.”). In addition to satisfying the timing, ownership and other requirements specified in Article II, Section 2.11 of the Bylaws, a stockholder’s notice must set forth as to each person whom the stockholder proposes to recommend that the committee nominate for election to the Board of Directors all information relating to such person that is required to be disclosed in solicitations of proxies for election of directors in an election contest, or is otherwise required, pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)and our bylaws (including such person’s written consent to being named in the proxy statement as a nominee and to serve as a director if elected). Properly communicated stockholder recommendations will be considered in the same manner as recommendations received from other sources.

Our Nominating and Corporate Governance Committee is currently comprised of Z. Jamie Behar, Keith M. Locker, and Lewis N. Wolff. Mr. Wolff is the chair. The Nominating and Corporate Governance Committee held two meetingsone meeting during 2006.2007. We expect that after the Annual Meeting, the Nominating and Corporate Governance Committee will continue to be comprised of the same members.

Committee Membership

The table below summarizes current membership information for each of the Board of Directors committees:

The table below summarizes expected membership information for each of the Board of Directors committees assuming that the nominees listed in Proposal 1 are elected as directors at the Annual Meeting:

Audit Committee Financial Expert

The Board of Directors has determined that each of Keith M. Locker and Keith P. Russell are qualified as audit committee financial experts within the meaning of SEC regulations. In making this determination, the Board considered the following qualifications: (a) understanding of generally accepted accounting principles, (“GAAP”);or GAAP; (b) ability to apply GAAP to accounting for estimates, accruals and reserves; (c) experience preparing, auditing, analyzing or evaluating financial statements that present a breadth and level of complexity of accounting issues that are generally comparable to the issues likely to be raised by our financial statements, or experience actively supervising persons engaged in these activities; (d) understanding of internal control over financial reporting; and (e) understanding of audit committee functions.

Meetings of Non-Employee Directors

Ms. Behar and Messrs. Wolff, Dona, Lewis, Locker and Russell are currently our Non-Employee Directors.non-employee directors. The Non-Employee Directorsnon-employee directors held four meetings in 2006.2007. Following the Annual Meeting, we expect that our Non-Employee Directorsnon-employee directors will be Ms. Behar and Messrs. Wolff, Lewis, Locker and Russell and that Mr. Wolff will be selected to preside over executive sessions of the Non-Employee Directors.non-employee directors.

Succession Planning Committee

The Board of Directors formed and delegated to a Succession Planning Committee on May 3, 2006, the specific responsibility of conducting a search process to identify potential successors to Mr. Alter as the Company’s Chief Executive Officer.CEO. The Succession Planning Committee was comprised of Messrs. Dona, Lewis and Locker. As part of the search process, the Succession Planning Committee met with both internal and external candidates who possessed strong experience in hotel management, individual asset acquisition and corporate transactions, and who had significant capital markets knowledge and strong industry relationships.Locker, as well as our former director, Mr. Anthony W. Dona. On January 17, 2007, the Succession Planning Committee concluded its work and selected Steven R. Goldman as the successor to Mr. Alter as Chief Executive Officer,CEO, effective March 19, 2007.

Chief Executive Officer Search Committee

Report of the Audit Committee of the Board of Directors

The following report of the Audit Committee does not constitute soliciting material and should not be deemed filed or incorporated by reference into any of Sunstone’s filings under the Securities Act of 1933, as amended, or under the Securities the Exchange Act of 1934, as amended, except to the extent we specifically incorporate this Reportreport by reference.

The purpose of the Audit Committee of Sunstone Hotel Investors, Inc. (“Sunstone”) is to assist the Board of Directors in its oversight of (i) the integrity of Sunstone’s financial statements, (ii) Sunstone’s compliance with legal and regulatory requirements, (iii) the independent auditors’ qualifications and independence, and (iv) the performance of the independent auditors; to retain Sunstone’s independent auditors and to prepare this report. As set forth in the Audit Committee charter, a copy of which may be found in the Investor Relations section of Sunstone’s website at www.sunstonehotels.com, management of Sunstone is responsible for the preparation, presentation and integrity of Sunstone’s financial statements and Sunstone’s accounting and for ensuring that financial reporting principles and internal controls and procedures are designed to assure compliance with accounting standards and applicable laws and regulations. The independent auditors are responsible for auditing Sunstone’s financial statements and expressing an opinion as to their conformity with U.S. generally accepted accounting principles.

In performance of its oversight function, the Audit Committee has considered and discussed the audited financial statements with management and the independent auditors. The Audit Committee has also discussed with the independent auditors the matters required to be discussed by Statement on Auditing Standards No. 61, Communication with Audit Committees, as amended. In addition, the Audit Committee has discussed with the independent auditors the auditors’ independence from Sunstone and its management, including the matters in the written disclosures and letter required by Independence Standards Board Standard No. 1, Independence Discussions with Audit Committees, a copy of which the Audit Committee has received.

The members of the Audit Committee are not full-time employees of Sunstone and are not performing the functions of auditors or accountants. As such, it is not the duty or responsibility of the Audit Committee or its members to conduct “field work” or other types of auditing or accounting reviews or procedures or to set auditor independence standards. Members of the Audit Committee necessarily rely on the information provided to them by management and the independent accountants. Accordingly, the Audit Committee’s considerations and discussions referred to above do not assure that the audit of the Company’s financial statements has been carried out in accordance with U.S. generally accepted accounting principles or that the Company’s auditors are in fact “independent.”

In reliance on the reviews and discussions referred to above, and subject to the limitations on the role and responsibilities of the Audit Committee referred to above and in the Audit Committee charter, the Audit Committee recommended to the Board of Directors the inclusion of the audited financial statements in Sunstone’s 20062007 Annual Report on Form 10-K for filing with the Securities and Exchange Commission.Commission, as amended by Sunstone’s Form 10-K/A filed with the Securities and Exchange Commission on February 25, 2008.

AUDIT COMMITTEE

Keith M. Locker, Chair

Thomas A. Lewis

Keith P. Russell

March 20, 2007April 1, 2008

Compensation of Directors

Each of our independent directors is entitled to receive an annual stock grant of shares having a value equal to $60,000 for serving on our Board of Directors, and an attendance fee paid in cash of $1,000 per meeting of our Board of Directors if the meeting is attended in person or $500 if the meeting is attended telephonically. Pursuant to an arrangement with Ms. Behar’s employer, all director fees for Ms. Behar (including the value of the annual stock grant and attendance fees) are paid in cash to her employer.

In addition, each member of our Audit Committee, Compensation Committee and Nominating and Corporate Governance Committee is entitled to an attendance fee of $1,000 per committee meeting or $500 if the meeting is attended telephonically. The chair of our Audit Committee receives $10,000, the chair of our Compensation Committee receives $4,000 and the chair of our Nominating and Corporate Governance Committee receives $1,000, in each case in cash payable in quarterly installments.

Directors are also entitled to reimbursement for expenses incurred in fulfilling their duties as our directors and receive complimentary hotel rooms at our hotels and resorts when on personal travel. In certain circumstances, directors may also receive such complimentary hotel rooms at the Company’s hotels for one year following their retirement or resignation from the Board of Directors.

20062007 Director Compensation

Executive Officers

The following sets forth biographical information regarding our executive officers as of MarchApril 1, 2007,2008, other than Messrs.Mr. Alter and Goldman whose biographical information is set forth above under “Proposal 1: Election of Directors”.

Jon D. Kline, 40, is our President. Prior to our formation and through September 2006, Mr. Kline served as our Executive Vice President and Chief Financial Officer. Previously, Mr. Kline spent five years with Merrill Lynch & Co.’s Investment Banking Division, during which time he directed the firm’s Hospitality and Leisure practice. Before that time, he was a member of the Real Estate and Lodging Finance Group of Smith Barney’s Investment Banking Division as well as an attorney with Sullivan & Cromwell LLP. Mr. Kline holds a B.A. degree in Economics from Emory University and a J.D. degree from New York University School of Law.

Gary A. Stougaard, 52, is our Executive Vice President and Chief Investment Officer. From October 1997 to our formation, Mr. Stougaard was employed by Sunstone Hotel Investors, L.L.C. overseeing the company’s development and renovation activities. Since 1985 and prior to joining Sunstone, he served as a developer and asset manager of hotel properties and prior to that time he was a certified public accountant in private practice. Mr. Stougaard holds a B.A. degree in Accounting from Michigan State University.

Kenneth E. Cruse, 38,39, is our Senior Vice President and Chief Financial Officer.Officer, or CFO. Mr. Cruse joined us in April 2005 and through December 31, 2006, Mr. Cruse served as our Senior Vice President – Asset Management.Management, and was appointed Senior Vice President – Corporate Finance on September 1, 2006 and Senior Vice President and CFO on January 1, 2007. For the eight years prior to joining Sunstone, Mr. Cruse worked in a variety of roles for Host Marriott Corporation, the predecessor of Host Hotels and Resorts, Inc., most recently as Vice President, Corporate Finance. Mr. Cruse holds a B.S. degree in Commercial Recreation and Tourism Management from Colorado State University and an M.B.A. degree from Georgetown University.

Christopher M. Lal, 35, is our Senior Vice President, General Counsel and Secretary. Mr. Lal joined us in April 2007 as Vice President, Legal and was appointed General Counsel in November 2007 and Senior Vice President in February 2008. Prior to joining Sunstone, Mr. Lal served as General Counsel and Assistant Secretary for RemedyTemp, Inc., a publicly traded human capital services company. From 1998 to 2005, Mr. Lal served as an associate and then counsel at O’Melveny & Myers LLP, where he specialized in securities, mergers and acquisitions and general corporate representation. Mr. Lal holds a B.A. degree in Law and Society from the University of California, Santa Barbara, and a J.D. degree from the University of Southern California.

Executive Officer Compensation

Compensation Discussion and Analysis

This Compensation Discussion and Analysis describesexplains our compensation philosophy and policies that apply to our executive officers.officers, including our named executive officers listed in the Summary Compensation Table below, or the Named Executive Officers. It explains the structure and rationale associated with each material element of the compensation program for our executive officers, describes the actual compensation paid to our Named Executive Officers for 2006 (being those persons set forth in the Summary Compensation Table below),2007, and provides important context for the more detailed disclosure relating to our Named Executive Officers in the compensation tables following this Compensation Discussion and Analysis.

During 2007, we undertook a management restructuring. In connection with that restructuring, the CEO, role was transitioned from Mr. Alter to Mr. Goldman, Mr. Kline, our former CFO, assumed the position of President, and Mr. Cruse, our former Senior Vice President – Corporate Finance, assumed the position of CFO. Subsequently, Mr. Kline and Mr. Stougaard, our former Chief Investment Officer, agreed that their employment with us would terminate. In addition, in March 2008 Mr. Goldman resigned from his position with us and Mr. Alter was appointed interim Chief Executive Officer. In accordance with the rules of the SEC, each of these individuals—Messrs. Alter, Goldman, Cruse, Kline and Stougaard—are Named Executive Officers. Accordingly, this Compensation Discussion and Analysis discusses certain on-going compensation arrangements with respect to those of our Named Executive Officers who were employed by the Company at the end of 2007, as well as specific arrangements entered into with Messrs. Kline and Stougaard who left the Company during 2007.

This Compensation Discussion and Analysis contains statements regarding company performance targets and goals. These targets and goals are disclosed in the limited context of our executive compensation programs and should not be understood to be statements of management’s future expectations or estimates of future results or other guidance. We specifically caution investors not to apply these statements to other contexts.

Compensation Philosophy and Objectives

The Compensation Committee seeks to attract, motivate and retain Sunstone’s executive officers through competitive compensation arrangements that provide strong financial incentives for the executive officers to maximize stockholder value.

Our executive compensation program is designed to reward performance relative to financial and other metrics that we believe will result in favorable total stockholder returns, both in terms of absolute appreciation in the value of our shares, and in terms of relative performance as compared to our peers, taking into consideration our competitive position within the real estate industry and each executive’s long-term career contributions to the Company.

In order to achieve these compensation objectives, the Compensation Committee has established a compensation structure that is intendedprimarily rewards our executives for performance relative to position an executive’s total compensation at a levelfinancial metrics and other financial indicators that is competitive

withwe believe are related to maximizing stockholder value in our industry. The Compensation Committee has also designed the compensation program to reward our executive officers at levels that the Compensation Committee generally believes to be competitive for companies in its industry, including in part as a result of the relevantreview of executive officersofficer compensation levels at certain companies in oura peer group.group, as identified below. These compensation objectives are also furthered by providing that a significant amount of the executive officer’s total compensation will be variable and will be awarded by reference to these key financial metrics which we believe closely correlate to maximizing stockholder returns.and other financial indicators.

To implement these compensation objectives, the executive compensation program for fiscal year 20062007 primarily consisted of a combination of:

Implementation of our Compensation Philosophy and Objectives

Compensation Committee

The Compensation Committee assists the Board of Directors in discharging the Board of Directors’ responsibilities relating to compensation of our executive officers. It evaluates and recommends to the Board of Directors appropriate policies and decisions relative to executive officer benefits, bonus, incentive compensation, severance, and equity-based or other compensation plans. It also oversees preparation of executive compensation disclosures for inclusion in our proxy statement and assists management in regulatory compliance with respect to compensation matters. The members of the Compensation Committee in 20062007 were Lewis M.N. Wolff and Anthony R. Dona,Keith P. Russell, each of whom is “independent” within the meaning of the listing standards of the NYSE, is a “nonemployee director” within the meaning of Rule 16b-3 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) and is an “outside director” within the meaning of Section 162(m) of the Internal Revenue Code of 1986.Code.

The Compensation Committee exercises independent discretion and judgment in making compensation decisions after evaluating the Company’s performance, the executive’s past performance, including the extent to which the executive has met or exceeded specified targets or affected the Company’s performance, and the executive’s long-term potential to enhance stockholder value. In connection with the executive compensation determination process, the Compensation Committee seeks input from the Chief Executive Officer (CEO)CEO regarding the compensation of the executive officers other executive officers. However, only independentthan the CEO. Although the Compensation Committee members vote on recommendations todiscusses the full Board of Directors regarding changes in executive compensation. Further,CEO’s compensation with him, the CEO does not provide recommendations for changes in his own compensation. The Compensation Committee discusses the CEO’s compensation, with him, butand final deliberations and all votes regarding the recommendation of his compensation to the full Board of Directors are made in executive sessions, without the CEO present. Only Compensation Committee members vote on recommendations to the full Board of Directors regarding changes in executive compensation.

Compensation

As described in more detail below, compensation for fiscal year 20062007 for each of our executive officers was determined by the Compensation Committee based onupon a review of total compensation paid by the Company to each executive officer in prior years, publicly-disclosed compensation packages of executives of other public lodging and other Real Estate Investment Trusts, or REITs, and the Company’s performance, both nominallythe individual performance of each such executive officer and, as compared to other public lodging REITs.in certain instances, taking into account certain peer group information provided in a compensation consultant’s report. The Compensation Committee’s analysis is discussed below in the context of each element and amount of compensation.

The annual cash incentive bonus and equity incentive awards for a fiscal year are typically paid in the first quarter of the subsequent fiscal year, when audited financial statements for such fiscal year become available for the Company. For example, in February 2007,2008, we paid the 20062007 cash incentive bonuses and issued long-term equity incentive awards to the Named Executive Officers with respect to the Company’s performance for the fiscal year 2006.2007.

Consultants

We generally do not make regular use of compensation consultants. In 2006, we retainedHowever, in connection with compensation decisions made in 2007, our Compensation Committee reviewed a report prepared by the Schonbraun McCann Group LLC (“Schonbraun”)LLP, or Schonbraun, the compensation consultant we retained in 2006 in connection with aour management restructuring completed in the first quarter of 2007 whereby (i) our CEO through March 18, 2007, Robert Alter, was succeeded by Steven R. Goldman, (ii) our former Chief Financial Officer, Jon Kline, assumed the position of President, and (iii) Kenneth Cruse, formerly our Senior Vice President—Finance, assumed the position of Chief Financial Officer.restructuring. Schonbraun was asked to report to the Compensation Committee on market data on executive pay levels and incentive program designs, to recommend compensation levels for our executive officers and to recommend modifications to the Company’s existing annual and long-term incentive plan designs.

We had previously engaged a The role of this compensation consultant in selecting specific elements and levels of compensation for each of the Named Executive Officers employed with us at the end of 2007 is discussed in connection with the our initial public offering in 2004.elements of compensation for each Named Executive Officer below.

Peer Group Information

In connection with its engagement in 2006, Schonbraun provided certain market data on executive pay levels for a group of peer companies and compared our 2006 executive compensation levels with this peer group information. The peer group companies were selected by Schonbraun based on their market size, geographic location, property type and asset quality. The peer group companies consisted of the following:

Other than in connection with the Schonbraun engagement, as a general matter our Compensation Committee has not engaged in benchmarking of compensation of our executive officers against other companies, but instead has relied on its own experience and judgment with respect to determining the competitiveness of Sunstone’s compensation arrangements. In addition, with respect to the peer group information provided by Schonbraun, the Compensation Committee did not “benchmark” or peg executive compensation to any particular level of peer group compensation, but rather used that information in a subjective manner in its evaluation of and in making decisions concerning executive compensation as more particularly described, where applicable, below.

Tax Considerations

We take into account tax implications in the design of our executive compensation program. For example, pursuant to Section 162(m) of the Internal Revenue Code, of 1986, as amended, which was adopted in 1993, publicly traded companies may not deduct, in any taxable year, compensation in excess of $1,000,000 paid to their chief executive officer and each of the next fourthree most highly compensated executive officers as of the end of any fiscal year (other than the Chief Financial Officer) unless that compensation qualifies as “performance based,” as defined in Section 162(m). The Compensation Committee believes that it is in the best interests of the Company and its stockholders to comply with the limitations of Section 162(m) of the Code to the extent practicable and consistent with retaining, attracting and motivating the Company’s Named Executive Officers. Mr. Alter wasAs described under Proposal 3, we are asking our stockholders to approve the only NamedSunstone Hotel Investors, Inc. Executive Officer whoseIncentive Plan, which, if approved, will be a vehicle for the payment of annual incentive compensation in 2006 exceededfor the $1,000,000 limit for purposes of Section 162(m). Our LTIP provides for performance based awards within the meaning of2008 fiscal year and subsequent fiscal years that should qualify as “performance-based” compensation under Section 162(m) and, accordingly, continue to be deductible by the Compensation Committee generally intends to grant awards under the LTIP that are performance based within the meaning of Section 162(m).Company.

Elements of Executive Compensation

We use a portfolio of pay components to accomplish our compensation philosophy and objectives discussed above. Our executive compensation program consists of the following components:

Annual Base Salary

The annual base salary component of an executive officer’s compensation is intended to provide a reasonable standard of living and a base wage at a comparable levellevels believed by the Compensation Committee to the Company’s lodging REIT peers on the basis of a review of the publicly disclosed executive compensation arrangements of such peers. Basebe competitive. The Compensation Committee reviews base salaries are reviewed annually, but base salaries are not automatically increased pursuant to pre-determined formulas or otherwise (other than annual cost-of-living increases provided pursuant to certain of our executives’ employment agreements) and may not be increased if, among other things, the Compensation Committee believes that other elements of compensation are more appropriate in light of the Company’s stated objectives. This strategy is consistent with the Company’s primary intentgoal of offering compensation that is intended to incentivize thean executive officersofficer to seek to maximize stockholder returns and that is contingent on the achievement of

performance objectives. A multiple of eachEach executive officer’s base salary serves as the basisbase amount for determining annual cash and equity incentive award opportunities.opportunities, which are calculated as percentages of such executive’s base salary.

The base salary of each of our executive officers is based on the review of the Compensation Committee described above and the following:

In 2006, allThis determination is not formulaic and is not based on specific Company or individual performance targets objectives, but rather is subjective and made in light of our compensation philosophy and objectives described above. The following is a discussion of the Company’s named executive officers (other than Andrew Gross, whose 2006base salary determinations for each of our Named Executive Officers who were employed with us at the end of 2007.

Robert A. Alter. From January 1, 2007 to October 19, 2007, Mr. Alter’s annual base salary was $600,000. In March 2007, in connection with our management restructuring, Mr. Alter transitioned from the position of CEO to Executive Chairman and Mr. Alter’s employment agreement was amended to provide that his base salary would be reduced to $275,000 effective October 20, 2007. This reduced base salary was determined pursuant to and consistent with his 2006original employment agreement) were grantedagreement because the retention of a 4% raisenew CEO would have triggered such reduction. We determined to amend his employment agreement to provide that the reduction would not take effect until October 20, 2007 to account for Mr. Alter’s role as advisor to the new CEO during that time. Mr. Alter’s base salary is adjusted by any annual cost-of-living increases in their respective base salaries granted to senior executives of the Company generally.

Kenneth E. Cruse. Mr. Cruse’s initial base salary for 2007 was $250,000, which represents a 26.5% increase over 2005 amounts. TheMr. Cruse’s 2006 base salary. In determining to recommend to the Board of Directors that Mr. Cruse be paid this amount, the Compensation Committee took into account, among other things, Mr. Cruse’s promotion to the position of CFO, the increased responsibilities attendant with this new position and the recommendations of Schonbraun with respect to CFO compensation. Noting that Mr. Cruse’s 2006 base salary was significantly lower than the base salaries for peer group information provided by Schonbraun, the Compensation Committee recommended a 26.5% increase over Mr. Cruse’s 2006 base salary, and indicated that it would be appropriate to reevaluate Mr. Cruse’s salary during the course of 2007 once it was able to evaluate Mr. Cruse’s performance in the CFO role. Effective May 15, 2007, on the recommendation of our former CEO and based upon the Compensation Committee’s judgment that an increase in base salary was warranted in light of Mr. Cruse’s performance of the CFO role, Mr. Cruse received a 14% increase in base salary, increasing his base salary to $285,000.

Steven R. Goldman. In March 2007, in connection with his hiring, we entered into an employment agreement with Mr. Goldman pursuant to which Mr. Goldman received an annual base salaries paidsalary of $600,000 in 2007. Mr. Goldman’s employment agreement provided for an annual 4% cost-of-living increase in base salary. In determining to recommend to the Named Executive OfficersBoard of Directors that Mr. Goldman be paid this amount, the Compensation Committee reviewed, among other things, the recommendations of Schonbraun with respect to CEO compensation, noting that the proposed amount fell between the 50^th and 75^th percentile of base salaries for the peer group information provided by Schonbraun. The Compensation Committee determined that, in 2006 are provided inorder to attract Mr. Goldman to the Summary Compensation Table below.position with Sunstone, it would be advisable to offer a base salary competitive with the peer group.

Annual Cash Incentive Bonuses and Equity Incentive Awards.Awards

We use annual cash incentive bonus and equity award incentivesincentive awards to further motivate executive officers by establishing a relationship between the bonuses and the long-term equity compensationawards and the performance of the Company and the executive officer. All of our executive officers are eligible to participate in this program. We believe that tying our executive officers’ cash bonus and long-term equity compensation to the quantitative metrics discussed below provides a strong financial incentive to maximize stockholder value.

The annual cash incentive bonus isand equity incentive awards are intended to compensate our executive officers for achieving our annual financial goals at both the corporate and hotel asset levels and for implementing long-term plans and strategies. The annual cash incentive bonus and annual equity incentive award program is based on performance and responsibility level rather than on the basis of seniority, tenure or other entitlement. Each year, the Compensation Committee establishes performance-based criteria, both corporate and individual, for each Named Executive Officer, and the level of achievement of those criteria determines the size of the annual bonuses and awards made to the Named Executive Officer in the next calendar year. This performance-based program encourages our officers to continually improve their capabilities to deliver short- and long-term business results. The Compensation Committee sets the executive officer target annual cash incentive bonuses so that they are competitive with bonuses paid to executive officers in similar positions and with similar responsibilities at companies in the Company’s previously-described peer groups.

The annual equity incentive awards are also intended to encourage ownership, foster retention and align the executive officers’ interests with the long-term interests of our stockholders. Historically, we have used restricted stock grant awards that are granted based on achievement of pre-established performance goals and generally vest over a three-year period. Because the awards are based ononly granted if certain performance criteria are met, we generally do not utilize additional performance-based criteria in connection with the vesting criteria. In determining the equity incentive compensation of an executive officer,these awards.

As described further below, the Compensation Committee considers, among other factors,sets the Company’starget annual cash incentive bonus and equity incentive award levels for each Named Executive Officer based on the achievement of objective corporate performance and relative stockholder return, the valuecriteria as well as subjective individual performance criteria. The amounts of similar awards to officers performing similar functions at comparable companies and the awards givenare set at levels designed to officersprovide the executives with a significant incentive to enhance stockholder value. Accordingly, as discussed below, the target annual incentive cash bonus and equity incentive award are set at levels that represent a significant percentage of the Company acting in similar roles in past years.each officer’s overall compensation arrangements.

Criteria and Metrics for 20062007 Incentive Compensation.In the second quarter of 2006,2007, the Compensation Committee established performance measures for both the annual cash incentive awardsbonuses and the annual equity incentive awards. The Compensation Committee determined that the amounts of the bonuses and awards to base these awardseach Named Executive Officer would be based on the following three components each weighted as described: (1) 25% based on return on investment, (2) 25% based on adjusted FFO per share, and (3) 50% based on specificsubjective and objective measures of the Company’s performance, divided equally between Funds From Operations (FFO Per Share)officer’s individual performance. The weighting established by the Compensation Committee reflected its subjective analysis of the appropriate amount of emphasis to place on both corporate and targets relatedsubjective goals, and not any pre-determined formula or methodology.

For each of these three components, the Compensation Committee established four achievement levels—“Threshold”, “Target”, “High” and “Superior”, and for each achievement level, a corresponding multiple. For any of the three components, the amount granted to the Named Executive Officer was the product of (a) his base salary, (b) the weighting for that component as described above and (c) the multiple corresponding to his level of achievement. The Compensation Committee added the “Superior” category in 2007 in part based on the assessment of Schonbraun that an additional, extraordinary level of achievement was increasingly common among peer companies and in order to incentivize our Named Executive Officers to achieve an extraordinary level of performance.

Return on Investment. The primary objective of the return on investment (Returncomponent is to measure the financial performance of the Company’s gross investment in hotels, joint ventures and related businesses owned for the entire subject year. Any intra-year acquisitions or dispositions are excluded from the calculation. Return on Investment),investment is calculated as In Place EBITDA/In Place Assets, where:

The Compensation Committee determined that for fiscal year 2007, the range for return on investment should be as described in the table below. The Compensation Committee set these levels such that the “Threshold” equals a minimally-expected ratio of EBITDA to invested capital for a stabilized portfolio of hotel assets, the “Target” level equates to a typically-expected ratio of EBITDA to invested capital for a stabilized portfolio of hotel assets, the “High” level equates to an above-average ratio of EBITDA to invested capital for a stabilized portfolio of hotel assets and 50% on subjective measuresthe “Superior” level equates to a well-above average ratio of each executive officer’s individual performance.EBITDA to invested capital for a stabilized portfolio of hotel assets.

Incentive CompensationAdjusted FFO Per Share. The primary objective of the adjusted FFO per share component is to measure management’s ability to budget appropriately and oversee the financial performance of the Company. We adjust FFO for non-recurring items including, but not limited to, write-off of deferred financing fees, prepayment penalties, loss on early extinguishment of debt, write-off of loan premiums, adjustments relating to prior periods, taxes paid on gains from asset sales and non-cash interest expense related to a change in accounting of exchangeable notes. In 2007, we adjusted FFO for the write-off of deferred financing fees, prepayment penalties, loss on early extinguishment of debt, loan premiums and non-recurring costs and amortization of deferred stock compensation associated with chief executive officer succession and executive officer severance.

The Compensation Committee determined that for the fiscal year 2007, the range for adjusted FFO per share should be as described in the table below. The Compensation Committee set these levels such that the “Threshold” generally approximates the low end of the Company’s initial adjusted FFO per share guidance, the “Target” generally approximates the mid-point of the Company’s initial adjusted FFO per share guidance, the “High” generally approximates the high end of the Company’s initial adjusted FFO per share guidance and the “Superior” corresponds to a level in excess of the high end of the Company’s initial adjusted FFO per share guidance range.

Individual Goals. The primary objective of the individual goals is to drive individual performance and ensure accountability to individual performance throughout the calendar year. The subjective individual goals for each Named Executive Officers in 2006.For 2006,Officer who was employed by Sunstone at the end of 2007 were as follows:

In determining the Threshold, Target and other achievement levels, while the Compensation Committee determinedconsidered information previously provided and recommendations made by Schonbraun, the Compensation Committee’s determination of these amounts reflected its subjective analysis of the amounts required to keepappropriately incentivize each Named Executive Officer’sOfficer to achieve the relevant corporate and individual goals.

The Compensation Committee set targets for the above individual goals such that the “Threshold” represents performance compensation opportunities asat a percentagesatisfactory level, the “Target” represents the achievement of a majority of individual annual goals, the “High” represents the achievement of all individual annual goals and the “Superior” represents the achievement of all annual goals and general performance at a level above expectation.

salaryThe following is a tabular presentation of the same as the equivalent opportunities in 2005 (other than Andrew Gross, whose 2006foregoing performance compensation opportunities as a percentage of salary were determined pursuant to his employment agreement). The tables below show these performance compensation opportunities for 2006 at the threshold, targetcriteria and maximumrelated achievement levels as well as each executive’s actual award with respect todetermined by the 2006 calendar year as a percentage of base salary for 2006. The following paragraphs describe the information contained in the tables below.Compensation Committee:

2007 Awards. To determine the actual award,incentive awards for each Named Executive Officer above, the Compensation Committee in February 20072008 reviewed and assessed the performance of the Company and eachsuch Named Executive Officer in comparison to the subjective and objective performance measures established in 2006.2007. The Compensation Committee determined the extent to which each of the various objective and subjective performance measures were achieved and decided whether the incentive compensation for each performance measure should be funded at 0%, 40%, 75%the Threshold, Target, High or 100%Superior levels.

The following tables detail actual calculation of the cash incentive bonus and the equity incentive award with respect to the 2007 calendar year for each Named Executive Officer who was employed by Sunstone at the end of 2007. The paragraphs following the tables describe the information contained in the tables below.

Cash Incentive Bonus

Equity Incentive Award

Return on Investment. For example,fiscal year 2007, the Company’s return on investment calculated as described above was 10.2%. This resulted in the funding of the return on investment component at the Target level for each of Messrs. Alter, Cruse and Goldman.

Adjusted FFO Per Share. For fiscal year 2007, the Company’s adjusted FFO per share was $2.86. This resulted in the funding of the adjusted FFO Per Share component at the Superior level for each of Messrs. Alter, Cruse and Goldman.

Individual Performance. For each Named Executive Officer who was employed by Sunstone at the end of 2007, the Compensation Committee determined that becausehe had met his individual goals at the Company’s Return on Investment exceeded 10.5% (the Company achieved 10.56%) each Named Executive Officer would receive the full 25% of the incentive compensation associated withSuperior level. This means that performance measure. Further, because FFO Per Share was less than $2.52 (the Company achieved $2.42), the Compensation Committee decided that each Named Executive Officer would receive none of the incentive compensation associated with FFO Per Share. Finally, the Compensation Committee determined, thatafter a subjective consideration of the individual goals for each such Named Executive Officer, had achieved his individual performance measures and that eachthe Named Executive Officer would receiveachieved all of his individual goals at a level above the full 50% ofCompensation Committee’s expectations. For example, with respect to Mr. Alter, at the incentive compensation associated with those measures.

The Compensation Committee then used the 75% obtained by adding the 25% associated with Return on Investment, the 0% associated with FFO Per Share and the 50% associated with individualtime Mr. Alter’s performance measures to determine the actual amount of the cash and equity incentive bonus that each Named Executive Officer would be paid for his service in 2006. In order to make the determination of the actual amount of the cash and equity incentive bonus to be paid to each Named Executive Officer,was evaluated, the Compensation Committee reviewed the Company’s overall performance in relationtook into account what it believed to forecastsbe a smooth and to its peers and reviewed each Named Executive Officer’s overall performance and determined that each Named Executive Officer should receive 75% (which 75% was determined as described above)successful transition of the maximum multiplierCEO role to Mr. Goldman and Mr. Alter’s continuing contributions to the strategic direction of base salary to compute the cash and equity incentive bonuses payable to each Named Executive Officer. Accordingly, each of Messrs. Alter, Kline and Stougaard were paid a cash bonus equal to 93.8% of their respective base salaries and an equity-based incentive award equal to 150% of their respective base salaries. Because Mr. Gross departed the Company, priorincluding with respect to year end, he was not evaluated for 2006 incentive compensation. The charts below present the details associated with the decisions ofcontinuing hotel redevelopment plans and hotel asset and divestiture strategies. With respect to Mr. Goldman, the Compensation Committee relatednoted, among other things, that Mr. Goldman successfully filled all outstanding senior management positions; successfully completed a revised organizational structure for Sunstone management and implemented a revised system incorporating required communication and control issues in each case in the timeframe set out for Mr. Goldman; and led Sunstone to the amountfinancial performance described above. With respect to Mr. Cruse, the Compensation

Committee noted, among other things, Mr. Cruse’s contribution to and successful leadership of the incentive compensation paidCompany’s exchangeable notes financing in the spring and summer of 2007 and amendment to eachits credit facility to take advantage of the Named Executive Officers for their performance in 2006.new market terms.

The table immediatelytables above also reflectsreflect that the Compensation Committee’s allocation between cash and equity incentive compensation was designed to award more than 50%half of each Named Executive Officer’s annual incentive compensation in equity

to further the incentive compensation objectives of fostering executive ownership and the alignment of aneach executive’s interests with those of stockholders. The incentive compensation program for 20062007 was entirely based on the executive’s performance in 2006,2007, and therefore the Compensation Committee did not consider the amounts realizable from prior equity grants or cash bonus awards in determining the above incentive compensation awards. The equity incentive awards for 20062007 were in the form of shares of restricted stock issued under the Company’s Long-Term Incentive Plan, or the LTIP, and were granted on February 7, 2007.6, 2008. One-third of the number of shares granted will vest on each of February 7, 2008,6, 2009, 2010 and 2010.2011.

Adjustment or Recovery of Awards.The Company has not adopted a formal policy or any employment agreement provisions that enable recovery, or “clawback,” of incentive awards in the event of misstated or restated financial results. However, Section 304 of the Sarbanes-Oxley Act does provide some ability to recover incentive awards in certain circumstances. If the Company is required to restate its financials due to material noncompliance with any financial reporting requirements as a result of misconduct, the CEO and the CFO mustshall reimburse the Company for (1) any bonus or other incentive- or equity-based compensation received during the 12 months following the first public issuance of the non-complying document, and (2) any profits realized from the sale of securities of the Company during those 12 months.

401(k) Savings and Retirement Plan.The Company sponsors a 401(k) Savings and Retirement Plan pursuant to which the Company contributes 3% of fiscal year base earnings to all eligible employees, including all of the executive officers. In addition, the Company, contributes annually, at the discretion of the Compensation Committee, amakes an annual profit-sharing contribution to all eligible employees, including the executive officers as detailed in the footnotes to the Summary Compensation Table below.

Benefit Plans.The executive officers of the Company participate in the same broad-based employee benefit plans as the Company’s other employees, including medical, dental, vision, life insurance and disability programs.

EmploymentCompensation Plans and Agreements

Employment Agreements

Each ofWe currently have an employment agreement with our interim CEO, Robert A. Alter,Alter. As described in detail below, we also had employment agreements with Steven R. Goldman, Jon D. Kline and Gary A. Stougaard has entered into an employment agreement with the Company. The agreements for Messrs. Alter, Kline and Stougaard became effective on October 26, 2004, and an amendment to Mr. Alter’s agreement became effective on March 19, 2007. Mr. Andrew W. Gross, the Company’s former Senior Vice President and General Counsel, originally entered into his employment agreement with the Company on January 11, 2006; however, as detailed below, Mr. Gross’ employment agreement wasthat were terminated on November 16, 2006 upon his departuretheir respective departures from the Company.

Robert A. Alter.Alter

Since our initial public offering through March 18, 2007, our employment agreement, (the “Agreement”)or the Agreement, with Mr. Alter provided that Mr. Alter would serve as our Chief Executive Officer.CEO. We have entered into an amendment, (the “Amendment”)or the Amendment, to thisthe Agreement, effective March 19, 2007, as part of the succession plan resulting in connection with the appointment of Mr. Goldman as the Chief Executive OfficerCEO and Mr. Alter’s transition to Executive Chairman. A description of the Amendment follows the description of the Agreement.

The Agreement provided for an initial term of three years and automatic extensions for additional one-year periods, unless terminated by either party upon 90 days’ notice prior to the renewal date. A decision by us or Mr. Alter not to renew the Agreement would not have triggered any severance payments. From January 1, 2007

through October 19, 2007, Mr. Alter will receivereceived an annual base salary of $600,000 and an annual incentive bonus in a target amount of between 75% and 200% of his base salary. Mr. Alter received a bonus of $533,077$998,000 for 2006, $653,125 for 2005 and $365,000 for 2004.2007, which was paid in the first quarter of 2008. Mr. Alter was granted 210,526 restricted stock units at the closing of our initial public offering, of which 25.0% vested immediately, 15.0% vested on the second anniversary of the closing of our initial public offering, 20.0% vested on the third anniversary of the closing of our initial public offering and 20.0% will vest on each of the third, fourth and fifth anniversaries of the closing of our initial public offering so long as Mr. Alter remains employed by us. He is also

entitled to receive all employee benefits and participate in all incentive and insurance programs generally available to similarly situated employees. As part of this,his incentive compensation, Mr. Alter was granted 54,822 shares of restricted stock in February 2006, which will vest in three equal annual installments. Mr. Alter was granted an additional 30,925 shares of restricted stock in February 2007 and 73,575 shares of restricted stock in February 2008, each of which will vestvests in three equal annual installments beginning with the first anniversary of its respective grant date. In addition, the Agreement provided that in February 2008. In the event we terminate Mr. Alter without cause or he terminates his employment for good reason, Mr. Alter will receive all of a Change in Circumstances (as defined in the following amounts: (1) salary and accrued vacation throughAgreement to include the dateretention of termination; (2) bonus for any completed fiscal year elapsed prior to the date of termination; (3) a lump sum payment equal to one timesnew CEO), Mr. Alter’s annual base salary plus a bonus severance amount (which willwould be equalreduced to the lesser of the target annual bonus for the year in which the termination occurs or the actual bonus earned in the prior calendar year, if the termination occurs during the remainder of the employment term); (4) 18 months of continued health insurance coverage for Mr. Alter and his dependents; and (5) all outstanding and then unvested equity awards due to vest in the succeeding 12 months will become fully vested. If following a change in control, we terminate Mr. Alter’s employment without cause or Mr. Alter terminates his employment for good reason, then he will be entitled to the same amounts as specified above within 180 days after the effective date of the change in control, except that the severance amount will be calculated using a multiple of two rather than one. $275,000.

The Amendment changeschanged the above description of the Agreement in that (1) Mr. Alter’s annual base salary will bewas reduced to $275,000 per yearin accordance with his Agreement, effective as of October 20, 2007 and that(2) Mr. Alter willis no longer be entitled to receive an annual bonus or participate in the Company’s LTIP after Sunstone’s 2007 fiscal year. Mr. Alter’s existing equity awards will continue to vest during his term as Executive Chairman.

Jon D. Kline. We have an employment agreementEffective March 21, 2008, in connection with Mr. Kline that provides thatGoldman’s resignation, the Company’s Board of Directors appointed Mr. KlineAlter interim CEO until a permanent CEO could be retained. In consideration of his new role with the Company, on April 1, 2008, we approved a grant of 200,000 non-qualified stock options to Mr. Alter under our LTIP. The options, which will serve as our President. The agreement has an initial term of five years andmature on April 27, 2018, will be automatically extended for additional one-year periods, unless terminated by either party upon 90 days’ notice prior to the renewal date. A decision by us or Mr. Kline not to renew his employment agreement will not trigger any severance payments. During fiscal year 2007, Mr. Kline will receivegranted on April 28, 2008 at an annual base salary of $475,000 and an annual incentive bonus in a target amount of between 75% and 175% of his base salary. Mr. Kline received a cash incentive bonus of $363,462 for 2006, $445,313 for 2005 and $294,000 for 2004. Mr. Kline was granted 118,421 restricted stock units at the closing of our initial public offering, of which 25.0% vested immediately, 15.0% vested on the second anniversary of the closing of our initial public offering and 20.0% will vest on each of the third, fourth and fifth anniversaries of the closing of our initial public offering. He is also entitled to receive all employee benefits and participate in all incentive and insurance programs generally available to similarly situated employees. As part of this, Mr. Kline was granted 35,168 shares of restricted stock in February 2006, which will vest in three equal annual installments beginning February 2007. Mr. Kline was granted an additional 39,215 shares of restricted stock in February 2007, which will vest in three equal annual installments beginning February 2008. In the event we terminate Mr. Kline without cause or he terminates his employment for good reason, Mr. Kline will receive all of the following amounts: (1) salary and accrued vacation through the date of termination; (2) bonus for any completed fiscal year elapsed prior to the date of termination; (3) a lump sum paymentexercise price equal to one times Mr. Kline’s salary plus a bonus severance amount (which will be equal to the lesser of the target annual bonus for the year in which the termination occurs or the actual bonus earned in the prior calendar year, if the termination occurs during the remainder of the employment term); (4) 18 months of continued health insurance coverage for Mr. Kline and his dependents; and (5) all outstanding and then unvested equity awards due to vest in the succeeding 12 months will become fully vested. If following a change in control, we terminate Mr. Kline without cause or Mr. Kline terminates his employment for good reason, then he will be entitled to the same amounts as specified above within 180 days after the effective date of the change in control, except that the severance amount will be calculated using a multiple of two rather than one, and all outstanding and then unvested equity awards will become fully vested and exercisable.

Gary A. Stougaard. We have an employment agreement with Mr. Stougaard that provides that Mr. Stougaard will serve as our Executive Vice President and Chief Investment Officer. The agreement has an initial term of five years and will be automatically extended for additional one-year periods, unless terminated by either party upon 90 days’ notice prior to the renewal date. A decision by us or Mr. Stougaard not to renew his employment agreement will not trigger any severance payments. During fiscal year 2007, Mr. Stougaard will

receive an annual base salary of $378,473 and an annual incentive bonus in a target amount of between 50% and 150% of his base salary. Mr. Stougaard received a cash incentive bonus of $339,231 for 2006, $415,625 for 2005 and $263,500 for 2004. Mr. Stougaard was granted 92,105 restricted stock units at the closing of our initial public offering, of which 25.0% vested immediately, 15.0% vested on the second anniversary of the closing of our initial public offering and 20.0% will vest on each of the third, fourth and fifth anniversaries of the closing of our initial public offering. He is also entitled to receive all employee benefits and participate in all incentive and insurance programs generally available to similarly situated employees. As part of this, Mr. Stougaard was granted 31,203 shares of restricted stock in February 2006, which will vest in three equal annual installments beginning February 2007. Mr. Stougaard was granted an additional 19,680 shares of restricted stock in February 2007, which will vest in three equal annual installments beginning February 2008. In the event we terminate Mr. Stougaard without cause or he terminates his employment for good reason, Mr. Stougaard will receive all of the following amounts: (1) salary and accrued vacation through the date of termination; (2) bonus for any completed fiscal year elapsed prior to the date of termination; (3) a lump sum payment equal to one times Mr. Stougaard’s salary plus a bonus severance amount (which will be equal to the lesser of the target annual bonus for the year in which the termination occurs or the actual bonus earned in the prior calendar year, if the termination occurs during the remainder of the employment term); (4) 18 months of continued health insurance coverage for Mr. Stougaard and his dependents; and (5) all outstanding and then unvested equity awards due to vest in the succeeding 12 months will become fully vested. If following a change in control, we terminate Mr. Stougaard’s employment without cause or Mr. Stougaard terminates his employment for good reason, then he will be entitled to the same amounts as specified above within 180 days after the effective date of the change in control, except that the severance amount will be calculated using a multiple of two rather than one, and all outstanding and then unvested equity awards will become fully vested and exercisable.

Andrew W. Gross. We had an employment agreement with Andrew W. Gross that provided that Mr. Gross would serve as our Senior Vice President and General Counsel. Mr. Gross began employment with us on February 1, 2006 and terminated his employment with us on November 16, 2006. The agreement provided for an annual base salary of $300,000 and an annual incentive bonus in a target amount of between 50% and 75% of his base salary. The agreement also provided that Mr. Gross would receive a restricted stock grant valued at $1,000,000 (with the stock valued based on the average closing price of the Company’sfor Sunstone common stock on the NYSE for the twenty consecutive tradingbusiness days endingcommencing with April 1, 2008 and will vest fully on the third trading day prior to the date of approval of the grant). The restricted stock was slated to vest in equal installments over four years, beginning on February 1, 2007. April 28, 2009.

Mr. Gross wasAlter has also entitled to receive all employee benefits and participate in all incentive and insurance programs generally available to similarly situated employees as well as receive a reimbursement in the amount of his actual, documented expenses associated with his relocation, up to a maximum reimbursement of $75,000. The Company did not pay any money to Mr. Gross with respect to relocation costs. Upon separation on November 16, 2006, we agreed to pay Mr. Gross a one-time cash severance payment totaling $300,000 and to immediately vest 8,684 shares of restricted stock from his initial restricted stock grant. As the one-time cash severance payment was deemed to be deferred compensation under Section 409A of the Internal Revenue Code of 1986, as amended, the severance amount is payable by the Company 6 months and 1 day after Mr. Gross’ termination.

Each of Messrs. Alter, Kline Stougaard has entered into a non-competition agreement with us that restricts him from directly or indirectly engaging in any business that is directly competitive with our business and/or having ownership interests in any business that is, directly or indirectly, competitive with our business during the term of his employment and for one year following his termination, with exceptions for existing investments and direct or indirect ownership of up to 3% of the outstanding equity interests of any public company. Each of theThe non-competition agreementsagreement also prevents the Named Executive OfficerMr. Alter from soliciting our employees for one year following the date of termination of his employment.

Steven R. Goldman

We had an employment agreement with Mr. Goldman providing that Mr. Goldman would serve as our CEO and as the Chief Executive Officer of Sunstone Hotel Partnership, LLC. The agreement had an initial term of five years and would have been automatically extended for additional one-year periods, unless terminated by either party upon 90 days’ notice prior to the renewal date.

The agreement provided for an annual base salary of $600,000. Mr. Goldman’s salary was to have been increased from time to time in the Compensation Committee’s sole discretion, except that Mr. Goldman was entitled to an annual increase equal to the greater of 4% and any annual cost-of-living increase granted generally to senior executives. Mr. Goldman was also entitled to an annual incentive bonus with a target amount of 150% of his salary and a guaranteed minimum of $450,000 for 2007. Mr. Goldman received a bonus of $1,125,000 for 2007, which was paid in the first quarter of 2008. Based on the agreement, Mr. Goldman received a restricted stock grant valued at $6,000,000 (with the stock valued based on the average closing price of the Company’s common stock on the NYSE for the twenty consecutive trading days ending three business days prior to the date of grant). The restricted stock was to vest in equal annual installments over five years, with the first installment vesting on the first anniversary of the date of grant. Mr. Goldman was eligible to earn additional annual equity awards having a minimum value between $1,400,000 and $1,600,000, which were to be granted subject to

meeting Company performance targets or, to the extent Company performance targets were not attained, individual performance targets. Mr. Goldman was eligible to participate in all employee benefit plans, incentive plans and savings/retirement plans generally available to senior executives of the Company and to receive additional life insurance coverage consistent with the amount that was provided to Mr. Alter. Mr. Goldman was also to receive (i) a reimbursement in the amount of his reasonable, actual out-of-pocket, documented expenses associated with his relocation, (ii) a reimbursement in the amount of $5,000 per month for reasonable and actual out-of-pocket temporary living expenses for a period of six months, (iii) a reimbursement of up to $19,975 in certain attorney fees and (iv) if any of the preceding reimbursements were taxable to Mr. Goldman, a cash payment so that Mr. Goldman would have been in the same position as he would have been had no taxes been imposed. The aggregate amount of reimbursements described in (i), (ii) and (iv) above could not exceed $300,000.

Mr. Goldman’s employment with us terminated in March 2008. A description of the change in control provisions of Mr. Goldman’s employment agreement, as well as the actual payment he received upon the termination of his employment, are described under “Potential Payments Upon Termination or Change-in-Control” below.

Mr. Goldman has also entered into a non-competition agreement with us that restricts him from directly or indirectly engaging in any business that is directly competitive with our business and/or having ownership interests in any business that is, directly or indirectly, competitive with our business during the term of his employment and for one year following his termination, with exceptions for existing investments and direct or indirect ownership of up to 3% of the outstanding equity interests of any public company. The non-competition agreement also prevents Mr. Goldman from soliciting our employees for one year following the date of termination of his employment.

Jon D. Kline

We had an employment agreement with Mr. Kline which provided that Mr. Kline would serve as our President. The agreement had an initial term of five years and would have been automatically extended for additional one-year periods, unless terminated by either party upon 90 days’ notice prior to the renewal date. A decision by us or Mr. Kline not to renew his employment agreement would not have triggered any severance payments. During fiscal year 2007, Mr. Kline was scheduled to receive an annual base salary of $475,000 and an annual incentive bonus in a target amount of between 75% and 175% of his base salary. Mr. Kline did not receive incentive compensation in 2007 but was instead compensated pursuant to the termination provisions in his employment agreement, discussed below under “Potential Payments Upon Termination or Change-in-Control.”

Mr. Kline was granted 118,421 restricted stock units at the closing of our initial public offering, of which 25.0% vested immediately, 15.0% vested on the second anniversary of the closing of our initial public offering, 20.0% vested on the third anniversary of the closing of our initial public offering and 20.0% was to vest on each of the fourth and fifth anniversaries of the closing of our initial public offering. He was also entitled to receive all employee benefits and participate in all incentive and insurance programs generally available to similarly situated employees. As part of this, Mr. Kline was granted 35,168 shares of restricted stock in February 2006 and 39,215 shares of restricted stock in February 2007, which were to vest in three equal annual installments beginning with the first anniversary of their respective grant dates.

Mr. Kline’s employment with us terminated in June 2007. A description of the change in control provisions of Mr. Kline’s employment agreement, as well as the actual payment he received upon the termination of his employment and the treatment of the vesting of Mr. Kline’s unvested shares of restricted stock, are described under “Potential Payments Upon Termination or Change-in-Control” below.

Mr. Kline has also entered into a non-competition agreement with us that restricts him from directly or indirectly engaging in any business that is directly competitive with our business and/or having ownership

interests in any business that is, directly or indirectly, competitive with our business during the term of his employment and for one year following his termination, with exceptions for existing investments and direct or indirect ownership of up to 3% of the outstanding equity interests of any public company. The non-competition agreement also prevents Mr. Kline from soliciting our employees for one year following the date of termination of his employment. Effective May 24, 2007, we entered into a separation agreement with Mr. Kline extending his non-competition and non-solicitation obligations as discussed below under “Other 2007 Compensation Agreements—Jon D. Kline Separation Agreement.”

Gary A. Stougaard

We had an employment agreement with Mr. Stougaard which provided that Mr. Stougaard would serve as our Executive Vice President and Chief Investment Officer. The agreement had an initial term of five years and would have been automatically extended for additional one-year periods, unless terminated by either party upon 90 days’ notice prior to the renewal date. A decision by us or Mr. Stougaard not to renew his employment agreement would not have triggered any severance payments. During fiscal year 2007, Mr. Stougaard was scheduled to receive an annual base salary of $378,473 and an annual incentive bonus in a target amount of between 50% and 150% of his base salary. Mr. Stougaard did not receive incentive compensation in 2007 but was instead compensated pursuant to the termination provisions in his employment agreement, discussed below under “Potential Payments Upon Termination or Change-in-Control”.

Mr. Stougaard was granted 92,105 restricted stock units at the closing of our initial public offering, of which 25.0% vested immediately, 15.0% vested on the second anniversary of the closing of our initial public offering, 20% vested on the third anniversary of the closing of our initial public offering and 20.0% was to vest on each of the fourth and fifth anniversaries of the closing of our initial public offering. He was also entitled to receive all employee benefits and participate in all incentive and insurance programs generally available to similarly situated employees. As part of this, Mr. Stougaard was granted 31,203 shares of restricted stock in February 2006 and 19,680 shares of restricted stock in February 2007, which were to vest in three equal annual installments beginning with the first anniversary of their respective grant dates.

On April 19, 2007, the Company and Mr. Stougaard agreed that, effective April 23, 2007, Mr. Stougaard would transition from the role of Executive Vice President and Chief Investment Officer to a new role as Special Advisor to the CEO for up to two months. On May 23, 2007, we agreed with Mr. Stougaard’s that his employment with Sunstone would terminate effective June 30, 2007. A description of the change in control provisions of Mr. Stougaard’s employment agreement, as well as the actual payment he received upon the termination of his employment and the treatment of the vesting of Mr. Stougaard’s unvested shares of restricted stock, are described under “Potential Payments Upon Termination or Change-in-Control” below.

Mr. Stougaard has also entered into a non-competition agreement with us that restricts him from directly or indirectly engaging in any business that is directly competitive with our business and/or having ownership interests in any business that is, directly or indirectly, competitive with our business during the term of his employment and for one year following his termination, with exceptions for existing investments and direct or indirect ownership of up to 3% of the outstanding equity interests of any public company. The non-competition agreement also prevents Mr. Stougaard from soliciting our employees for one year following the date of termination of his employment. Effective May 24, 2007, we entered into a separation agreement with Mr. Stougaard extending his non-competition and non-solicitation obligations as discussed below under “Other 2007 Compensation Agreements—Gary A. Stougaard Separation Agreement.”

Other 2007 Compensation Agreements

Jon D. Kline Separation Agreement

In connection with Mr. Kline’s departure from the Company, we entered into a separation agreement with Mr. Kline, effective as of May 24, 2007, whereby Mr. Kline’s non-solicitation and non-competition obligations

were extended through October 1, 2008. In consideration of Mr. Kline’s compliance with this agreement and the execution of a release at that time, Mr. Kline will be eligible to receive a payment of $665,000.

Gary A. Stougaard Separation Agreement

In connection with Mr. Stougaard’s departure from the Company, we entered into a separation agreement with Mr. Stougaard, effective as of May 24, 2007, whereby Mr. Stougaard’s non-solicitation and non-competition obligations were extended through October 1, 2008. In consideration of Mr. Stougaard’s compliance with this agreement and the execution of a release at that time, Mr. Stougaard will be eligible to receive a payment of $515,000.

Other Plans

Robert A. Alter Retirement Benefit Agreement and Life Insurance Policy.Policy

The Company has a Retirement Benefit Agreement, (the “Retirement Agreement”)or the Retirement Agreement, with Mr. Alter. Pursuant to the Retirement Agreement, Mr. Alter may defer a portion of his compensation. Mr. Alter may amend the amount of his compensation to be deferred from time to time; provided, however, that any such amendment will only apply to amounts earned by Mr. Alter after such amendment and that such amendments must be made in compliance with the new tax laws affecting deferred compensation. The Company will match 25% of Mr. Alter’s deferrals for each year, up to a maximum of 6% of Mr. Alter’s total compensation for that year. The Company’s wasCompany did not required to make a matching contribution for fiscal year 2006.2007. Mr. Alter is currently vested in all of the Company’s matching contributions. Earnings on Mr. Alter’s deferrals and the Company’s matching contributions are an amount equal to the amount which would have been earned on such deferrals and matching contributions had they been paid as premiums on a life insurance policy insuring Mr. Alter’s life in accordance with the investment designations made by Mr. Alter. The balance in Mr. Alter’s deferred compensation account is payable over a period of time following the termination of his employment with the Company, regardless of the reason for such termination. In addition, a payment or payments may be made prior to Mr. Alter’s termination in the event of an unanticipated emergency that is caused by an event beyond Mr. Alter’s control and that would result in severe financial hardship to him if an early distribution was not made.

The Company also currently pays the premiums for a $5,000,000 split dollar life insurance policy for Mr. Alter. Under the terms of the policy, the Company is entitled to receive the greater of the cash surrender value of the policy or the premiums paid by the Company following the termination of Mr. Alter’s employment with the Company. Within 60 days following the date of the termination of the split dollar policy during Mr. Alter’s lifetime, Mr. Alter may obtain a release of such obligation by paying the Company the greater of the total amount of the premiums paid by the Company or the thenthen-current cash surrender value, which was $1,914,128 as of $1,656,243.December 31, 2007.

Steven R. Goldman Life Insurance and Disability Policy

The Company paid the premiums for both a $5,000,000 life insurance and a long-term disability policy for Mr. Goldman through the date of his departure from the Company.

Long-Term Incentive Plan (the “LTIP”)

As discussed above in connection with Proposal 3: Increase in Authorized Shares to be Issued Under the 2004 Long-Term Incentive Plan, weWe adopted our LTIP that became effective in October 2004 upon completion of our initial public offering. The purpose of the LTIP is to attract and retain our directors, executive officers and employees. The LTIP is administered by the Compensation Committee or the Board of Directors, which has broad powers to interpret and implement the plan.

Typesplan, and the Board of Awards.Directors may from time to time suspend, discontinue, revise or amend the LTIP. The LTIP provides for grants of incentive stock options (within the meaning of Section 422 of the Code), nonqualified stock options, stock appreciation rights, dividend equivalent rights, restricted stock, restricted stock

units and other stock-based awards such as performance shares.shares, to any director, officer or employee, including any prospective employee, and to any consultant or advisor selected by the Compensation Committee. The terms of the LTIP and each award are intended to comply with Section 409A of the Code, which imposes specific restrictions on deferred compensation arrangements.

Shares Subject to the LTIP; Other Limitations on Awards.At the time of our initial public offering, we established the maximum number of shares of common stock issuable under the LTIP at 2,100,000. On May 1, 2007, our stockholders approved an amendment to the LTIP increasing the number of shares of common stock available for issuance under the LTIP to 3,850,000. As of March 19, 2007,25, 2008, there were 901,6352,705,974 shares of common stock available under the LTIP for future grants to directors, officers and employees. In addition to these shares available for future grants, there were outstanding as of March 19, 2007, 967,37525, 2008, 688,800 shares of unvested restricted stock and restricted stock units previously granted to directors, officers and employees between October 26, 2004 and February 7, 2007. Assuming shareholder approval of the proposed LTIP Amendment, there will be a total of 2,651,635 shares available for future grants to directors, officers and employees, and the number of outstanding shares of unvested restricted stock will remain unchanged.March 25, 2008. Shares that may be issued under the LTIP may be authorized but unissued shares of our common stock or otherwise acquired for the purposes of the LTIP. If any award is forfeited or is otherwise terminated or canceled without the delivery of shares of our common stock, if shares of our common stock are surrendered or withheld from any award to satisfy a recipient’s income tax or other withholding obligations, or if shares of our common stock owned by a recipient are tendered to pay the exercise price of awards, then such shares will again become available under the LTIP. The Compensation Committee will adjust the terms of any outstanding awards and the number of shares of our common stock issuable under the LTIP for any increase or decrease in the number of issued shares of our common stock resulting from a stock split, reverse stock split, stock dividend,

spin-off, combination or reclassification of our common stock, or any other event that the Compensation Committee determines affects our capitalization.

Eligibility. Awards may be made to any director, officer or employee, including any prospective employee, and to any consultant or advisor selected by the Compensation Committee.

Stock Options and Stock Appreciation Rights. The Compensation Committee may grant incentive stock options and non-qualified stock options to purchase shares of our common stock from us (at the price set forth in the applicable award agreement), and stock appreciation rights in such amounts, and subject to such terms and conditions, as the Compensation Committee may determine. No grantee of an option or stock appreciation right will have any of the rights of a stockholder of us with respect to shares subject to their award until the issuance of the shares.

Restricted Stock. The Compensation Committee may grant restricted shares of common stock in amounts, and subject to terms and conditions, as the Compensation Committee may determine. The grantee will have the rights of a stockholder with respect to the restricted stock, subject to any restrictions and conditions as the Compensation Committee may include in the applicable award agreement.

Restricted Stock Units. The Compensation Committee may grant restricted stock units in amounts, and subject to terms and conditions, as the Compensation Committee may determine. Recipients of restricted stock units have only the rights of a general unsecured creditor of us and no rights as a stockholder of us until the common stock underlying the restricted stock units is delivered, which occurs within a period following vesting of the restricted stock units and is subject to tax withholding.

Other Equity-Based Awards. The Compensation Committee may grant other types of equity-based awards, including the grant of unrestricted shares, in amounts, and subject to terms and conditions, as the Compensation Committee may determine. These awards may involve the transfer of actual shares of our common stock, or the payment in cash or otherwise of amounts based on the value of shares of our common stock.

Change in Control. The Compensation Committee may provide in any award agreement for provisions relating to a change in control of us or any of our subsidiaries or affiliates, including, without limitation, the acceleration of the exercisability of, or the lapse of restrictions with respect to, the award.

Dividend Equivalent Rights. The Compensation Committee may in its discretion include in the award agreement a dividend equivalent right entitling the grantee to receive amounts equal to the dividends that would be paid, during the time such award is outstanding, on the shares of our common stock covered by such award as if such shares were then outstanding.

Nonassignability. Except to the extent otherwise provided in the applicable award agreement or approved by the Compensation Committee, no award or right granted to any person under the stock incentive plan will be assignable or transferable other than by will or by the laws of descent and distribution, and all awards and rights will be exercisable during the life of the grantee only by the grantee or the grantee’s legal representative.

U.S. Federal Tax Implications

The following is a summary of the principal U.S. federal income tax considerations relevant to the LTIP. This discussion does not address all federal income tax consequences of the LTIP and does not discuss any state, local or foreign tax considerations relating to the LTIP. This section is based on the Internal Revenue Code of 1986, as amended (the “Code”), its legislative history, existing and proposed regulations under the Code, and published rulings and court decisions, all as currently in effect. These laws are subject to change, possibly on a retroactive basis.

Incentive Stock Options. An optionee will not be required to recognize income for federal income tax purposes on the grant or exercise of an incentive stock option, and the Company will not be entitled to a

deduction. However, the excess of the fair market value of the common stock received on the date of exercise over the exercise price paid will be included in an optionee’s alternative minimum taxable income. If an optionee does not dispose of the common stock acquired upon exercise within either the one-year period beginning on the date of exercise or the two-year period beginning on the date of grant of the incentive stock option, then any gain or loss realized by the optionee upon the subsequent disposition of such shares will be taxed as long-term capital gain or loss. In such event, no deduction will be allowed to the Company. If the optionee disposes of the common stock within the one-year or two-year periods referred to above (a “disqualifying disposition”), the optionee will recognize ordinary income at the time of disposition in an amount equal to the excess of the fair market value of the common stock on the date of exercise (or, if less, the net proceeds of the disposition) over the exercise price, and the Company will generally be entitled to a corresponding deduction. Any excess of the amount realized on the disqualifying disposition over the fair market value of the shares on the date of exercise will be taxable as capital gain. If the amount realized is less than the exercise price, and the loss sustained on the disqualifying disposition would otherwise be recognized, the optionee will not recognize any ordinary income from the disposition and instead will recognize a capital loss.

Non-Qualified Stock Options. An optionee will not be required to recognize income for federal income tax purposes upon the grant of a nonqualified stock option, and the Company will not be entitled to a deduction. Upon the exercise of such an option, the optionee will recognize ordinary income in the amount by which the fair market value of the common stock at the time of exercise exceeds the exercise price, and the Company will be entitled to a corresponding deduction.

Stock Appreciation Rights. A grantee will not be subject to tax upon the grant of a stock appreciation right. Upon exercise of a stock appreciation right, an amount equal to the cash and/or the fair market value (measured on the date of exercise) of the shares of common stock received will be taxable to the grantee as ordinary income, and such amount generally will be deductible by the Company.

Restricted Stock. A grantee will not be subject to tax upon receipt of an award of common stock subject to forfeiture conditions and transfer restrictions (the “restrictions”). Upon lapse of the restrictions, the grantee will recognize ordinary income equal to the fair market value of the shares on the date of lapse (less any amount the grantee may have paid for the shares).

Restricted Stock Units. A grantee will not be subject to tax upon the grant of a restricted stock unit. Upon distribution of the cash and/or shares of common stock underlying the restricted stock unit, the grantee will recognize as ordinary income an amount equal to the cash and/or fair market value (measured on the distribution date) of the shares received, and such amount will generally be deductible by the Company.

Section 409A and Recent Legislation. The terms of the LTIP and each award are intended to comply with Section 409A of the Code, which imposes specific restrictions on deferred compensation arrangements. On February 1, 2007, the United States Senate approved The Small Business and Work Opportunity Act of 2007, which includes a provision that would amend Section 409A to cap the aggregate annual amount of compensation that an individual can defer, beginning in 2007. The cap would be equal to the lesser of $1 million or the individual’s average annual taxable compensation received for the previous five years for services performed by the individual for the employer maintaining the deferred compensation plan. If this provision is enacted into law, it could apply to certain types of awards made under the LTIP. At present, it is uncertain whether this provision will be enacted into law and, if so, when it would become effective.

Amendment and Termination. The Board of Directors may from time to time suspend, discontinue, revise or amend the LTIP.

Summary Compensation Table

(3)	This number represents the annual cash incentive bonus earned by Mr. Alter in fiscal year 2007 and paid in the first fiscal quarter of 2008.

(4)	This number is based on an initial balance as of January 1, 2007 of $1,656,243 and aggregate earnings for the deferred compensation totaling $257,885 for an ending balance as of December 31, 2007 of $1,914,128.

(5)

This number represents $161,686 in dividends paid to Mr. Alter in connection with his unvested restricted stock units and $82,317 paid in connection with his unvested restricted stock; $11,565 contributed to Mr. Alter’s 401(k) account in the form of both the Company’s safe-harbor contribution and a profit-sharing contribution earned in fiscal year 2007 and paid in the first fiscal quarter of 2008; $7,520 in premiums for executive life and disability insurance; and $7,309 for reimbursement for the Company’s health insurance coverage premiums.

(6)	This number represents compensation expense in the fiscal year 2006 for Mr. Alter consisting of $536,842 related to unvested restricted stock units granted on October 26, 2004 and $482,266 related to unvested restricted shares granted on February 9, 2006.

(3)(7)

This number represents the annual cash incentive bonus earned by Mr. Alter in fiscal year 2006 and paid in the first fiscal quarter of 2007.

(4)(8)

This number is based on an initial balance as of January 1, 2006 of $1,417,305 and including Executive Contributionsexecutive contributions totaling $45,850 and premium payments to the life insurance carrier totaling $103,800, the Aggregate Earningsaggregate earnings for the Deferred Compensationdeferred compensation totaled $296,888 for an ending balance as of December 31, 2006 of $1,656,243.

(5)(9)

This number represents $189,474 in dividends paid to Mr. Alter in connection with his unvested restricted stock units and $49,340 paid in connection with his unvested restricted shares; $29,000 contributed to Mr. Alter’s 401(k) account in through the form of both the Company’s Safe-Harborsafe-harbor contribution and a Profit-Sharingprofit-sharing contribution earned in fiscal year 2006 and paid in the first fiscal quarter of 2007; $7,520 in premiums for executive life and disability insurance; and $5,395 for reimbursement for the Company’s health insurance coverage premiums.

(6)(10)

This number represents compensation expense in the fiscal year 2007 for Mr. Goldman consisting of $1,007,252 related to unvested restricted stock granted on February 7, 2007. As a result of his departure from the Company on March 21, 2008, 289,835 shares of unvested restricted stock held by Mr. Goldman were cancelled.

(11)	This number represents the annual cash incentive bonus earned by Mr. Goldman in fiscal year 2007 and paid in the first fiscal quarter of 2008.

(12)

This number represents $208,847 in dividends paid to Mr. Goldman in connection with his unvested restricted shares; $29,500 contributed to Mr. Goldman’s 401(k) account in the form of both the Company’s safe-harbor contribution and a profit-sharing contribution earned in fiscal year 2007 and paid in the first fiscal quarter of 2008; $14,784 in premiums for executive life and disability insurance; $5,192 for reimbursement for the Company’s health insurance coverage premiums; and $170,355 for reimbursement of relocation expenses.

(13)

This number represents compensation expense in the fiscal year 2007 for Mr. Cruse consisting of $126,442 related to unvested restricted stock units granted on April 11, 2005, $83,337 related to unvested restricted stock granted on February 9, 2006 and $114,696 related to unvested restricted stock granted on February 7, 2007.

(14)	This number represents the annual cash incentive bonus earned by Mr. Cruse in fiscal year 2007 and paid in the first fiscal quarter of 2008.

(15)

This number represents $20,558 in dividends paid to Mr. Cruse in connection with his unvested restricted stock units and $20,519 paid in connection with his unvested restricted stock; and $29,500 contributed to Mr. Cruse’s 401(k) account in the form of both the Company’s safe-harbor contribution and a profit-sharing contribution earned in fiscal year 2007 and paid in the first fiscal quarter of 2008.

(16)

This number represents compensation expense in the fiscal year 2007 for Mr. Kline consisting of $50,328 related to unvested restricted stock units granted on October 26, 2004, $365,620 related to unvested restricted stock granted on February 9, 2006 and $386,660 related to unvested restricted stock granted on February 7, 2007.

(17)

This number reflects $838,462 in severance payment paid to Mr. Kline in the second fiscal quarter of 2007; $1,376,319 in immediate vesting of 23,684 unvested restricted stock units and 24,795 unvested restricted stock in the second fiscal quarter of 2007 based upon a closing common stock price of $28.39 on the NYSE on June 29, 2007; $45,474 in dividends paid to Mr. Kline in connection with his unvested restricted stock units and $51,356 in dividends paid to Mr. Kline in connection with his unvested restricted stock; $41,106 of accrued vacation paid out to Mr. Kline upon his termination; $6,750 contributed to Mr. Kline’s 401(k) account in the form of the Company’s safe-harbor contribution earned in fiscal year 2007 and paid in the first fiscal quarter of 2008; $6,528 in premiums for executive life and disability insurance; and $3,915 for reimbursement for the Company’s health insurance coverage premiums. As a result of his departure from the Company on June 30, 2007, 37,865 shares of unvested restricted stock and 47,369 restricted stock units held by Mr. Kline were cancelled.

(18)	This number represents compensation expense in the fiscal year 2006 for Mr. Kline consisting of $301,974 related to unvested restricted stock units granted on October 26, 2004 and $309,371 related to unvested restricted shares granted on February 9, 2006.

(7)(19)

This number represents the annual cash incentive bonus earned by Mr. Kline in fiscal year 2006 and paid in the first fiscal quarter of 2007.

(8)(20)

This number represents $106,579 in dividends paid to Mr. Kline in connection with his unvested restricted stock units and $31,651 paid in connection with his unvested restricted shares; $29,000 contributed to Mr. Kline’s 401(k) account in through the form of both the Company’s Safe-Harborsafe-harbor contribution and a Profit-Sharingprofit-sharing contribution earned in fiscal year 2006 and paid in the first fiscal quarter of 2007; $2,860 in premiums for executive life and disability insurance; and $8,258 for reimbursement for the Company’s health insurance coverage premiums.

(9)(21)

This number represents compensation expense in the fiscal year 2007 for Mr. Stougaard consisting of $39,592 related to unvested restricted stock units granted on October 26, 2004, $324,399 related to unvested restricted stock granted on February 9, 2006 and $194,045 related to unvested restricted stock granted on February 7, 2007.

(22)

This number reflects $660,659 in severance payment paid to Mr. Stougaard in the second fiscal quarter of 2007; $1,004,495 in immediate vesting of 18,421 unvested restricted stock units and 16,961 unvested restricted stock in the second fiscal quarter of 2007 based upon a closing common stock price of $28.39 on the NYSE on June 29, 2007; $35,369 in dividends paid to Mr. Stougaard in connection with his unvested restricted stock units and $35,893 in dividends paid to Mr. Stougaard in connection with his unvested restricted stock; $43,670 of accrued vacation paid out to Mr. Stougaard upon his termination; $6,047 contributed to Mr. Stougaard’s 401(k) account in the form of the Company’s safe-harbor contribution earned in fiscal year 2007 and paid in the first fiscal quarter of 2008; $5,850 in premiums for executive life and disability insurance; and $3,915 for reimbursement for the Company’s health insurance coverage premiums. As a result of his departure from the Company on June 30, 2007, 23,521 shares of unvested restricted stock and 36,843 restricted stock units held by Mr. Stougaard were cancelled.

(23)	This number represents compensation expense in the fiscal year 2006 for Mr. Stougaard consisting of $234,868 related to unvested restricted stock units granted on October 26, 2004 and $274,491 related to unvested restricted shares granted on February 9, 2006.

(10)(24)

This number represents the annual cash incentive bonus earned by Mr. Stougaard in fiscal year 2006 and paid in the first fiscal quarter of 2007.

(11)(25)

This number represents $82,895 in dividends paid to Mr. Stougaard in connection with his unvested restricted stock units and $28,083 paid in connection with his unvested restricted shares; $29,000 contributed to Mr. Stougaard’s 401(k) account in through the form of both the Company’s Safe-Harborsafe-harbor contribution and a Profit-Sharingprofit-sharing contribution earned in fiscal year 2006 and paid in the first fiscal quarter of 2007; $5,850 in premiums for executive life and disability insurance; and $8,258 for reimbursement for the Company’s health insurance coverage premiums.

(12)	This number represents compensation expense in the fiscal year 2006 for Mr. Gross consisting of $251,395 related to unvested restricted shares granted on February 9, 2006.

(13)

This number reflects $300,000 in severance payment earned by Mr. Gross in fiscal year 2006 and will be paid in the second fiscal quarter of 2007; $31,262 in dividends paid to Mr. Gross in connection with his unvested restricted shares; $24,231 of accrued vacation paid out to Mr. Gross upon his termination; and $9,680 contributed to Mr. Gross’ 401(k) account in the form of both the Company’s Safe-Harbor contribution and a Profit-Sharing contribution earned in fiscal year 2006 and paid in the first fiscal quarter of 2007.

GRANTS OF PLAN-BASED AWARDS

Grants of Plan-Based Awards

The following table sets forth the information with respect to plan-based restricted stock awards granted under our LTIP in 20062007 to the Named Executive Officers. The dollar amounts indicated under the “Grant Date Fair Value of Stock &and Option Awards” is the grant date fair value of each grant, computed in accordance with FAS 123R, which is greater than the amortization costs the Company recognized on its fiscal year 20062007 financial statements with respect to such grant.