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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

For the quarterly period ended September 30, 2004

OR

For the transition period from              to             

Commission file number 333-117141

Sunstone Hotel Investors, Inc.

(Exact Name of Registrant as Specified in Its Charter)

Registrant’s telephone number, including area code: (949) 369-4000

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

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

As of November 30, 2004, 31,353,616 shares, $0.01 par value per share, of the registrant’s common stock were outstanding.

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SUNSTONE HOTEL INVESTORS, INC.

QUARTERLY REPORT ON

FORM 10-Q

For the Quarterly Period Ended September 30, 2004

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PART I—FINANCIAL INFORMATION

Item 1. Financial Statements

SUNSTONE HOTEL INVESTORS, INC.

BALANCE SHEETS

See accompanying notes.

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SUNSTONE HOTEL INVESTORS, INC.

NOTES TO BALANCE SHEETS (UNAUDITED)

1. Organization and Description of Business

Sunstone Hotel Investors, Inc. (the “Company”) was incorporated in Maryland on June 28, 2004. On October 26, 2004, the Company completed an initial public offering of 21,294,737 shares of its common stock, par value $0.01 per share. The offering price was $17.00 per share resulting in gross proceeds of $362.0 million. On November 22, 2004, in connection with the exercise of the underwriters’ over-allotment option, the Company issued an additional 3,165,000 shares of common stock and received gross proceeds of $53.8 million. The aggregate proceeds to the Company, net of underwriting discounts and commissions and estimated offering expenses, were approximately $376.7 million. In addition, simultaneously with the initial public offering, the Company obtained a $75.0 million unsecured term note. A portion of the net proceeds of the offering and the unsecured term note were used to acquire a portfolio of hotel properties (the “Properties”) and continue the real estate business of the Sunstone Predecessor Companies. The Sunstone Predecessor Companies were actively engaged in owning, acquiring, selling and renovating hotel properties in the United States.

Formation and Structuring Transactions

Concurrently with the consummation of the initial public offering of the Company’s common stock, (the “Offering”), the Company and a newly formed limited partnership (the “Operating Partnership”), together with Sunstone Predecessor Companies engaged in certain formation and structuring transactions (the “Formation Transactions”). The Formation Transactions were designed to (i) enable the Company to raise the necessary capital to acquire the Properties and repay certain mortgage debt relating thereto, (ii) provide a vehicle for future acquisitions, (iii) enable the Company to comply with certain requirements under the federal income tax laws and regulations relating to real estate investment trusts, (iv) facilitate potential financings and (v) preserve certain tax advantages for Sunstone Predecessor Companies.

The operations of the Company are carried on primarily through the Operating Partnership and its subsidiaries in order to comply with the Internal Revenue Code.

The Company is the sole general partner in the Operating Partnership and Sunstone Predecessor Companies transferred their property and operating interests in the Sunstone Predecessor Companies in exchange for limited partnership interests in the Operating Partnership, common stock and cash.

The transfer of the properties and operating interests of Sunstone Predecessor Companies for 9,990,932 shares of common stock and 19,112,556 membership interests in the Operating Partnership were accounted for at the historical cost of their interests in Sunstone Predecessor Companies similar to a pooling of interests as these entities are all under common control. We purchased 12,247,984 membership units in Sunstone Hotel Partnership from the Sunstone Predecessor Companies with the proceeds from the initial public offering. In addition, on November 22, 2004, in connection with the exercise of the underwriters’ over-allotment option, the Company purchased 3,165,000 membership units in Sunstone Hotel Partnership from the Sunstone Predecessor Companies.

2. Basis of Presentation and Summary of Accounting Policies

The accompanying interim financial statement has been prepared in accordance with accounting principles generally accepted in the United States and in conformity with the rules and regulations of the Securities and Exchange Commission. In our opinion, the interim financial statement presented herein reflects all adjustments, consisting solely of normal and recurring adjustments, which are necessary to fairly present the interim financial statement. This financial statement should be read in conjunction with the financial statements included in our registration statement on Form S-11, as amended, declared effective by the Securities and Exchange Commission on October 20, 2004.

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The financial statement includes the accounts of the Company. Through September 30, 2004, there have been no intercompany balances or transactions.

Use of Estimates

The preparation of financial statements in conformity with United States generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements during the reporting period. Actual results could materially differ from those estimates.

3. Income Taxes

The Company intends to make an election to be taxed as a real estate investment trust (“REIT”) under Sections 856 through 860 of the Internal Revenue Code. As a REIT, the Company generally will not be subject to federal income tax if it distributes at least 90% of its taxable income for each tax year to its stockholders. REITs are subject to a number of organizational and operational requirements. If the Company fails to qualify as a REIT in any taxable year, the Company will be subject to federal income tax (including any applicable alternative minimum tax) on its taxable income at regular corporate tax rates. Even if the Company qualifies for taxation as a REIT, the Company may be subject to state and local income taxes and to federal income tax and excise tax on its undistributed income.

4. Deferred offering costs and payable to related party

In connection with the initial public offering discussed in Note 1, the Company had unsecured borrowings, through September 30, 2004, of approximately $3.3 million from Sunstone Hotel Investors, L.L.C. (an affiliate of the Company) to fund offering costs incurred prior to the offering, including legal, accounting and other related costs.

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SUNSTONE HOTEL INVESTORS, L.L.C.

WB HOTEL INVESTORS, LLC

SUNSTONE/WB HOTEL INVESTORS IV, LLC

COMBINED BALANCE SHEETS

(In thousands)

See accompanying notes to combined financial statements (unaudited).

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SUNSTONE HOTEL INVESTORS, L.L.C.

WB HOTEL INVESTORS, LLC

SUNSTONE/WB HOTEL INVESTORS IV, LLC

COMBINED STATEMENTS OF OPERATIONS (UNAUDITED)

(In thousands)