SUNSTONE HOTEL INVESTORS INC, S-8, 1996-10-15

SUNSTONE HOTEL INVESTORS INC
S-8, 1996-10-15
REAL ESTATE INVESTMENT TRUSTS

Previous: MVE INC, 10-Q, 1996-10-15

Next: HORIZON BANCORP INC, S-8, 1996-10-15

<PAGE> 1
As filed with the Securities and Exchange Commission on October 15, 1996
Registration No. 333-_________
================================================================================

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

----------

FORM S-8
REGISTRATION STATEMENT
Under
The Securities Act of 1933

----------

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

MARYLAND 52-1891908
(State or other jurisdiction (IRS Employer Identification No.)
of incorporation or organization)

115 CALLE DE INDUSTRIAS, SUITE 201
SAN CLEMENTE, CALIFORNIA 92672
(Address of principal executive offices) (Zip Code)

----------

SUNSTONE HOTEL INVESTORS, INC.
1994 STOCK INCENTIVE PLAN
1994 DIRECTORS PLAN
(Full title of the Plans)

----------

ROBERT A. ALTER
CHAIRMAN OF THE BOARD AND PRESIDENT
SUNSTONE HOTEL INVESTORS, INC.
115 CALLE DE INDUSTRIAS, SUITE 201
SAN CLEMENTE, CALIFORNIA 92672
(714) 361-3900
(Name, address including zip code, and telephone number,
including area code, of agent for service)

CALCULATION OF REGISTRATION FEE
================================================================================

<TABLE>
<CAPTION>
Proposed Proposed
Title of Maximum Maximum
Securities Amount Offering Aggregate Amount of
to be to be Price Offering Registration
Registered Registered(1) per Share(2) Price(2) Fee
---------- ------------- ------------ -------- ---
<S> <C> <C> <C> <C>
1994 Stock Incentive Plan
- -------------------------
Options to Purchase
Common Stock 500,000

Common Stock, 500,000 shares $10.3125 $5,156,250 $1,562.50
$0.01 par value

1994 Directors Plan
- -------------------
Options to Purchase 150,000
Common Stock

Common Stock, 150,000 shares $10.3125 $1,546,875 $468.75
$0.01 par value
</TABLE>

(1) This Registration Statement shall also cover any additional shares of
Common Stock which become issuable under the 1994 Stock Incentive Plan
and/or 1994 Directors Plan by reason of any stock dividend, stock
split, recapitalization or other similar transaction effected without
the receipt of consideration which results in an increase in the number
of the outstanding shares of Common Stock of Sunstone Hotel Investors,
Inc.

(2) Calculated solely for purposes of this offering under Rule 457(h) of
the Securities Act of 1933, as amended, on the basis of the average of
the high ($10.375) and low ($10.25) selling prices per share of Common
Stock of Sunstone Hotel Investors, Inc. on October 11, 1996, as
reported by the New York Stock Exchange.
<PAGE> 2
PART II

INFORMATION REQUIRED IN THE REGISTRATION STATEMENT

Item 3. Incorporation of Documents by Reference

Sunstone Hotel Investors, Inc. (the "Registrant") hereby incorporates
by reference into this Registration Statement the following documents previously
filed with the Securities and Exchange Commission (the "Commission"):

1. Annual Report (i) on Form 10-K of the Registrant for the fiscal
year ended December 31, 1995; and (ii) on Form 10-K/A filed with
the Commission on October 11, 1996;

2. Quarterly Reports (i) on Form 10-Q for the quarters ended March
31, 1996, and June 30, 1996; and (ii) on Form 10-Q/A for the
quarter ended March 31, 1996 filed with the Commission on May 21,
1996 and June 27, 1996;

3. Current Reports (i) on Form 8-K filed with the Commission on
February 20, 1996, July 13, 1996 and August 28, 1996; and (ii) on
Form 8-K/A filed with the Commission on April 19, 1996 and August
28, 1996;

4. The description of the Common Stock of the Registrant included in
the Registrant's Registration Statement on Form 8-A, filed with
the Commission on June 26, 1995; and on Form 8-A/A, filed with
the Commission on July 17, 1996.

In addition, all reports and other documents subsequently filed by the
Registrant with the Commission pursuant to Section 13, 14 or 15(d) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act") after the date
of this Registration Statement and prior to the termination of the offering
shall be deemed to be incorporated by reference in this Registration Statement
and to be a part hereof from the date of the filing of such documents (such
documents, and the documents enumerated above, being herein referred to as
"Incorporated Documents," provided however, that the documents enumerated above
or subsequently filed by the Registrant pursuant to Section 13, 14 or 15(d) of
the Exchange Act prior to the filing of the Registrant's next Annual Report on
Form 10-K with the Commission shall not be Incorporated Documents or be
incorporated by reference in this Registration Statement or be a part hereof
from and after any such filing of an Annual Report on Form 10-K). Any statement
contained in a document incorporated or deemed to be incorporated by reference
herein shall be deemed to be modified or superseded for purposes of this
Registration Statement to the extent that a statement contained herein (or in
any other subsequently filed document which also is or is deemed to be
incorporated by reference herein) modifies or supersedes such statement. Any
statements so modified or superseded shall not be deemed to constitute a part of
this Registration Statement, except as so modified or superseded.

Item 4. Description of Securities

Not Applicable.

Item 5. Interests of Named Experts and Counsel

Not Applicable.

Item 6. Indemnification of Directors and Officers

The Registrant's Articles of Incorporation and Bylaws limit the
liability of the Company's directors and officers to the Company and its
stockholders to the fullest extent permitted from time to time by Maryland law.
Maryland law presently permits the liability of directors and officers to a
corporation or its stockholders for money damages to be limited, except (i) to
the extent that it is proved that the director or officer actually received an
improper benefit or profit, or (ii) to the extent that a judgment or other final
adjudication is entered in a proceeding based on a finding that the director's
or officer's action, or failure to act, was the result of active and deliberate
dishonesty and was material to the cause of action, as adjudicated in the
proceeding. This provision does not limit the ability of the Company or its
stockholders to obtain other relief, such as an injunction or rescission.

The Registrant's Articles of Incorporation and Bylaws require the
Company to indemnify its directors and officers to the fullest extent permitted
from time to time by Maryland law. The Company's Articles of Incorporation and
Bylaws also permit the Company to indemnify employees, agents and other persons
acting on behalf of or at the request of the Company. The Maryland General
Corporation Law ("MGCL") permits a corporation to indemnify its directors,
<PAGE> 3
officers and certain other parties against judgments, penalties, fines,
settlements and reasonable expenses actually incurred by them in connection with
any proceeding to which they may be made a party by reason of their service to
or at the request of the Company, unless it is established that: (i) the act or
omission of the indemnified party was material to the matter giving rise to the
proceeding and was committed in bad faith or was the result of active and
deliberate dishonesty; (ii) the indemnified party actually received an improper
personal benefit; or (iii) in the case of any criminal proceeding, the
indemnified party had reasonable cause to believe that the act or omission was
unlawful. Indemnification may be made against judgments, penalties, fines,
settlements and reasonable expenses actually incurred by the director or officer
in connection with the proceeding; provided, however, that if the proceeding is
one by or in the right of the Company, indemnification may not be made with
respect to any proceeding in which the director or officer has been adjudged to
be liable to the Company. In addition, a director or officer may not be
indemnified with respect to any proceeding charging improper personal benefit to
the director or officer in which the director or officer was adjudged to be
liable on the basis that the personal benefit was improperly received. The
termination of any proceeding by conviction, or upon a plea of nolo contendere
or its equivalent, or an entry of any order of probation prior to judgment,
creates a rebuttable presumption that the director or officer did not met the
requisite standard conduct required for indemnification to be permitted.
Indemnification under the provisions of the MGCL is not deemed exclusive to any
other rights, by indemnification or otherwise, to which an officer or director
may be entitled under the Company's Articles of Incorporation or Bylaws, or
under resolutions of shareholders or director, contract or otherwise.

In addition, the Company has entered into indemnification agreements
with each of its directors and executive officers. In addition, the Company
maintains a directors' and officers' liability policy.

Item 7. Exemption from Registration Claimed

Not Applicable.

Item 8. Exhibits

Number Exhibit
------ -------

4 Instruments Defining Rights of Stockholders. Reference is
made to Registrant's Registration Statements Nos. 000-24874
and 000-26304 on Form 8-A which are incorporated herein by
reference pursuant to Item 3(b).

5 Opinion and Consent of Ballard Spahr Andrews & Ingersoll.

23.1 Consent of Coopers & Lybrand L.L.P., Independent
Accountants.

23.2 Consent of Ballard Spahr Andrews & Ingersoll is contained in
Exhibit 5.

24 Power of Attorney. Reference is made to page II-4 of this
Registration Statement.

99.1 1994 Stock Incentive Plan.

99.2 Form of Notice of Grant of Stock Option to be generally used
in connection with the Discretionary Option Grant Program of
the 1994 Stock Incentive Plan.

99.3 Form of Stock Option Agreement to be generally used in
connection with the Discretionary Option Grant Program of
the 1994 Stock Incentive Plan.

99.4 Addendum to Stock Option Agreement (Limited Stock
Appreciation Right).

99.5 1994 Directors Plan.

99.6 Form of Notice of Grant of Automatic Stock Option to be
generally used in connection with the 1994 Directors Plan.

99.7 Form of Automatic Stock Option Agreement to be generally
used in connection with the 1994 Directors Plan.

99.8 Form of Automatic Stock Issuance Agreement to be generally
used in connection with the 1994 Directors Plan.

II-2.
<PAGE> 4
Item 9. Undertakings

A. The undersigned Registrant hereby undertakes: (1) to file, during
any period in which offers or sales are being made, a post-effective amendment
to this Registration Statement (i) to include any prospectus required by Section
10(a)(3) of the 1933 Act, (ii) to reflect in the prospectus any facts or events
arising after the effective date of this Registration Statement (or the most
recent post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth in this
Registration Statement and (iii) to include any material information with
respect to the plan of distribution not previously disclosed in this
Registration Statement or any material change to such information in this
Registration Statement; provided, however, that clauses (1)(i) and (1)(ii) shall
not apply if the information required to be included in a post-effective
amendment by those paragraphs is contained in periodic reports filed by the
Registrant pursuant to Section 13 or Section 15(d) of the 1934 Act that are
incorporated by reference into this Registration Statement; (2) that for the
purpose of determining any liability under the 1933 Act each such post-effective
amendment shall be deemed to be a new registration statement relating to the
securities offered therein and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof; and (3) to remove
from registration by means of a post-effective amendment any of the securities
being registered which remain unsold at the termination of the Registrant's 1994
Stock Incentive Plan and/or the 1994 Directors Plan.

B. The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the 1933 Act, each filing of the Registrant's
annual report pursuant to Section 13(a) or Section 15(d) of the 1934 Act that is
incorporated by reference into this Registration Statement shall be deemed to be
a new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.

C. Insofar as indemnification for liabilities arising under the 1933
Act may be permitted to directors, officers, or controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that, in the opinion of the SEC, such indemnification is
against public policy as expressed in the 1933 Act, and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer, or controlling person of the Registrant in the
successful defense of any action, suit, or proceeding) is asserted by such
director, officer, or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the 1933 Act and will be governed by the final
adjudication of such issue.

II-3.
<PAGE> 5
SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, as amended,
the Registrant certifies that it has reasonable grounds to believe that it meets
all of the requirements for filing on Form S-8, and has duly caused this
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of San Clemente, State of California on this 4th
day of October, 1996.

SUNSTONE HOTEL INVESTORS, INC.

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

POWER OF ATTORNEY

KNOW ALL PERSONS BY THESE PRESENTS:

That the undersigned officers and directors of Sunstone Hotel
Investors, Inc., a Maryland corporation, do hereby constitute and appoint Robert
A. Alter and Charles L. Biederman and each of them, the lawful attorneys-in-fact
and agents with full power and authority to do any and all acts and things and
to execute any and all instruments which said attorneys and agents, and any one
of them, determine may be necessary or advisable or required to enable said
corporation to comply with the Securities Act of 1933, as amended, and any rules
or regulations or requirements of the Securities and Exchange Commission in
connection with this Registration Statement. Without limiting the generality of
the foregoing power and authority, the powers granted include the power and
authority to sign the names of the undersigned officers and directors in the
capacities indicated below to this Registration Statement, to any and all
amendments, both pre-effective and post-effective, and supplements to this
Registration Statement, and to any and all instruments or documents filed as
part of or in conjunction with this Registration Statement or amendments or
supplements thereof, and each of the undersigned hereby ratifies and confirms
that all said attorneys and agents, or any one of them, shall do or cause to be
done by virtue hereof. This Power of Attorney may be signed in several
counterparts.

IN WITNESS WHEREOF, each of the undersigned has executed this Power of
Attorney as of the date indicated.

Pursuant to the requirements of the Securities Act of 1933, as
amended, this Registration Statement has been signed below by the following
persons in the capacities and on the dates indicated.

<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ Robert A. Alter President, Chief Financial October 4, 1996
- ------------------------- Officer, Secretary and Chairman of
Robert A. Alter of the Board of Directors
(Principal Executive, Financial and
Accounting Officer)
</TABLE>

II-4.
<PAGE> 6
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ Charles L. Biederman Executive Vice President October 4, 1996
- ------------------------- and Director
Charles L. Biederman

/s/ C. Robert Enever Director October 4, 1996
- -------------------------
C. Robert Enever

/s/ Frederic H. Gould Director October 4, 1996
- -------------------------
Frederic H. Gould

/s/ H. Raymond Bingham Director October 4, 1996
- -------------------------
H. Raymond Bingham

/s/ David Lambert Director October 4, 1996
- -------------------------
David Lambert

/s/ Edward H. Sondker Director October 4, 1996
- -------------------------
Edward H. Sondker
</TABLE>

II-5.
<PAGE> 7
EXHIBIT INDEX

Number Exhibit
- ------ -------

4 Instruments Defining Rights of Stockholders. Reference is made to
Registrant's Registration Statements Nos. 000-24874 and 000-26304
on Form 8-A which are incorporated herein by reference pursuant
to Item 3(b).

5 Opinion and Consent of Ballard Spahr Andrews & Ingersoll.

23.1 Consent of Coopers & Lybrand L.L.P., Independent Accountants.

23.2 Consent of Ballard Spahr Andrews & Ingersoll is contained in
Exhibit 5.

24 Power of Attorney. Reference is made to page II-4 of this
Registration Statement.

99.1 1994 Stock Incentive Plan.

99.2 Form of Notice of Grant of Stock Option to be generally used in
connection with the Discretionary Option Grant Program of the
1994 Stock Incentive Plan..

99.3 Form of Stock Option Agreement to be generally used in connection
with the Discretionary Option Grant Program of the 1994 Stock
Incentive Plan.

99.4 Addendum to Stock Option Agreement (Limited Stock Appreciation
Right).

99.5 1994 Directors Plan.

99.6 Form of Notice of Grant of Automatic Stock Option to be generally
used in connection with the 1994 Directors Plan.

99.7 Form of Automatic Stock Option Agreement to be generally used in
connection with the 1994 Directors Plan.

99.8 Form of Automatic Stock Issuance Agreement to be generally used
in connection with the 1994 Directors Plan.

<PAGE> 1
Exhibit 5

[BALLARD SPAHR ANDREWS & INGERSOLL LETTERHEAD]

October 11, 1996

Sunstone Hotel Investors, Inc.
300 South El Camino Real
Suite 203
San Clemente, California 92672

Re: Sunstone Hotel Investors, Inc., a Maryland corporation (the
"Corporation") - Registration Statement on Form S-8 pertaining
to Six Hundred Fifty Thousand (650,000) Shares of Common Stock,
par value One Cent ($.01) per Share (the "Shares")

Ladies and Gentlemen:

In connection with the registration of the Shares under the Securities
Act of 1933, as amended (the "Act"), by the Corporation on Form S-8 filed or to
be filed with the Securities and Exchange Commission (the "Commission") on or
about October 15, 1996 (the "Registration Statement"), you have requested our
opinion with respect to the matters set forth below.

We have acted as special Maryland corporate counsel for the Corporation
in connection with the matters described herein. In our capacity as special
Maryland corporate counsel to the Corporation, we have reviewed and are
familiar with the proceedings taken by the Corporation in connection with the
authorization of the Shares. In addition, we have relied upon certificates and
advice from the officers of the Corporation upon which we believe we are
justified in relying and on various certificates from, and documents recorded
with, the State Department of Assessments and Taxation of Maryland (the
"SDAT"), including the charter of the Corporation (the "Charter"), consisting
of Articles of Incorporation of the Corporation filed with the SDAT on
September 21, 1994, Amended Articles of Incorporation filed with the SDAT on
September 23, 1994, Articles of Amendment filed with the SDAT on November 9,
1994, Articles of Amendment filed with the SDAT on June 19, 1995 and Articles
of Amendment filed with the SDAT on August 14, 1995. We have also
<PAGE> 2

BALLARD SPAHR ANDREWS & INGERSOLL

Sunstone Hotel Investors, Inc.
October 11, 1996
Page 2

examined Bylaws of the Corporation adopted as of September 23, 1994 and
resolutions of the Board of Directors of the Corporation adopted on or before
the date hereof and are in full force and effect on the date hereof; and such
laws, records, documents, certificates, opinions and instruments as we deem
necessary to render this opinion.

We have assumed the genuineness of all signatures, and the authenticity
of all documents submitted to us as originals and the conformity of the
originals of all documents submitted to us as certified, photostatic or
conformed copies. In addition, we have assumed that each person executing any
instrument, document or certificate referred to herein on behalf of any party
is duly authorized to do so.

Based on the foregoing and subject to the assumptions and
qualifications set forth herein, it is our opinion that, as of the date of this
letter, the Shares have been duly authorized by all necessary corporate action
on the part of the Corporation, and the Shares will, upon issuance and delivery
in accordance with and subject to the terms and conditions described in the
Registration Statement after approval by the Board of Directors of the
Corporation or a committee thereof, against payment of the purchase price
therefore, as determined by the Board of Directors of the Corporation or a
committee thereof, be validly issued, fully paid and nonassessable.

We consent to your filing this opinion as an exhibit to the
Registration Statement, and further consent to the filing of this opinion as an
exhibit to the applications to securities commissioners for the various states
of the United States for registration of the Shares. We also consent to the
identification of our firm as Maryland counsel to the Corporation in the
section of the Prospectus (which is part of the Registration Statement)
entitled "Legal Matters".

The opinions set forth herein are limited to the current laws of the
State of Maryland and we express no opinion with respect to any laws other than
the laws of the State of Maryland. Furthermore, the opinions presented in this
letter are limited to the matters specifically set forth herein and no other
opinion shall be inferred beyond the matters expressly stated.
<PAGE> 3

BALLARD SPAHR ANDREWS & INGERSOLL

Sunstone Hotel Investors, Inc.
October 11, 1996
Page 3

The opinions expressed in this letter are solely for your use and may
not be relied upon by any other person without our prior written consent.

Very truly yours,

/s/ Ballard Spahr Andrews & Ingersoll

<PAGE> 1

EXHIBIT 23.1

CONSENT OF INDEPENDENT ACCOUNTANTS

We consent to the incorporation by reference in the Registration Statement of
Sunstone Hotel Investors, Inc. on Form S-8 being filed under the Securities Act
of 1933, as amended, of our report dated March 28, 1996 on our audits of the
consolidated financial statements and financial statement schedule of Sunstone
Hotel Investors, Inc. and Sunstone Initial Hotels (the Predecessor), of our
report dated March 22, 1996 on our audit of the financial statements of
Sunstone Hotel Properties, Inc. (the Lessee) appearing in the Annual Report on
Form 10-K, as amended, of Sunstone Hotel Investors, Inc. (the "Company") for
the year ended December 31, 1995, of our report dated January 31, 1996 on our
audit of the combined financial statements of The Cypress Inns, Acquisition
Hotels, appearing in the Company's Current Report on Form 8-K/A filed April 19,
1996, of our report dated June 7, 1996 on our audit of the financial statements
of Renton Joint Venture and of our report dated July 2, 1996 on our audit of
the combined financial statements of Bay City Hospitality, Inc. and Price
Hospitality, Inc. appearing in the Prospectus filed pursuant to Rule 424(b)(4)
on August 8, 1996.

Coopers & Lybrand L.L.P.

Los Angeles, California
October 11, 1996

<PAGE> 1
EXHIBIT 99.1

SUNSTONE HOTEL INVESTORS, INC.

1994 STOCK INCENTIVE PLAN

ARTICLE ONE
GENERAL

I. PURPOSE OF THE PLAN

A. This 1994 Stock Incentive Plan (the "Plan") is intended to promote
the interests of Sunstone Hotel Investors, Inc., a Maryland corporation or any
successor corporation (the "Corporation") adopting the Plan, by providing (i)
employees (including officers and directors) of the Corporation (or its parent
or subsidiary corporations) who are responsible for the management, growth and
financial success of the Corporation (or its parent or subsidiary corporations)
and (ii) consultants and other advisors (and their respective employees) who
provide valuable services to the Corporation (or its parent or subsidiary
corporations) with the opportunity to acquire a proprietary interest, or
otherwise increase their proprietary interest, in the Corporation as an
incentive for them to remain in the service of the Corporation (or its parent or
subsidiary corporations).

B. The Plan shall become effective immediately upon the execution and
final pricing of the Underwriting Agreement for the initial public offering of
the Corporation's Common Stock. The execution date of such Underwriting
Agreement is hereby designated as the Effective Date of the Plan.

II. DEFINITIONS

A. For purposes of the Plan, the following definitions shall be in
effect:

BOARD: the Corporation's Board of Directors.

CHANGE IN CONTROL: a change in ownership or control of the Corporation
effected through either of the following transactions:

a. the direct or indirect acquisition by any person or related group of
persons (other than the Corporation or a person that directly or indirectly
controls, is controlled by, or is under common control with, the
Corporation) of beneficial ownership (within the meaning of Rule 13d-3 of
the 1934 Act) of securities possessing more than fifty percent (50%) of the
total combined voting
<PAGE> 2
power of the Corporation's outstanding securities pursuant to a tender or
exchange offer made directly to the Corporation's stockholders which the
Board does not recommend such stockholders to accept; or

b. a change in the composition of the Board over a period of thirty-six
(36) consecutive months or less such that a majority of the Board members
(rounded up to the next whole number) ceases, by reason of one or more
contested elections for Board membership, to be comprised of individuals
who either (i) have been Board members continuously since the beginning of
such period or (ii) have been elected or nominated for election as Board
members during such period by at least a majority of the Board members
described in clause (i) who were still in office at the time such election
or nomination was approved by the Board.

CODE: the Internal Revenue Code of 1986, as amended.

COMMITTEE: one or more committees of the Board, each with at least two
(2) Board members, which shall assume responsibility for the administration of
one or more functions under the Plan, either to the extent expressly provided in
the Plan or as specifically authorized by Board resolution.

COMMON STOCK: shares of the Corporation's common stock.

CORPORATE TRANSACTION: any of the following stockholder-approved
transactions to which the Corporation is a party:

a. a merger or consolidation in which the Corporation is not the
surviving entity, except for a transaction the principal purpose of which
is to change the state in which the Corporation is incorporated;

b. the sale, transfer or other disposition of all or substantially all
of the assets of the Corporation in complete liquidation or dissolution of
the Corporation; or

c. any reverse merger in which the Corporation is the surviving entity
but in which securities possessing more than fifty percent (50%) of the
total combined voting power of the Corporation's outstanding securities are
transferred to a person or persons different from the persons holding those
securities immediately prior to such merger.

EMPLOYEE: an individual who performs services while in the employ of
the Corporation or one or more parent or subsidiary corporations, subject to the
control and direction

2.
<PAGE> 3
of the employer entity not only as to the work to be performed but also as to
the manner and method of performance.

EXERCISE DATE: the date on which the Corporation shall have received
written notice of the exercise of an option granted pursuant to the
Discretionary Option Grant Program of Article Two of the Plan.

FAIR MARKET VALUE: the value per share of Common Stock determined in
accordance with the following provisions:

a. For any option grants or direct stock issuances made on the
Effective Date, the Fair Market Value shall be the price per share at which
the Common Stock is to be sold in the initial public offering of the Common
Stock pursuant to the Underwriting Agreement. For all other purposes, the
Fair Market Value shall be determined in accordance with the provisions of
subparagraphs b through d below.

b. If the Common Stock is at the time traded on the Nasdaq National
Market, the Fair Market Value shall be the closing selling price per share
on the date in question, as such price is reported by the National
Association of Securities Dealers on the Nasdaq National Market or any
successor system. If there is no reported closing selling price for the
Common Stock on the date in question, then the closing selling price on the
last preceding date for which such quotation exists shall be determinative
of Fair Market Value.

c. If the Common Stock is at the time listed or admitted to trading on
any national securities exchange, then the Fair Market Value shall be the
closing selling price per share on the date in question on the securities
exchange determined by the Plan Administrator to be the primary market for
the Common Stock, as such price is officially quoted in the composite tape
of transactions on such exchange. If there is no reported sale of Common
Stock on such exchange on the date in question, then the Fair Market Value
shall be the closing selling price on the exchange on the last preceding
date for which such quotation exists.

HOSTILE TAKE-OVER: a change in ownership of the Corporation effected
through the following transaction:

3.
<PAGE> 4
power of the Corporation's outstanding securities pursuant to a tender or
exchange offer made directly to the Corporation's stockholders which the
Board does not recommend such stockholders to accept, and

b. the acceptance of more than fifty percent (50%) of the securities so
acquired in such tender or exchange offer from holders other than the
officers and directors of the Corporation subject to the short-swing profit
restrictions of Section 16 of the 1934 Act.

INCENTIVE OPTION: a stock option which satisfies the requirements of
Code Section 422.

1934 ACT: the Securities and Exchange Act of 1934, as amended from time
to time.

NON-STATUTORY OPTION: a stock option not intended to meet the
requirements of Code Section 422.

OPTIONEE: any person to whom an option is granted under the
Discretionary Option Grant Program in effect under Article Two of the Plan.

PARTICIPANT: any person who receives an award of Performance Shares
under the Performance Share Program of Article Three or a direct issuance of
Common Stock under the Stock Issuance Program of Article Four of the Plan.

PERFORMANCE SHARE: an equity-like participating interest in the
Corporation which may be awarded to a Participant pursuant to the Performance
Share Program of Article Three of the Plan.

PERMANENT DISABILITY OR PERMANENTLY DISABLED: the inability of an
Optionee or a Participant to engage in any substantial gainful activity by
reason of any medically determinable physical or mental impairment expected to
result in death or to be of continuous duration of twelve (12) months or more.

PLAN ADMINISTRATOR: either the Board or a Committee of the Board to the
extent any such Committee is at the time responsible for the administration of
the Plan in accordance with Section IV of Article One.

PRIMARY COMMITTEE: a committee of two (2) or more non-employee Board
members appointed by the Board.

4.
<PAGE> 5
SECTION 12(g) REGISTRATION DATE: the date on which the initial
registration of the Common Stock under Section 12(g) of the 1934 Act becomes
effective.

SERVICE: the performance of services on a periodic basis to the
Corporation (or any parent or subsidiary corporation) in the capacity of an
Employee, a non-employee member of the board of directors or an independent
consultant or advisor, except to the extent otherwise specifically provided in
the applicable stock option grant, Performance Share award, or stock issuance
agreement.

TAKE-OVER PRICE: the greater of (a) the Fair Market Value per share of
Common Stock on the date an option to purchase such stock is surrendered to the
Corporation in connection with a Hostile Take-Over or (b) the highest reported
price per share of Common Stock paid by the tender offeror in effecting such
Hostile Take-Over. However, if the surrendered option is an Incentive Option,
the Take-Over Price shall not exceed the clause (a) price per share.

B. The following provisions shall be applicable in determining the
parent and subsidiary corporations of the Corporation:

Any corporation (other than the Corporation) in an unbroken chain
of corporations ending with the Corporation shall be considered to be a
PARENT of the Corporation, provided each such corporation in the unbroken
chain (other than the Corporation) owns, at the time of the determination,
stock possessing fifty percent (50%) or more of the total combined voting
power of all classes of stock in one of the other corporations in such
chain.

Each corporation (other than the Corporation) in an unbroken chain
of corporations beginning with the Corporation shall be considered to be a
SUBSIDIARY of the Corporation, provided each such corporation in the
unbroken chain (other than the last corporation) owns, at the time of the
determination, stock possessing fifty percent (50%) or more of the total
combined voting power of all classes of stock in one of the other
corporations in such chain.

III. STRUCTURE OF THE PLAN

A. Stock Programs. The Plan shall be divided into three (3) separate
components: the Discretionary Option Grant Program specified in Article Two, the
Performance Share Program specified in Article Three and the Stock Issuance
Program specified in Article Four. Under the Discretionary Option Grant Program,
eligible individuals may be granted options to purchase shares of Common Stock.
Under the Performance Share Program, Participants may be awarded Performance
Shares entitling them to receive a payment equal to the Fair Market Value of a
specified number of shares of Common Stock if certain pre-determined performance
goals are attained. Under the Stock Issuance Program, eligible individuals may
be issued shares

5.
<PAGE> 6
of Common Stock directly, either through the immediate purchase of such shares
at a price not less than the Fair Market Value of the shares at the time of
issuance or as a bonus tied to the performance of services or the Corporation's
attainment of financial objectives.

B. General Provisions. Unless the context clearly indicates otherwise,
the provisions of Articles One and Five shall apply to the Discretionary Option
Grant Program, the Performance Share Program and the Stock Issuance Program and
shall accordingly govern the interests of all individuals under the Plan.

IV. ADMINISTRATION OF THE PLAN

A. The Plan shall be administered in accordance with the following
provisions:

- The Primary Committee shall have sole and exclusive authority to
administer the Plan with respect to those individuals subject to the
short-swing profit restrictions of the Federal securities laws. No Board
member shall be eligible to serve on the Primary Committee if such
individual has, within the relevant period designated below, received an
option grant, stock appreciation right, Performance Share award or stock
issuance under this Plan or under any other stock option, stock
appreciation, stock bonus or other stock plan of the Corporation (or any
parent or subsidiary corporation), other than pursuant to the Corporation's
1994 Directors Plan:

1. for each of the initial members of the Primary Committee, the
period commencing with the Section 12(g) Registration Date and ending with
the date of his or her appointment to the Primary Committee, or

2. for any successor or substitute member, the twelve (12)-month
period immediately preceding the date of his or her appointment to the
Primary Committee or (if shorter) the period commencing with the Section
12(g) Registration Date and ending with the date or his or her appointment
to the Primary Committee.

- Administration of the Plan with respect to all other individuals
eligible to participate in the Plan may, at the Board's discretion, be
vested in the Primary Committee or a secondary committee of two (2) or more
Board members appointed by the Board, or the Board may retain the power to
administer those programs with respect to all individuals who are not
subject to the short-swing profit restrictions of the Federal securities
laws. The membership of any secondary committee may include Board members
who are Employees eligible to receive option grants, stock appreciation
rights, Performance Share awards or stock issuances under this Plan or any
other stock option, stock appreciation, stock

6.
<PAGE> 7
bonus or other stock plan of the Corporation (or any parent or subsidiary
corporation).

- Members of the Primary Committee or any secondary committee shall
serve for such period as the Board may determine and shall be subject to
removal by the Board at any time. The Board may also at any time reassume
all administrative powers and authority delegated under the Plan to any
secondary committee appointed by the Board.

B. The Plan Administrator shall, within the scope of its administrative
authority under the Plan, have full power and discretion (subject to the express
provisions of the Plan) to establish such rules and regulations as it may deem
appropriate for the proper administration of the Plan and to make such
determinations under, and issue such interpretations of, the provisions of each
program established under the Plan and any outstanding option grants, stock
appreciation rights, Performance Shares or stock issuances thereunder as it may
deem necessary or advisable. Decisions of the Plan Administrator within the
scope of its administrative authority under the Plan shall be final and binding
on all parties who have an interest in the Plan or any outstanding option, stock
appreciation right, Performance Share or stock issuance thereunder.

C. Service on the Primary Committee or any secondary committee shall
constitute service as a Board member, and members of each such committee shall
accordingly be entitled to full indemnification and reimbursement as Board
members for their service on such committee. No member of either committee shall
be liable for any act or omission made in good faith with respect to the Plan or
any options granted, Performance Shares awarded or shares issued under the Plan.

V. OPTION GRANTS AND STOCK ISSUANCES

A. The following persons shall be eligible to participate in the Plan:

1. Officers and other Employees of the Corporation (or its parent
or subsidiary corporations) who render services which contribute to the
management, growth and financial success of the Corporation (or its parent
or subsidiary corporations); and

2. those consultants or other advisors (and their respective
employees) who provide valuable services to the Corporation (or its parent
or subsidiary corporations).

B. Non-employee Board members shall not be eligible to participate in
the Plan. Such individuals shall, however, be eligible to receive automatic
option grants and direct stock issuances pursuant to the Corporation's 1994
Directors Plan.

7.
<PAGE> 8
C. The Plan Administrator shall have full authority to determine (i)
with respect to the grants made under the Discretionary Option Grant Program,
which eligible individuals are to be granted stock options or stock appreciation
rights, the time or times when such grants are to be made, the number of shares
to be covered by each such grant, the status of any granted option as either an
Incentive Option or a Non-Statutory Option, the time or times at which each
granted option or stock appreciation right is to become exercisable and the
maximum term for which the option or stock appreciation right may remain
outstanding, (ii) with respect to awards made under the Performance Share
Program, which eligible individuals are to receive Performance Shares, the
number of Performance Shares to be awarded, the performance-related objectives
to be achieved, or the period of Service to be completed, in order for such
Performance Shares to become fully vested and the form in which payment is to be
made on the vested Performance Shares, and (iii) with respect to direct
issuances under the Stock Issuance Program, which eligible individuals are to
receive such issuances, the number of shares subject to each such issuance, the
vesting schedule (if any) to be applicable to the issued shares and the
consideration to be paid by the individual for those shares.

VI. STOCK SUBJECT TO THE PLAN

A. Shares of Common Stock shall be available for issuance under the
Plan and shall be drawn from either the Corporation's authorized but unissued
shares of Common Stock or from reacquired shares of Common Stock, including
shares repurchased by the Corporation on the open market. The maximum number of
shares of Common Stock which may be issued over the term of the Plan shall not
exceed 500,000 shares, subject to adjustment from time to time in accordance
with the provisions of this Section VI.

B. In no event shall the aggregate number of shares of Common Stock for
which any one individual participating in the Plan may be granted stock options
and separately exercisable stock appreciation rights exceed 250,000 shares in
any calendar year. In addition, the aggregate number of shares of Common Stock
for which any one individual participating in the Plan may receive Performance
Shares and direct stock issuances in any one calendar year shall not exceed
50,000 shares.

C. Should one or more outstanding options under Article Two of this
Plan expire or terminate for any reason prior to exercise in full (including any
option cancelled in accordance with the cancellation-regrant provisions of
Section IV of Article Two), then the shares subject to the portion of each
option not so exercised shall be available for subsequent issuance under the
Plan. Should one or more Performance Shares awarded under Article Three of this
Plan terminate or expire prior to vesting, the number of shares underlying those
expired or terminated Performance Share award shall be available for subsequent
issuance under the Plan. Shares subject to any stock appreciation rights
exercised in accordance with Section V of Article Two or any vested Performance
Shares liquidated pursuant to the payout provisions of Article Three and all
stock issuances under the Plan, whether or not the shares are subsequently
repurchased by the

8.
<PAGE> 9
Corporation pursuant to its repurchase rights under the Plan, shall reduce on a
share-for-share basis the number of shares of Common Stock available for
subsequent issuance the Plan. In addition, should the exercise price of an
outstanding option under the Plan be paid with shares of Common Stock or should
shares of Common Stock otherwise issuable under the Plan be withheld by the
Corporation in satisfaction of the withholding taxes incurred in connection with
the exercise of an outstanding option under Article Two or the vesting of a
direct stock issuance under Article Four, then the number of shares of Common
Stock available for issuance under the Plan shall be reduced by the gross number
of shares for which the option is exercised or which vest under the stock
issuance, and not by the net number of shares of Common Stock actually issued to
the holder of such option or stock issuance.

D. Should any change be made to the Common Stock issuable under the
Plan by reason of any stock split, stock dividend, recapitalization, combination
of shares, exchange of shares or other change affecting the outstanding Common
Stock as a class without the Corporation's receipt of consideration, then
appropriate adjustments shall be made to (i) the maximum number and/or class of
securities issuable under the Plan, (ii) the maximum number and/or class of
securities for which any one individual participating in the Plan may be granted
stock options, separately exercisable stock appreciation rights, Performance
Shares and direct stock issuances in the aggregate per calendar year, (iii) the
number and/or class of securities and price per share in effect under each
option or stock appreciation right outstanding under the Discretionary Option
Grant Program and (iv) the number and/or class of securities underlying the
Performance Shares outstanding under the Performance Share Program. Such
adjustments are to be effected by the Plan Administrator in a manner which shall
preclude the enlargement or dilution of rights and benefits under the Plan, and
such adjustments shall be final, binding and conclusive.

9.
<PAGE> 10
ARTICLE TWO

DISCRETIONARY OPTION GRANT PROGRAM

I. TERMS AND CONDITIONS OF OPTIONS

Options granted pursuant to the Discretionary Option Grant Program
shall be authorized by action of the Plan Administrator and may, at the Plan
Administrator's discretion, be either Incentive Options or Non-Statutory
Options. Individuals who are not Employees of the Corporation or its parent or
subsidiary corporations may only be granted Non-Statutory Options. Each granted
option shall be evidenced by one or more instruments in the form approved by the
Plan Administrator; provided, however, that each such instrument shall comply
with the terms and conditions specified below. Each instrument evidencing an
Incentive Option shall, in addition, be subject to the applicable provisions of
Section II of this Article Two.

A. Exercise Price.

1. The exercise price per share shall be fixed by the Plan
Administrator but shall in no event be less than one hundred percent (100%) of
the Fair Market Value per share of Common Stock on the grant date.

2. The exercise price shall become immediately due upon exercise of
the option and, subject to the provisions of Section I of Article Five and the
instrument evidencing the grant, shall be payable in one of the alternative
forms specified below:

a. full payment in cash or check made payable to the
Corporation's order;

b. full payment in shares of Common Stock held for the requisite
period necessary to avoid a charge to the Corporation's earnings for
financial reporting purposes and valued at Fair Market Value on the
Exercise Date;

c. full payment in a combination of shares of Common Stock held
for the requisite period necessary to avoid a charge to the Corporation's
earnings for financial reporting purposes and valued at Fair Market Value
on the Exercise Date and cash or check made payable to the Corporation's
order; or

d. to the extent the option is exercised for vested shares, full
payment through a broker-dealer sale and remittance procedure pursuant to

10.
<PAGE> 11
which the option holder shall provide concurrent irrevocable written
instructions (i) to a Corporation-designated brokerage firm to effect the
immediate sale of the purchased shares and remit to the Corporation, out of
the sale proceeds available on the settlement date, sufficient funds to
cover the aggregate exercise price payable for the purchased shares plus
all applicable Federal, state and local income and employment taxes
required to be withheld by the Corporation in connection with such purchase
and (ii) to the Corporation to deliver the certificates for the purchased
shares directly to such brokerage firm in order to complete the sale
transaction.

Except to the extent the sale and remittance procedure is utilized in
connection with the exercise of the option, payment of the exercise price for
the purchased shares must accompany the written notice to the Corporation
evidencing the option exercise.

B. Term and Exercise of Options. Each option granted under this
Discretionary Option Grant Program shall be exercisable at such time or times
and during such period as is determined by the Plan Administrator and set forth
in the instrument evidencing the grant. No such option, however, shall have a
maximum term in excess of ten (10) years measured from the grant date. During
the lifetime of the Optionee, the option, together with any stock appreciation
rights pertaining to such option, shall be exercisable only by the Optionee and
shall not be assignable or transferable by the Optionee except for a transfer of
the option effected by will or by the laws of descent and distribution following
the Optionee's death.

C. Termination of Service.

1. The following provisions shall govern the exercise period
applicable to any outstanding options held by the Optionee at the time of
cessation of Service or death.

a. Should an Optionee cease Service for any reason (including
death or Permanent Disability) while holding one or more outstanding
options under this Article Two, then none of those options shall (except to
the extent otherwise provided pursuant to subparagraph 3 below) remain
exercisable for more than a thirty-six (36)-month period (or such shorter
period determined by the Plan Administrator and set forth in the instrument
evidencing the grant) measured from the date of such cessation of Service.

b. Any option held by the Optionee under this Article Two and
exercisable in whole or in part on the date of his or her death may be
exercised by the personal representative of the Optionee's estate or by the
person or persons to whom the option is transferred pursuant to the
Optionee's will or in accordance with the laws of descent and distribution.
However, the right to exercise such option shall lapse upon the earlier of
(i) the third anniversary of the

11.
<PAGE> 12
date of the Optionee's death (or such shorter period determined by the Plan
Administrator and set forth in the instrument evidencing the grant) or (ii)
the specified expiration date of the option term. Accordingly, upon the
occurrence of the earlier event, the option shall terminate and cease to
remain outstanding.

c. Under no circumstances shall any such option be exercisable
after the specified expiration date of the option term.

d. During the applicable post-Service exercise period, the
option may not be exercised in the aggregate for more than the number of
shares (if any) in which the Optionee is vested at the time of his or her
cessation of Service. Upon the expiration of the limited post-Service
exercise period or (if earlier) upon the specified expiration date of the
option term, each such option shall terminate and cease to remain
outstanding with respect to any vested shares for which the option has not
otherwise been exercised. However, each outstanding option shall
immediately terminate and cease to remain outstanding, at the time of the
Optionee's cessation of Service, with respect to any shares for which the
option is not otherwise at that time exercisable or in which the Optionee
is not otherwise vested.

e. Should (i) the Optionee's Service be terminated for
misconduct (including, but not limited to, any act of dishonesty, willful
misconduct, fraud or embezzlement) or (ii) the Optionee make any
unauthorized use or disclosure of confidential information or trade secrets
of the Corporation or its parent or subsidiary corporations, then in any
such event all outstanding options held by the Optionee under this Article
Two shall immediately terminate and cease to remain outstanding.

2. The Plan Administrator shall have complete discretion,
exercisable either at the time the option is granted or at any time while the
option remains outstanding, to permit one or more options held by the Optionee
under this Article Two to be exercised, during the limited post-Service exercise
period applicable under this paragraph C., not only with respect to the number
of vested shares of Common Stock for which each such option is exercisable at
the time of the Optionee's cessation of Service but also with respect to one or
more additional installments in which the Optionee would have subsequently
vested had the Optionee continued in Service.

3. The Plan Administrator shall also have full power and authority,
exercisable either at the time the option is granted or at any time while the
option remains outstanding, to extend the period of time for which the option is
to remain exercisable following the Optionee's cessation of Service or death
from the limited period in effect under subparagraph C.1. above to such greater
period of time as the Plan Administrator shall deem appropriate. In

12.
<PAGE> 13
no event, however, shall such option be exercisable after the specified
expiration date of the option term.

D. Stockholder Rights. An Optionee shall have no stockholder rights
with respect to any shares covered by the option until such individual shall
have exercised the option and paid the exercise price for the purchased shares.

E. Repurchase Rights. The shares of Common Stock acquired upon the
exercise of any Article Two option grant may be subject to repurchase by the
Corporation in accordance with the following provisions:

1. The Plan Administrator shall have the discretion to authorize the
issuance of unvested shares of Common Stock under this Article Two. Should the
Optionee cease Service while holding such unvested shares, the Corporation shall
have the right to repurchase any or all of those unvested shares at the exercise
price paid per share. The terms and conditions upon which such repurchase right
shall be exercisable (including the period and procedure for exercise and the
appropriate vesting schedule for the purchased shares) shall be established by
the Plan Administrator and set forth in the instrument evidencing such
repurchase right.

2. All of the Corporation's outstanding repurchase rights under this
Article Two shall automatically terminate, and all shares subject to such
terminated rights shall immediately vest in full, upon the occurrence of a
Corporate Transaction, except to the extent: (i) such repurchase right is
expressly assigned to the successor corporation (or parent thereof) in
connection with the Corporate Transaction or (ii) such termination is precluded
by other limitations imposed by the Plan Administrator at the time the
repurchase right is issued.

3. The Plan Administrator shall have the discretionary authority,
exercisable either before or after the Optionee's cessation of Service, to
cancel the Corporation's outstanding repurchase rights with respect to one or
more shares purchased or purchasable by the Optionee under this Discretionary
Option Grant Program and thereby accelerate the vesting of such shares in whole
or in part at any time.

II. INCENTIVE OPTIONS

The terms and conditions specified below shall be applicable to all
Incentive Options granted under this Article Two. Incentive Options may only be
granted to individuals who are Employees. Options which are specifically
designated as Non-Statutory Options when issued under the Plan shall not be
subject to such terms and conditions.

A. Dollar Limitation. The aggregate Fair Market Value (determined as of
the respective date or dates of grant) of the Common Stock for which one or more
options granted to any Employee under this Plan (or any other option plan of the
Corporation or its parent or

13.
<PAGE> 14
subsidiary corporations) may for the first time become exercisable as Incentive
Options under the Federal tax laws during any one calendar year shall not exceed
the sum of One Hundred Thousand Dollars ($100,000). To the extent the Employee
holds two (2) or more such options which become exercisable for the first time
in the same calendar year, the foregoing limitation on the exercisability of
such options as Incentive Options under the Federal tax laws shall be applied on
the basis of the order in which such options are granted. Should the number of
shares of Common Stock for which any Incentive Option first becomes exercisable
in any calendar year exceed the applicable One Hundred Thousand Dollar
($100,000) limitation, then that option may nevertheless be exercised in such
calendar year for the excess number of shares as a Non-Statutory Option under
the Federal tax laws.

B. 10% Stockholder. If any individual to whom an Incentive Option is
granted is the owner of stock (as determined under Section 424(d) of the Code)
possessing ten percent (10%) or more of the total combined voting power of all
classes of stock of the Corporation or any one of its parent or subsidiary
corporations, then the exercise price per share shall not be less than one
hundred ten percent (110%) of the Fair Market Value per share of Common Stock on
the grant date, and the option term shall not exceed five (5) years measured
from the grant date.

Except as modified by the preceding provisions of this Section II, the
provisions of Articles One, Two and Five of the Plan shall apply to all
Incentive Options granted hereunder.

III. CORPORATE TRANSACTION/CHANGE IN CONTROL

A. In the event of any Corporate Transaction, each option which is at
the time outstanding under this Article Two shall automatically accelerate so
that each such option shall, immediately prior to the specified effective date
for the Corporate Transaction, become fully exercisable with respect to the
total number of shares of Common Stock at the time subject to such option and
may be exercised for all or any portion of such shares as fully vested shares of
Common Stock. However, an outstanding option under this Article Two shall NOT so
accelerate if and to the extent: (i) such option is, in connection with the
Corporate Transaction, either to be assumed by the successor corporation or
parent thereof or to be replaced with a comparable option to purchase shares of
the capital stock of the successor corporation or parent thereof, (ii) such
option is to be replaced with a cash incentive program of the successor
corporation which preserves the option spread existing at the time of the
Corporate Transaction and provides for subsequent payout in accordance with the
same vesting schedule applicable to such option or (iii) the acceleration of
such option is subject to other limitations imposed by the Plan Administrator at
the time of the option grant. The determination of option comparability under
clause (i) above shall be made by the Plan Administrator, and its determination
shall be final, binding and conclusive.

14.
<PAGE> 15
B. Immediately following the consummation of the Corporate Transaction,
all outstanding options under this Article Two shall terminate and cease to
remain outstanding, except to the extent assumed by the successor corporation or
its parent corporation.

C. Each outstanding option under this Article Two which is assumed in
connection with the Corporate Transaction shall be appropriately adjusted,
immediately after such Corporate Transaction, to apply and pertain to the number
and class of securities which would have been issued to the option holder in
consummation of such Corporate Transaction, had such person exercised the option
immediately prior to such Corporate Transaction. Appropriate adjustments shall
also be made to the exercise price payable per share, provided the aggregate
exercise price payable for such securities shall remain the same. In addition,
the class and number of securities available for issuance under the Plan on an
aggregate and per participant basis following the consummation of the Corporate
Transaction shall be appropriately adjusted.

D. The Plan Administrator shall have the discretion, exercisable either
at the time the option is granted or at any time while the option remains
outstanding, to provide (upon such terms as it may deem appropriate) for (i) the
automatic acceleration of one or more outstanding options granted under this
Article Two which are assumed or replaced in the Corporate Transaction and do
not otherwise accelerate at that time and/or (ii) the immediate termination of
one or more of the Corporation's outstanding repurchase rights which are
assigned in connection with the Corporate Transaction and do not otherwise
terminate at that time, in the event the Optionee's Service should subsequently
terminate within a designated period following such Corporate Transaction.

E. The Plan Administrator shall have the discretionary authority,
exercisable at the time the option is granted or at any time while the option
remains outstanding, to provide (upon such terms as it may deem appropriate) for
the automatic acceleration of one or more outstanding options under this Article
Two (and the immediate termination of one or more of the Corporation's
outstanding repurchase rights under this Article Two) upon the occurrence of a
Change in Control. The Plan Administrator shall also have full power and
authority to condition any such option acceleration (and the termination of any
outstanding repurchase rights) upon the subsequent termination of the Optionee's
Service within a specified period following the Change in Control.

F. Any options accelerated in connection with the Change in Control
shall remain fully exercisable until the expiration or sooner termination of the
option term.

G. The grant of options under this Article Two shall in no way affect
the right of the Corporation to adjust, reclassify, reorganize or otherwise
change its capital or business structure or to merge, consolidate, dissolve,
liquidate or sell or transfer all or any part of its business or assets.

15.
<PAGE> 16
H. The portion of any Incentive Option accelerated under this Section
III in connection with a Corporate Transaction or Change in Control shall remain
exercisable as an Incentive Option under the Federal tax laws only to the extent
the dollar limitation of Section II of this Article Two is not exceeded. To the
extent such dollar limitation is exceeded, the accelerated portion of such
option shall be exercisable as a Non-Statutory Option under the Federal tax
laws.

IV. CANCELLATION AND REGRANT OF OPTIONS

The Plan Administrator shall have the authority to effect, at any time
and from time to time, with the consent of the affected Optionees, the
cancellation of any or all outstanding options under this Article Two and to
grant in substitution therefor new options under the Plan covering the same or
different numbers of shares of Common Stock but with an exercise price per share
not less than the Fair Market Value per share of Common Stock on the new grant
date.

V. STOCK APPRECIATION RIGHTS

A. The Plan Administrator shall have full power and authority,
exercisable in its sole discretion, to grant stock appreciation rights to
selected Optionees or other individuals eligible to receive option grants under
the Discretionary Option Grant Program.

B. Three types of stock appreciation rights shall be authorized for
issuance under the Plan: Tandem Stock Appreciation Rights ("Tandem Rights"),
Independent Stock Appreciation Rights ("Independent Rights") and Limited Stock
Appreciation Rights ("Limited Rights").

C. The following terms and conditions shall govern the grant and
exercise of Tandem Rights under this Article Two.

1. One or more Optionees may be granted the Tandem Right,
exercisable upon such terms and conditions as the Plan Administrator may
establish, to elect between the exercise of the underlying Article Two
stock option for shares of Common Stock and the surrender of that option in
exchange for a distribution from the Corporation in an amount equal to the
excess of (i) the Fair Market Value (on the option surrender date) of the
number of shares in which the Optionee is at the time vested under the
surrendered option (or surrendered portion thereof) over (ii) the aggregate
exercise price payable for such vested shares.

2. No such option surrender shall be effective unless it is approved
by the Plan Administrator. If the surrender is so approved, then the
distribution to which the Optionee shall accordingly become entitled under
this Section V may be made in shares of Common Stock valued at Fair Market
Value

16.
<PAGE> 17
on the option surrender date, in cash, or partly in shares and partly in
cash, as the Plan Administrator shall in its sole discretion deem
appropriate.

3. If the surrender of an option is rejected by the Plan
Administrator, then the Optionee shall retain whatever rights the Optionee
had under the surrendered option (or surrendered portion thereof) on the
option surrender date and may exercise such rights at any time prior to the
later of (i) five (5) business days after the receipt of the rejection
notice or (ii) the last day on which the option is otherwise exercisable in
accordance with the terms of the instrument evidencing such option, but in
no event may such rights be exercised more than ten (10) years after the
date of the option grant.

D. The following terms and conditions shall govern the grant and
exercise of Independent Rights under this Article Two:

1. One or more individuals eligible to participate in the
Discretionary Option Grant Program may be granted an Independent Right not
tied to any underlying Article Two stock option. The Independent Right
shall be exercisable upon such terms and conditions as the Plan
Administrator may establish and shall entitle the holder to receive a
distribution from the Corporation in an amount equal to the excess of (i)
the aggregate Fair Market Value (on the exercise date of such right) of the
shares of Common Stock underlying the exercised right over (ii) the
aggregate base price in effect for those shares.

2. The number of shares of Common Stock underlying the Independent
Right and the base price in effect for those shares shall be determined by
the Plan Administrator in its sole discretion at the time the Independent
Right is granted. The base price may not be less than the Fair Market Value
(on the grant date of the right) of the shares of Common Stock underlying
that right.

3. The distribution to which the holder of the Independent Right
shall become entitled under this Section V may be made in shares of Common
Stock valued at Fair Market Value on the exercise date of such right, in
cash, or partly in shares and partly in cash, as the Plan Administrator
shall in its sole discretion deem appropriate.

E. The following terms and conditions shall govern the grant and
exercise of Limited Rights under this Article Two:

1. One or more officers of the Corporation subject to the
short-swing profit restrictions of the Federal securities laws may, in the
Plan

17.
<PAGE> 18
Administrator's sole discretion, be granted Limited Rights with respect to
their outstanding options under this Article Two.

2. Upon the occurrence of a Hostile Take-Over, each such officer
holding one or more options with such a Limited Right in effect for at
least six (6) months shall have the unconditional right (exercisable for a
thirty (30)-day period following such Hostile Take-Over) to surrender each
such option to the Corporation, to the extent the option is at the time
exercisable for fully vested shares of Common Stock. The officer shall in
return be entitled to a cash distribution from the Corporation in an amount
equal to the excess of (i) the Take-Over Price of the vested shares of
Common Stock at the time subject to each surrendered option (or surrendered
portion of such option) over (ii) the aggregate exercise price payable for
such vested shares. Such cash distribution shall be made within five (5)
days following the option surrender date.

3. Neither the approval of the Plan Administrator nor the consent of
the Board shall be required in connection with such option surrender and
cash distribution. Any unsurrendered portion of the option shall continue
to remain outstanding and become exercisable in accordance with the terms
of the instrument evidencing such grant.

F. The shares of Common Stock subject to any stock appreciation right
exercised in accordance with this Section V shall NOT be available for
subsequent issuance under the Plan.

18.
<PAGE> 19
ARTICLE THREE

PERFORMANCE SHARE PROGRAM

I. AWARD OF PERFORMANCE SHARES

A. The Plan Administrator shall have full power and authority,
subject to the provisions of this Article Three, to award Performance Shares.
Each Performance Share shall function as an "equity-type" participating interest
in the Corporation and shall entitle the Participant to receive a payment equal
to the Fair Market Value per share of Common Stock on the date on which the
Performance Share vests. The Plan Administrator may condition vesting of
Performance Shares upon the attainment of specified performance goals or upon
other such factors or criteria as the Plan Administrator shall determine,
including (without limitation) continued Service, appreciation in the Fair
Market Value of the Common Stock, increased return on assets or earnings per
share growth.

Performance objectives may vary from Participant to
Participant and among groups of Participants and shall be based upon such
corporate-wide, subsidiary, group or division factors or criteria as the Plan
Administrator may deem appropriate.

B. Each Participant who is awarded Performance Shares shall be
issued a written agreement evidencing the total number of Performance Shares
awarded him or her and the terms and conditions upon which such Performance
Shares are to vest and become payable.

C. The award of Performance Shares under this Article Three
shall not entitle the holder to any stockholder rights, including (without
limitation) any voting, dividend or liquidation rights, with respect to the
underlying shares of Common Stock which serve to determine the value of the
award.

D. The award of Performance Shares under this Article Three
shall in no way affect the right of the Corporation to adjust, reclassify,
reorganize or otherwise change its capital or business structure or to merge,
consolidate, dissolve, liquidate or sell or transfer all or any part of its
business or assets.

II. VESTING OF PERFORMANCE SHARES

A. No Performance Share shall vest prior to the first
anniversary of the date on which the Performance Share award is approved by the
Plan Administrator. Subject to the foregoing restriction, the Plan Administrator
shall have full power and discretion to establish the vesting schedule
applicable to the Performance Shares.

19.
<PAGE> 20
B. All unvested Performance Shares held by a Participant at
the time of his or her cessation of Service shall automatically terminate and
cease to be outstanding, without any payment due the Participant on the
terminated shares. However, the Plan Administrator shall have full and complete
discretion, exercisable at any time, to accelerate in whole or in part the
vesting schedule in effect for one or more Performance Shares held by a
Participant.

III. LIQUIDATION OF PERFORMANCE SHARES

A. A Participant's Performance Shares shall be liquidated upon
the occurrence of the vesting event applicable to those Performance Shares, and
the Participant shall accordingly become entitled to a payment in an amount
determined by multiplying the number of vested Performance Shares by the Fair
Market Value of those Performance Shares on the vesting date.

B. Payment for the liquidated Performance Shares shall be made
to the Participant within thirty (30) days after the vesting event. Payment may,
in the Plan Administrator's sole discretion, be made in cash or shares of Common
Stock valued at Fair Market Value on the vesting date.

IV. CANCELLATION OF PERFORMANCE SHARES

Each outstanding Performance Share shall terminate, and each
Participant holding one or more Performance Shares shall cease to have any
further rights or benefit entitlement thereunder, upon the receipt of the amount
(if any) which becomes due and payable to such individual under the liquidation
provisions of Section III of this Article Three.

V. NON-TRANSFERABILITY/DEATH

Neither the Performance Shares issued under this Article Three
nor any rights or interests pertaining thereto may be transferred, assigned,
pledged or encumbered, other than a transfer effected pursuant to the
Participant's will or in accordance with the laws of descent and distribution
following the Participant's death. Any unpaid amounts due the Participant with
respect to vested Performance Shares liquidated prior to his or her death shall
be paid to the administrator or executor of such individual's estate.

VI. WITHHOLDING

All payments under this Article Three shall be subject to the
Corporation's collection of all applicable Federal, state and local income and
employment taxes required to be withheld therefrom.

20.
<PAGE> 21
VII. UNFUNDED AND UNSECURED OBLIGATION

The Corporation's obligation to pay the amounts which become
due and payable under this Article Three shall at all times be an unfunded and
unsecured obligation of the Corporation, and no trust fund, escrow arrangement
or other segregated account shall be established as a funding vehicle for any
payments to be made hereunder. Accordingly, holders of Performance Shares shall
only have the status of general creditors with respect to any amounts which may
actually become due and payable to them under this Article Three and shall look
solely and exclusively to the general assets of the Corporation for payment.

21.
<PAGE> 22
ARTICLE FOUR

STOCK ISSUANCE PROGRAM

I. TERMS AND CONDITIONS OF STOCK ISSUANCES

Shares of Common Stock may be issued under the Stock Issuance
Program through direct and immediate purchases without any intervening stock
option grants. The issued shares shall be evidenced by a Stock Issuance
Agreement ("Issuance Agreement") that complies with the terms and conditions of
this Article Four.

A. Consideration.

1. Shares of Common Stock shall be issued under
the Stock Issuance Program for one or more of the following items of
consideration which the Plan Administrator may deem appropriate in each
individual instance:

a. full payment in cash or check made
payable to the Corporation's order;

b. a promissory note payable to the
Corporation's order in one or more installments, which may be subject to
cancellation in whole or in part upon terms and conditions established by the
Plan Administrator; or

c. past services rendered to the
Corporation or any parent or subsidiary corporation.

2. The issued shares shall, in all instances,
be issued for consideration with a value equal to the Fair Market Value of such
shares at the time of issuance.

B. Vesting Provisions.

1. Shares of Common Stock issued under the
Stock Issuance Program may, in the absolute discretion of the Plan
Administrator, be fully and immediately vested upon issuance or may vest in one
or more installments over the Participant's period of Service or upon the
attainment of performance milestones. The elements of the vesting schedule
applicable to any unvested shares of Common Stock issued under the Stock
Issuance Program, namely:

a. the Service period to be completed by the Participant
or the performance milestones to be achieved by the Corporation or the
Participant,

b. the number of installments in which the shares are to
vest,

22.
<PAGE> 23
c. the interval or intervals (if any) which are to lapse
between installments, and

d. the effect which death, Permanent Disability or other
event designated by the Plan Administrator is to have upon the vesting schedule,

shall be determined by the Plan Administrator and incorporated into the Issuance
Agreement executed by the Corporation and the Participant at the time such
unvested shares are issued. However, (i) in the event that the Plan
Administrator determines that certain performance objectives are to be achieved
before the shares vest, such shares may not vest sooner than one year following
the date of the stock issuance, and (ii) in the event that the issued shares are
to vest in installments over the Participant's period of Service, full vesting
of such shares may not occur within the three (3)-year period immediately
following the date of the stock issuance.

2. The Participant shall have full stockholder
rights with respect to any shares of Common Stock issued to him or her under the
Plan, whether or not his or her interest in those shares is vested. Accordingly,
the Participant shall have the right to vote such shares and to receive any
regular cash dividends paid on such shares. Any new, additional or different
shares of stock or other property (including money paid other than as a regular
cash dividend) which the Participant may have the right to receive with respect
to his or her unvested shares by reason of any stock dividend, stock split,
recapitalization, combination of shares, exchange of shares or other change
affecting the outstanding Common Stock as a class without the Corporation's
receipt of consideration shall be issued, subject to (i) the same vesting
requirements applicable to his or her unvested shares and (ii) such escrow
arrangements as the Plan Administrator shall deem appropriate.

3. Should the Participant cease to remain in
Service while holding one or more unvested shares of Common Stock under the
Stock Issuance Program, then those shares shall be immediately surrendered to
the Corporation for cancellation, and the Participant shall have no further
stockholder rights with respect to those shares. To the extent the surrendered
shares were previously issued to the Participant for consideration paid in cash
or cash equivalent (including the Participant's purchase-money promissory note),
the Corporation shall repay to the Participant the cash consideration paid for
the surrendered shares and shall cancel the unpaid principal balance of any
outstanding purchase-money note of the Participant attributable to such
surrendered shares.

4. The Plan Administrator may in its discretion
elect to waive the surrender and cancellation of one or more unvested shares of
Common Stock (or other assets attributable thereto) which would otherwise occur
upon the non-completion of the vesting schedule applicable to such shares. Such
waiver shall result in the immediate vesting of the Participant's interest in
the shares of Common Stock as to which the waiver applies. Such waiver may be

23.
<PAGE> 24
effected at any time, whether before or after the Participant's cessation of
Service or the attainment or non-attainment of the applicable performance
objectives.

II. CORPORATE TRANSACTION/CHANGE IN CONTROL

A. Upon the occurrence of any Corporate Transaction, all
unvested shares of Common Stock at the time outstanding under this Stock
Issuance Program shall immediately vest in full and the Corporation's repurchase
rights shall terminate, except to the extent: (i) any such repurchase right is
expressly assigned to the successor corporation (or parent thereof) in
connection with the Corporate Transaction or (ii) such termination is precluded
by other limitations imposed in the Issuance Agreement.

B. The Plan Administrator shall have the discretionary
authority to provide for the automatic vesting of one or more unvested shares
outstanding under the Stock Issuance Program (and the immediate termination of
the Corporation's repurchase rights with respect to those shares) at the time of
any Change in Control. The Plan Administrator shall also have full power and
authority to condition any such accelerated vesting upon the subsequent
termination of the Participant's Service within a specified period following the
Change in Control.

III. TRANSFER RESTRICTIONS/SHARE ESCROW

A. Unvested shares may, in the Plan Administrator's
discretion, be held in escrow by the Corporation until the Participant's
interest in such shares vests or may be issued directly to the Participant with
restrictive legends on the certificates evidencing those unvested shares.

B. The Participant shall have no right to transfer any
unvested shares of Common Stock issued to him or her under the Stock Issuance
Program. For purposes of this restriction, the term "transfer" shall include
(without limitation) any sale, pledge, assignment, encumbrance, gift or other
disposition of such shares, whether voluntary or involuntary. Upon any such
attempted transfer, the unvested shares shall immediately be cancelled in
accordance with substantially the same procedure in effect under Section I.B.3
of this Article Four, and neither the Participant nor the proposed transferee
shall have any rights with respect to such cancelled shares. However, the
Participant shall have the right to make a gift of unvested shares acquired
under the Stock Issuance Program to his or her spouse or issue, including
adopted children, or to a trust established for such spouse or issue, provided
the donee of such shares delivers to the Corporation a written agreement to be
bound by all the provisions of the Stock Issuance Program and the Issuance
Agreement applicable to the gifted shares.

24.
<PAGE> 25
ARTICLE FIVE

MISCELLANEOUS

I. LOANS OR INSTALLMENT PAYMENTS

A. The Plan Administrator may, in its discretion, assist any
Optionee or Participant, to the extent such Optionee or Participant is an
Employee (including an Optionee or Participant who is an officer of the
Corporation), in the exercise of one or more options granted to such Optionee
under the Discretionary Option Grant Program or the purchase of one or more
shares issued to such Participant under the Stock Issuance Program, including
the satisfaction of any Federal, state and local income and employment tax
obligations arising therefrom, by (i) authorizing the extension of a loan from
the Corporation to such Optionee or Participant or (ii) permitting the Optionee
or Participant to pay the exercise price or purchase price for the purchased
shares in installments. The terms of any loan or installment method of payment
(including the interest rate and terms of repayment) shall be upon such terms as
the Plan Administrator specifies in the applicable option or issuance agreement
or otherwise deems appropriate under the circumstances. Loans or installment
payments may be authorized with or without security or collateral. However, the
maximum credit available to the Optionee or Participant may not exceed the
exercise or purchase price of the acquired shares plus any Federal, state and
local income and employment tax liability incurred by the Optionee or
Participant in connection with the acquisition of such shares.

B. The Plan Administrator may, in its absolute discretion,
determine that one or more loans extended under this financial assistance
program shall be subject to forgiveness by the Corporation in whole or in part
upon such terms and conditions as the Plan Administrator may deem appropriate.

II. AMENDMENT OF THE PLAN AND AWARDS

A. The Board has complete and exclusive power and authority to
amend or modify the Plan (or any component thereof) in any or all respects
whatsoever. However, (i) no such amendment or modification shall adversely
affect rights and obligations with respect to options at the time outstanding
under the Plan, nor adversely affect the rights of any Participant with respect
to outstanding Performance Shares or unvested Common Stock under the Performance
Share or Stock Issuance Programs, unless the Optionee or Participant consents to
such amendment. In addition, the Board may not, without the approval of the
Corporation's stockholders, amend the Plan to (i) materially increase the
maximum number of shares issuable over the term of the Plan or the maximum
number of shares for which any one individual participating in the Plan may be
granted stock options, separately exercisable stock appreciation

25.
<PAGE> 26
rights, Performance Shares and direct stock issuances in the aggregate per
calendar year, except for permissible adjustments under Section VI.D. of Article
One, (ii) materially modify the eligibility requirements for plan participation
or (iii) materially increase the benefits accruing to plan participants.

B. In no event may Performance Shares be awarded under Article
Three which are in excess of the number of shares of Common Stock then available
for issuance under the Plan. Options to purchase shares of Common Stock may be
granted under the Discretionary Option Grant Program, and shares of Common Stock
may be issued under the Stock Issuance Program which are in both instances in
excess of the number of shares then available for issuance under the Plan,
provided any excess shares actually issued under the Discretionary Option Grant
Program or the Stock Issuance Program are held in escrow until stockholder
approval is obtained for a sufficient increase in the number of shares available
for issuance under the Plan. If such stockholder approval is not obtained within
twelve (12) months after the date the first such excess option grants or excess
stock issuances are made, then (i) any unexercised excess options shall
terminate and cease to be exercisable and (ii) the Corporation shall promptly
refund the purchase price paid for any excess shares actually issued under the
Plan and held in escrow, together with interest (at the applicable Short Term
Federal Rate) for the period the shares were held in escrow.

III. TAX WITHHOLDING

A. The Corporation's obligation to deliver shares of Common
Stock upon the exercise of stock options for such shares or the vesting of such
shares under the Plan shall be subject to the satisfaction of all applicable
Federal, state and local income and employment tax withholding requirements.

B. The Plan Administrator may, in its discretion and in
accordance with the provisions of this Section III and such supplemental rules
as the Plan Administrator may from time to time adopt (including the applicable
safe-harbor provisions of Securities and Exchange Commission Rule 16b-3),
provide any or all holders of Non-Statutory Options or unvested shares of Common
Stock under the Plan with the right to use shares of Common Stock in
satisfaction of all or part of the Federal, state and local income and
employment tax liabilities incurred by such holders in connection with the
exercise of their options or the vesting of their shares (the "Taxes"). Such
right may be provided to any such holder in either or both of the following
formats:

Stock Withholding: The holder of the Non-Statutory
Option or unvested shares may be provided with the election to have the
Corporation withhold, from the shares of Common Stock otherwise issuable upon
the exercise of such Non-Statutory Option or the vesting of such shares, a
portion of those shares with an aggregate Fair Market Value to exceed one
hundred percent (100%) of the applicable Taxes.

26.
<PAGE> 27
Stock Delivery: The Plan Administrator may, in its
discretion, provide the holder of the Non-Statutory Option or the unvested
shares with the election to deliver to the Corporation, at the time the
Non-Statutory Option is exercised or the shares vest, one or more shares of
Common Stock previously acquired by such individual (other than in connection
with the option exercise or share vesting triggering the Taxes) with an
aggregate Fair Market Value not to exceed one hundred percent (100%) of the
Taxes incurred in connection with such option exercise or share vesting.

IV. EFFECTIVE DATE AND TERM OF PLAN

A. This Plan was adopted by the Board on September 23, 1994
and was subsequently approved by the Corporation's sole stockholder. The Plan
became effective on August 10, 1995, the date on which the Underwriting
Agreement for the initial public offering of the Corporation's Common Stock was
executed and finally priced.

B. The Plan shall terminate upon the earlier of (i) September
22, 2004 unless sooner terminated by the Board and (ii) the date on which all
shares available for issuance under the Plan shall have been issued or cancelled
pursuant to the exercise of the stock options and stock appreciation rights
granted under the Discretionary Option Grant Program, the award of Performance
Shares under the Performance Share Program or the issuance of shares (whether
vested or unvested) under the Stock Issuance Program. If the date of termination
is determined under clause (i) above, then all stock options, stock appreciation
rights, Performance Shares and stock issuances outstanding on such date shall
thereafter continue to have force and effect in accordance with the provisions
of the instruments evidencing such grants or issuances.

V. USE OF PROCEEDS

Any cash proceeds received by the Corporation from the sale of
shares pursuant to option grants or stock issuances under the Plan shall be used
for general corporate purposes.

VI. REGULATORY APPROVALS

A. The implementation of the Plan, the granting of any stock
option or stock appreciation right under the Discretionary Option Grant Program,
the award of any Performance Shares under the Performance Share Program, the
issuance of any shares under the Stock Issuance Program and the issuance of
Common Stock upon the exercise of the stock options or stock appreciation rights
granted hereunder shall each be subject to the Corporation's procurement of all
approvals and permits required by regulatory authorities having jurisdiction
over the Plan, the stock options, stock appreciation rights and Performance
Shares granted under it and the Common Stock issued pursuant to it.

27.
<PAGE> 28
B. No shares of Common Stock or other assets shall be issued
or delivered under this Plan unless and until there shall have been compliance
with all applicable requirements of Federal and state securities laws and all
applicable listing requirements of any securities exchange on which the Common
Stock is then listed for trading.

VII. NO EMPLOYMENT/SERVICE RIGHTS

Neither the action of the Corporation in establishing the
Plan, nor any action taken by the Plan Administrator hereunder, nor any
provision of the Plan shall be construed so as to grant any individual the right
to remain in the Service of the Corporation (or any parent or subsidiary
corporation) for any period of specific duration, and the Corporation (or any
parent or subsidiary corporation retaining the services of such individual) may
terminate such individual's Service at any time and for any reason, with or
without cause.

VIII. MISCELLANEOUS PROVISIONS

A. Except to the extent otherwise expressly provided in the
Plan, the right to acquire Common Stock or other assets under the Plan may not
be assigned, encumbered or otherwise transferred by any Optionee or Participant.

B. The provisions of the Plan relating to the exercise of
options and the vesting of shares shall be governed by the laws of the State of
California without resort to that State's conflict-of-laws rules, as such laws
are applied to contracts entered into and performed in such State.

C. The provisions of the Plan shall inure to the benefit of,
and be binding upon, the Corporation and its successors or assigns, whether by
Corporate Transaction or otherwise, and the Participants and the Optionees, the
legal representatives of their respective estates, their respective heirs or
legatees and their permitted assignees.

28.

<PAGE> 1
Exhibit 99.2

SUNSTONE HOTEL INVESTORS, INC.

1994 STOCK INCENTIVE PLAN

NOTICE OF GRANT OF STOCK OPTION

Notice is hereby given of the following stock option grant
(the "Option") to purchase shares of the Common Stock of Sunstone Hotel
Investors, Inc. (the "Corporation"):
OPTIONEE: FIELD (1)

GRANT DATE: FIELD (2)

EXERCISE PRICE: FIELD (3) per share

NUMBER OF OPTION SHARES: FIELD (4) shares

EXPIRATION DATE: FIELD (5)

TYPE OF OPTION: FIELD (6)

EXERCISE SCHEDULE: The Option shall become exercisable for twenty
percent (20%) of the Option Shares upon Optionee's completion of one
(1) year of Service (as defined in the attached Stock Option Agreement)
measured from the Grant Date and shall become exercisable for the
balance of the Option Shares in a series of four (4) successive equal
annual installments upon Optionee's completion of each additional year
of Service thereafter. In no event shall the Option become exercisable
for any additional Option Shares following Optionee's cessation of
Service.

Optionee understands and agrees that the Option is granted
subject to and in accordance with the express terms and conditions of the
Sunstone Hotel Investors, Inc. 1994 Stock Incentive Plan (the "Plan"). Optionee
further agrees to be bound by the terms and conditions of the Plan and the terms
and conditions of the Option as set forth in the Stock Option Agreement attached
hereto as EXHIBIT A. Optionee hereby acknowledges receipt of a copy of the Plan
Summary and Prospectus for the Plan in the form attached hereto as EXHIBIT B. A
copy of the Plan is available upon request made to the Corporate Secretary at
the Corporation's offices.
<PAGE> 2
NO EMPLOYMENT OR SERVICE CONTRACT. Nothing in this Notice of
Grant, the attached Agreements or the Plan shall confer upon Optionee any right
to continue in Service for any period of specific duration or interfere with or
otherwise restrict in any way the rights of the Corporation (or any parent or
subsidiary employing Optionee) or Optionee, which rights are hereby expressly
reserved by each, to terminate Optionee's Service at any time for any reason
whatsoever, with or without cause.

Dated: , 199
--------------------- --

SUNSTONE HOTEL INVESTORS, INC.

By:
---------------------------
Title:
------------------------

FIELD (1) OPTIONEE

Address:
----------------------
------------------------------

ATTACHMENTS:

EXHIBIT A: STOCK OPTION AGREEMENT
EXHIBIT B: PLAN SUMMARY AND PROSPECTUS

2.
<PAGE> 3
EXHIBIT A

STOCK OPTION AGREEMENT

<PAGE> 4
EXHIBIT B

PLAN SUMMARY AND PROSPECTUS

<PAGE> 1
EXHIBIT 99.3

SUNSTONE HOTEL INVESTORS, INC.

1994 STOCK INCENTIVE PLAN

STOCK OPTION AGREEMENT

WITNESSETH:

RECITALS

A. The Corporation's Board of Directors (the "Board") has
adopted the Corporation's 1994 Stock Incentive Plan (the "Plan") for the purpose
of attracting and retaining the services of employees (including officers and
directors), and consultants and other advisors (and their respective employees).

B. Optionee is an individual who is to render valuable
services to the Corporation or one or more parent or subsidiary corporations,
and this Agreement is executed pursuant to, and is intended to carry out the
purposes of, the Plan in connection with the grant of a stock option to purchase
shares of the Corporation's common stock ("Common Stock") under the Plan.

NOW, THEREFORE, it is hereby agreed as follows:

1. GRANT OF OPTION. Subject to and upon the terms and
conditions set forth in this Agreement, the Corporation hereby grants to
Optionee, as of the grant date (the "Grant Date") specified in the accompanying
Notice of Grant of Stock Option (the "Grant Notice"), a stock option to purchase
up to that number of shares of the Corporation's Common Stock (the "Option
Shares") as is specified in the Grant Notice. Such Option Shares shall be
purchasable from time to time during the option term at the exercise price (the
"Exercise Price") specified in the Grant Notice.

2. OPTION TERM. This option shall expire at the close of
business on the expiration date (the "Expiration Date") specified in the Grant
Notice, unless sooner terminated in accordance with Paragraph 5 or Paragraph 6.

3. LIMITED TRANSFERABILITY. This option shall be neither
transferable or assignable by Optionee, other than a transfer of this option
effected by will or by the laws of descent and distribution following Optionee's
death, and may be exercised, during Optionee's lifetime, only by Optionee.
<PAGE> 2
4. EXERCISABILITY. This option shall become exercisable for
the Option Shares in accordance with the installment schedule specified in the
Grant Notice. As the option becomes exercisable for one or more installments,
those installments shall accumulate, and the option shall remain exercisable for
the accumulated installments until the Expiration Date or sooner termination of
the option term under Paragraph 5 or Paragraph 6. In no event shall this option
become exercisable for any additional Option Shares following Optionee's
cessation of Service.

5. TERMINATION OF SERVICE. The option term specified in
Paragraph 2 shall terminate (and this option shall cease to remain outstanding)
prior to the Expiration Date in accordance with the following provisions:

a. Upon Optionee's cessation of Service for any reason,
this option shall immediately terminate and cease to remain outstanding for any
Option Shares for which the option is not otherwise at that time exercisable.

b. Should Optionee cease Service for any reason other than
death or permanent disability while this option remains outstanding, then
Optionee shall have a three (3)-month period measured from the date of such
cessation of Service in which to exercise this option for any or all of the
Option Shares for which this option is exercisable at the time of such cessation
of Service. In no event, however, may this option be exercised at any time after
the specified Expiration Date of the option term. Upon the expiration of such
three (3)-month period or (if earlier) upon the specified Expiration Date of the
option term, this option shall terminate and cease to remain outstanding.

c. Should Optionee die while in Service or within three (3)
months after cessation of Service, then the personal representative of
Optionee's estate or the person or persons to whom this option is transferred
pursuant to Optionee's will or in accordance with the laws of descent and
distribution shall have the right to exercise the option for any or all of the
Option Shares for which this option is exercisable at the time of Optionee's
cessation of Service (less any Option Shares subsequently purchased by Optionee
prior to death). Such right shall lapse, and this option shall terminate and
cease to remain outstanding, upon the earlier of (i) the first anniversary of
Optionee's death or (ii) the Expiration Date.

d. Should Optionee become permanently disabled and cease by
reason thereof to remain in Service at any time during the option term, then
Optionee shall have a twelve (12)-month period commencing with the date of such
cessation of Service in which to exercise this option for any or all of the
Option Shares for which this option is exercisable at the time of such cessation
of Service. In no event, however, may this option be exercised at any time after
the specified

2.
<PAGE> 3
Expiration Date. Upon the expiration of such limited period of exercisability
or (if earlier) upon the Expiration Date, this option shall terminate and cease
to be outstanding.

e. During the limited period of post-Service exercisability
applicable pursuant to Paragraphs 5.b through 5.d, this option may not be
exercised in the aggregate for more than the number of Option Shares (if any)
for which this option is, at the time of Optionee's cessation of Service,
exercisable in accordance with either the normal exercise provisions specified
in the Grant Notice or the special acceleration provisions of Paragraph 6.

f. Should Optionee's Service be terminated for Misconduct,
then this option shall terminate immediately and cease to remain outstanding.

g. For purposes of this Agreement, the following
definitions shall be in effect:

(i) Optionee shall be deemed to remain in SERVICE for so
long as such individual performs services on a periodic basis to the
Corporation (or any parent or subsidiary corporation) in the capacity
of an Employee, a non-employee member of the board of directors or an
independent consultant or advisor.

(ii) Optionee shall be considered to be an EMPLOYEE for
so long as such individual performs services while in the employ of the
Corporation or one or more parent or subsidiary corporations, subject
to the control and direction of the employer entity not only as to the
work to be performed but also as to the manner and method of
performance.

(iii) Optionee shall be deemed to be PERMANENTLY
DISABLED and to have incurred a PERMANENT DISABILITY if Optionee is
unable to engage in any substantial gainful activity by reason of any
medically determinable physical or mental impairment expected to result
in death or to be of continuous duration of twelve (12) months or more.

(iv) A corporation shall be considered to be a
SUBSIDIARY of the Corporation if it is a member of an unbroken chain of
corporations which begins with the Corporation, provided each such
corporation in the unbroken chain (other than the last

3.
<PAGE> 4
corporation) owns, at the time of determination, stock possessing fifty
percent (50%) or more of the total combined voting power of all classes
of stock in one of the other corporations in such chain.

(v) A corporation shall be considered to be a PARENT of
the Corporation if it is a member of an unbroken chain of corporations
ending with the Corporation, provided each such corporation in the
unbroken chain (other than the Corporation) owns, at the time of
determination, stock possessing fifty percent (50%) or more of the
total combined voting power of all classes of stock in one of the other
corporations in such chain.

(vi) Optionee's Service shall be deemed to have been
terminated for MISCONDUCT if such termination occurs by reason of
Optionee's commission of any act of fraud, embezzlement or dishonesty,
any unauthorized use or disclosure by Optionee of confidential
information or trade secrets of the Corporation or its parent or
subsidiary corporations, or any other willful misconduct by Optionee
adversely affecting the business or affairs of the Corporation in a
material manner. The foregoing definition shall not be deemed to be
inclusive of all the acts or omissions which the Corporation or any
parent or subsidiary may consider as grounds for the dismissal or
discharge of Optionee or any other individual in the Service of the
Corporation.

6. CORPORATE TRANSACTION.

a. In the event of any of the following stockholder-
approved transactions to which the Corporation is a party (a "Corporate
Transaction"):

(ii) the sale, transfer or other disposition of all or
substantially all of the assets of the Corporation in complete liquidation or
dissolution of the Corporation, or

4.
<PAGE> 5
(iii) any reverse merger in which the Corporation is the
surviving entity but in which securities possessing more than fifty percent
(50%) of the total combined voting power of the Corporation's outstanding
securities are transferred to a person or persons different from the persons
holding those securities immediately prior to such merger,

this option, to the extent outstanding at such time but not
otherwise exercisable, shall automatically accelerate so that such option shall,
immediately prior to the specified effective date for the Corporate Transaction,
become fully exercisable for all the Option Shares at the time subject to this
option and may be exercised for all or any portion of such shares as fully
vested shares of Common Stock. No such acceleration of this option, however,
shall occur if and to the extent: (i) this option is, in connection with the
Corporate Transaction, either to be assumed by the successor corporation or
parent thereof or to be replaced with a comparable option to purchase shares of
the capital stock of the successor corporation or parent thereof or (ii) such
option is to be replaced with a cash incentive program of the successor
corporation which preserves the option spread existing at the time of the
Corporate Transaction (the excess of the Fair Market Value (as such term is
defined in Paragraph 9.c) of the Option Shares at the time subject to this
option over the aggregate Exercise Price payable for such shares) and provides
for subsequent pay out in accordance with the same vesting schedule in effect
for the option pursuant to the option exercise schedule set forth in the Grant
Notice. The determination of option comparability under clause (i) shall be made
by the Plan Administrator, and such determination shall be final, binding and
conclusive.

b. The portion of this option accelerated in connection
with any Corporate Transaction shall remain exercisable as an incentive stock
option under the Federal tax laws (if the option is designated as such in the
Grant Notice) only to the extent the applicable dollar limitation of Paragraph
17 is not exceeded in the calendar year of such Corporate Transaction.

c. This option, to the extent not previously exercised,
shall terminate and cease to be outstanding immediately following the
consummation of such Corporate Transaction, unless it is expressly assumed by
the successor corporation or its parent corporation.

d. This Agreement shall in no way affect the right of the
Corporation to adjust, reclassify, reorganize or otherwise change its capital or
business structure or to merge, consolidate, dissolve, liquidate or sell or
transfer all or any part of its business or assets.

7. ADJUSTMENT IN OPTION SHARES.

5.
<PAGE> 6
without the Corporation's receipt of consideration, the Plan Administrator shall
make appropriate adjustments to (i) the number and/or class of securities
subject to this option and (ii) the Exercise Price payable per share in order to
prevent any dilution or enlargement of rights and benefits hereunder. Such
adjustments shall be final, binding and conclusive.

b. If this option is to be assumed in connection with a
Corporate Transaction under Paragraph 6, then this option shall, immediately
after such Corporate Transaction, be appropriately adjusted to apply and pertain
to the number and class of securities which would have been issued to Optionee
in the consummation of such Corporate Transaction had the option been exercised
immediately prior to such Corporate Transaction. Appropriate adjustments shall
also be made to the Exercise Price payable per share, provided the aggregate
Exercise Price payable hereunder shall remain the same.

8. PRIVILEGE OF STOCK OWNERSHIP. The holder of this option
shall not have any of the rights of a stockholder with respect to the Option
Shares until such individual shall have exercised the option and paid the
Exercise Price for the purchased Option Shares.

9. MANNER OF EXERCISING OPTION.

a. In order to exercise this option with respect to all or
any part of the Option Shares for which this option is at the time exercisable,
Optionee (or in the case of exercise after Optionee's death, Optionee's
executor, administrator, heir or legatee, as the case may be) must take the
following actions:

(1) Deliver to the Secretary of the Corporation a stock
purchase agreement (the "Purchase Agreement") in substantially the form of
Exhibit B to the Grant Notice.

(2) Pay the aggregate Exercise Price for the purchased
shares in one of the following alternative forms:

(a) full payment in cash or by check made payable to
the Corporation's order;

(b) full payment in shares of Common Stock held for
the requisite period necessary to avoid a charge to the Corporation's
earnings for financial reporting purposes valued at Fair Market Value
on the Exercise Date (as such terms are defined below);

6.
<PAGE> 7
(c) full payment in a combination of shares of
Common Stock held for the requisite period necessary to avoid a charge
to the Corporation's earnings for financial reporting purposes and
valued at Fair Market Value on the Exercise Date and cash or check
payable to the Corporation's order; or

(d) full payment through a broker-dealer sale and
remittance procedure pursuant to which Optionee shall provide
concurrent irrevocable written instructions (i) to a Corporation-
designated brokerage firm to effect the immediate sale of the purchased
shares and remit to the Corporation, out of the sale proceeds available
on the settlement date, sufficient funds to cover the aggregate
Exercise Price payable for the purchased shares plus all applicable
Federal, state and local income and employment taxes required to be
withheld in connection with such purchase and (ii) to the Corporation
to deliver the certificates for the purchased shares directly to such
brokerage firm in order to complete the sale transaction.

(3) Furnish to the Corporation appropriate documentation
that the person or persons exercising the option (if other than Optionee) have
the right to exercise this option.

b. For purposes of this Agreement, the Exercise Date
shall be the date on which the executed Purchase Agreement shall have been
delivered to the Secretary of the Corporation. Except to the extent the sale and
remittance procedure specified above is utilized in connection with the option
exercise, payment of the Exercise Price for the purchased shares must accompany
such Purchase Agreement.

c. For all valuation purposes under this Agreement,
the Fair Market Value per share of Common Stock on any relevant date shall be
determined in accordance with the following provisions:

(1) If the Common Stock is at the time traded on
the Nasdaq National Market, the Fair Market Value shall be the closing
selling price per share on the date in question, as such price is
reported by the National Association of Securities Dealers through the
Nasdaq National Market or any successor system. If there is no reported
closing selling price for the Common Stock on the date in question,
then the closing selling price on the last preceding date for which
such quotation exists shall be determinative of Fair Market Value.

7.
<PAGE> 8
(2) If the Common Stock is at the time listed or
admitted to trading on any national securities exchange, then the Fair
Market Value shall be the closing selling price per share on the date
in question on the securities exchange determined by the Plan
Administrator to be the primary market for the Common Stock, as such
price is officially quoted in the composite tape of transactions on
such exchange. If there is no reported sale of Common Stock on such
exchange on the date in question, then the Fair Market Value shall be
the closing selling price on the exchange on the last preceding date
for which such quotation exists.

d. As soon as practical after the Exercise Date, the
Corporation shall issue to or on behalf of Optionee (or any other person or
persons exercising this option in accordance herewith) a certificate or
certificates representing the purchased Option Shares.

e. In no event may this option be exercised for any
fractional shares.

10. NO EMPLOYMENT/SERVICE CONTRACT. Nothing in this Agreement
or in the Plan shall confer upon Optionee any right to continue in the Service
of the Corporation (or any parent or subsidiary employing or retaining Optionee)
for any period of specific duration or interfere with or otherwise restrict in
any way the rights of the Corporation (or any such parent or subsidiary) or
Optionee, which rights are hereby expressly reserved by each party, to terminate
Optionee's Service at any time for any reason whatsoever, with or without cause.

11. COMPLIANCE WITH LAWS AND REGULATIONS. The exercise of this
option and the issuance of Option Shares upon such exercise shall be subject to
compliance by the Corporation and Optionee with all applicable requirements of
law relating thereto and with all applicable regulations of any securities
exchange on which shares of the Corporation's Common Stock may be listed at the
time of such exercise and issuance.

12. SUCCESSORS AND ASSIGNS. Except to the extent otherwise
provided in Paragraph 3 or 6, the provisions of this Agreement shall inure to
the benefit of, and be binding upon, the successors, administrators, heirs and
legal representatives of Optionee and the successors and assigns of the
Corporation.

13. LIABILITY OF CORPORATION.

a. If the Option Shares covered by this Agreement exceed,
as of the Grant Date, the number of shares which may without stockholder
approval be issued under the Plan, then this option shall be void with respect
to such excess shares unless stockholder approval of an amendment sufficiently
increasing the number of shares issuable under the Plan is obtained in
accordance with the provisions of Section II of Article Five of the Plan.

8.
<PAGE> 9
b. The inability of the Corporation to obtain approval
from any regulatory body having authority deemed by the Corporation to be
necessary to the lawful issuance and sale of any Common Stock pursuant to this
option shall relieve the Corporation of any liability with respect to the
non-issuance or sale of the Common Stock as to which such approval shall not
have been obtained. The Corporation, however, shall use its best efforts to
obtain all such approvals.

14. NOTICES. Any notice required to be given or delivered to
the Corporation under the terms of this Agreement shall be in writing and
addressed to the Corporation in care of the Corporate Secretary at the
Corporation's principal offices at 300 South El Camino Real, Suite 203, San
Clemente, California 92672. Any notice required to be given or delivered to
Optionee shall be in writing and addressed to Optionee at the address indicated
on the Grant Notice. All notices shall be deemed to have been given or delivered
upon personal delivery or upon deposit in the U.S. mail, by registered or
certified mail, postage prepaid and properly addressed to the party to be
notified.

15. CONSTRUCTION. This Agreement and the option evidenced
hereby are made and granted pursuant to the Plan and are in all respects limited
by and subject to the express terms and provisions of the Plan. All decisions of
the Plan Administrator with respect to any question or issue arising under the
Plan or this Agreement shall be conclusive and binding on all persons having an
interest in this option.

16. GOVERNING LAW. The interpretation, performance and
enforcement of this Agreement shall be governed by the laws of the State of
California, as such laws are applied to contracts entered into and performed in
such State, without resort to that State's conflict-of-laws rules.

17. ADDITIONAL TERMS APPLICABLE TO AN INCENTIVE STOCK OPTION.
In the event this option is designated an incentive stock option in the Grant
Notice, the following terms and conditions shall also apply to the grant:

a. This option shall cease to qualify for favorable tax
treatment as an incentive stock option under the Federal tax laws if (and to the
extent) this option is exercised for one or more Option Shares: more than (i)
three (3) months after the date Optionee ceases to be an Employee for any reason
other than death or permanent disability (as such term is defined in Paragraph
5.g) or (ii) one (1) year after the date Optionee ceases to be an Employee by
reason of permanent disability.

b. If this option is to become exercisable in a series of
installments as indicated in the Grant Notice, no such installment shall qualify
for favorable tax treatment as an incentive stock option under the Federal tax
laws if (and to the extent) the aggregate Fair Market Value (determined at the
Grant Date) of the Common Stock for which such installment first

9.
<PAGE> 10
becomes exercisable hereunder would, when added to the aggregate value
(determined as of the respective date or dates of grant) of the Common Stock or
other securities for which this option or one or more other incentive stock
options granted to Optionee prior to the Grant Date (whether under the Plan or
any other option plan of the Corporation or any parent or subsidiary) first
become exercisable during the same calendar year, exceed One Hundred Thousand
Dollars ($100,000) in the aggregate. Should the applicable One Hundred Thousand
Dollar ($100,000) limitation be exceeded in any calendar year, the option may
nevertheless be exercised for the excess shares in such calendar year as a
non-statutory stock option.

c. Should the exercisability of this option be accelerated
upon a Corporate Transaction in accordance with Paragraph 6, then this option
shall qualify for favorable tax treatment as an incentive stock option under the
Federal tax laws only to the extent the aggregate Fair Market Value (determined
at the Grant Date) of the number of shares of Common Stock for which this option
first becomes exercisable in the calendar year in which the Corporate
Transaction occurs does not, when added to the aggregate value (determined as of
the respective date or dates of grant) of the shares of Common Stock or other
securities for which this option or one or more other incentive stock options
granted to Optionee prior to the Grant Date (whether under the Plan or any other
option plan of the Corporation or any parent or subsidiary) first become
exercisable during the same calendar year, exceed One Hundred Thousand Dollars
($100,000) in the aggregate. Should the applicable One Hundred Thousand Dollar
($100,000) limitation be exceeded in the calendar year of such Corporate
Transaction, the option may nevertheless be exercised for the excess shares in
such calendar year as a non-statutory stock option.

d. Should Optionee hold, in addition to this option, one
or more other options to purchase shares of Common Stock which become
exercisable for the first time in the same calendar year as this option, then
the foregoing limitations on the exercisability of such options as incentive
stock options under the Federal tax laws shall be applied on the basis of the
order in which such options are granted.

e. To the extent this option should fail to qualify for
incentive stock option treatment under the Federal tax laws, Optionee shall
recognize compensation income at the time the option is exercised in an amount
equal to the Fair Market Value of the purchased Option Shares less the aggregate
Exercise Price paid for those shares, and Optionee must make appropriate
arrangements with the Corporation or any parent or subsidiary employing Optionee
for the satisfaction of all Federal, state or local income and employment tax
withholding requirements applicable to such compensation income.

18. ADDITIONAL TERMS APPLICABLE TO A NON-STATUTORY STOCK
OPTION. In the event this option is designated a non-statutory stock option in
the Grant Notice, Optionee shall make appropriate arrangements with the
Corporation or any parent or subsidiary employing

10.
<PAGE> 11
Optionee for the satisfaction of all Federal, state or local income and
employment tax withholding requirements applicable to the exercise of this
option.

19. STOCKHOLDER APPROVAL. Notwithstanding any provision to the
contrary in this Agreement, this option may not be exercised in whole or in part
at any time prior to the approval of the Plan by the Corporation's stockholders.
Should such stockholder approval not be obtained within twelve (12) months after
the date the Plan was adopted by the Board, then this option shall terminate and
cease to remain outstanding without ever becoming exercisable for any of the
Option Shares.

11.

<PAGE> 1
EXHIBIT 99.4

SUNSTONE HOTEL INVESTORS, INC.

1994 STOCK INCENTIVE PLAN

ADDENDUM

TO STOCK OPTION AGREEMENT

SECTION 16 INSIDER

The following provisions are hereby incorporated into, and are
hereby made a part of, that certain Stock Option Agreement ("Option Agreement")
by and between Sunstone Hotel Investors, Inc. (the "Corporation") and FIELD (1),
an officer of the Corporation subject to the short-swing profit restrictions of
the Federal securities laws ("Optionee"), evidencing the stock option granted on
FIELD (2) to Optionee under the terms of the Corporation's 1994 Stock Incentive
Plan, and such provisions shall be effective immediately. All capitalized terms
used in this Addendum, to the extent not otherwise specifically defined herein,
shall have the meanings assigned to such terms in the Option Agreement.

LIMITED STOCK APPRECIATION RIGHT

Optionee is hereby granted a limited stock appreciation right
in tandem with the option, exercisable upon the terms and conditions set forth
below:

1. Should a Hostile Take-Over (as defined below) occur at any
time after the option has been outstanding for a period of at least six (6)
months measured from the Effective Date of this Addendum indicated below, then
Optionee shall have the unconditional right (exercisable for a thirty (30)-day
period immediately following the consummation of such Hostile Take-Over) to
surrender the option to the Corporation, to the extent the option is at the time
exercisable for fully vested shares of Common Stock. In return for the
surrendered option, Optionee shall receive a cash distribution from the
Corporation in an amount equal to the excess of (i) the Take-Over Price (as
defined below) of the vested shares of Common Stock at the time subject to the
surrendered option (or surrendered portion of the option) over (ii) the
aggregate Exercise Price payable for such vested shares.

2. To exercise this limited stock appreciation right, Optionee
must, during the applicable thirty (30)-day exercise period, provide the
Corporation with written notice of the option surrender in which there is
specified the number of vested Option Shares as to which the Option is being
surrendered. Such notice must be accompanied by the return of Optionee's copy of
the Option Agreement, together with any written amendments to such Agreement.
The cash distribution shall be paid to Optionee within five (5) days following
such delivery date, and neither the approval of the Plan Administrator nor the
consent of the Board shall be required in connection with such option surrender
and cash distribution. Upon receipt of such cash distribution, the
<PAGE> 2
option shall be cancelled with respect to the vested Option Shares subject to
the surrendered option (or the surrendered portion), and Optionee shall cease to
have any further right to acquire those Option Shares under the Option
Agreement. The option shall, however, remain outstanding for the balance of the
Option Shares (if any) in accordance with the terms and provisions of the Option
Agreement, and the Corporation shall issue to the Optionee a new stock option
agreement (substantially in the form of the surrendered Option Agreement) for
those remaining Option Shares.

3. For purposes of this limited stock appreciation right, the
following definitions shall be in effect:

A HOSTILE TAKE-OVER shall be deemed to occur should
any person or related group of persons (other than the Corporation or a
person that directly or indirectly controls, is controlled by, or is
under common control with, the Corporation) directly or indirectly
acquire beneficial ownership (within the meaning of Rule 13d-3 of the
Securities Exchange Act of 1934, as amended) of securities possessing
more than fifty percent of the total combined voting power of the
Corporation's outstanding securities pursuant to a tender or exchange
offer made directly to the Corporation's stockholders which the Board
does not recommend such stockholders to accept, and

more than fifty percent (50%) of the securities
acquired in such tender or exchange offer are accepted from holders
other than the officers and directors of the Corporation subject to the
short-swing profit restrictions of Section 16 of the Securities
Exchange Act of 1934, as amended.

The TAKE-OVER PRICE per share of Common Stock shall
be equal to the greater of (i) the Fair Market Value per share on the
date the option is surrendered to the Corporation in connection with a
Hostile Take-Over, as determined in accordance with the valuation
provisions of Paragraph 9.c. of the Option Agreement, or (ii) the
highest reported price per share of Common Stock paid by the tender
offeror in effecting such Hostile Take- Over. However, if the
surrendered option is designated as an Incentive Option in the Grant
Notice, then the Take-Over Price shall not exceed the clause (i) price
per share.

2.
<PAGE> 3
4. In no event may this limited stock appreciation right be
exercised when there is not a positive spread between the Fair Market Value of
the vested Option Shares and the aggregate Exercise Price payable for such
shares. This limited stock appreciation right shall in all events terminate upon
the expiration or sooner termination of the option term and may not be assigned
or transferred by Optionee.

IN WITNESS WHEREOF, Sunstone Hotel Investors, Inc. has caused
this Addendum to be executed by its duly-authorized officer, and Optionee has
executed this Addendum, all as of the Effective Date specified below.

SUNSTONE HOTEL INVESTORS, INC.

By
-----------------------------

Title
---------------------------

--------------------------------
FIELD (1), OPTIONEE

EFFECTIVE DATE: FIELD (2)

<PAGE> 1
EXHIBIT 99.5

SUNSTONE HOTEL INVESTORS, INC.
1994 DIRECTORS PLAN

ARTICLE ONE

GENERAL PROVISIONS

I. PURPOSE OF THE PLAN

A. This 1994 Directors Plan (the "Plan") is intended to
promote the interests of Sunstone Hotel Investors, Inc., a Maryland corporation
or any successor corporation (the "Corporation"), by offering non-employee
members of the Board the opportunity to acquire a proprietary interest, or
otherwise increase their proprietary interest, in the Corporation as an
incentive for them to remain in the service of the Corporation.

B. The Plan will become effective immediately upon the
execution and final pricing of the Underwriting Agreement for the initial public
offering of the Corporation's Common Stock. The execution date of such
Underwriting Agreement is hereby designated as the Effective Date of the Plan.

II. DEFINITIONS

A. For purposes of the Plan, the following definitions shall
be in effect:

BOARD: the Corporation's Board of Directors.

CHANGE IN CONTROL: a change in ownership or control of the
Corporation effected through either of the following transactions:

a. the acquisition, directly or indirectly, by any person or
related group of persons (other than the Corporation or a person that
directly or indirectly controls, is controlled by, or is under common
control with, the Corporation) of beneficial ownership (within the
meaning of Rule 13d-3 of the 1934 Act) of securities possessing more
than fifty percent (50%) of the total combined voting power of the
Corporation's outstanding securities pursuant to a tender or exchange
offer made directly to the Corporation's stockholders which the Board
does not recommend such stockholders to accept, or

b. a change in the composition of the Board over a period of
thirty-six (36) consecutive months or less such that a majority of the
Board members ceases, by reason of one or more contested elections for
Board membership, to be
<PAGE> 2
comprised of individuals who either (A) have been Board members
continuously since the beginning of such period or (B) have been
elected or nominated for election as Board members during such period
by at least a majority of the Board members described in clause (A) who
were still in office at the time the Board approved such election or
nomination.

CODE: the Internal Revenue Code of 1986, as amended.

COMMON STOCK: shares of the Corporation's common stock.

CORPORATE TRANSACTION: any of the following
stockholder-approved transactions to which the Corporation is a party:

a. a merger or consolidation in which the Corporation
is not the surviving entity, except for a transaction the principal
purpose of which is to change the state in which the Corporation is
incorporated;

b. the sale, transfer or other disposition of all or
substantially all of the assets of the Corporation in complete
liquidation or dissolution of the Corporation; or

c. any reverse merger in which the Corporation is the
surviving entity but in which securities possessing more than fifty
percent (50%) of the total combined voting power of the Corporation's
outstanding securities are transferred to a person or persons different
from the persons holding those securities immediately prior to such
merger.

EFFECTIVE DATE: August 10, 1995, the date on which the
Underwriting Agreement for the initial public offering of the Corporation's
Common Stock was executed and finally priced.

EMPLOYEE: an individual who performs services while in the
employ of the Corporation or one or more parent or subsidiary corporations,
subject to the control and direction of the employer entity not only as to the
work to be performed but also as to the manner and method of performance.

EXERCISE DATE: the date on which the Corporation shall have
received written notice of the exercise of an option granted pursuant to the
Automatic Option Grant Program of Article Two.

FAIR MARKET VALUE: the value per share of Common Stock
determined in accordance with the following provisions:

2.
<PAGE> 3
a. If the Common Stock is at the time traded on the
Nasdaq National Market, the Fair Market Value shall be the closing
selling price per share on the date in question, as such price is
reported by the National Association of Securities Dealers on the
Nasdaq National Market or any successor system. If there is no reported
closing selling price for the Common Stock on the date in question,
then the closing selling price on the last preceding date for which
such quotation exists shall be determinative of Fair Market Value.

b. If the Common Stock is at the time listed or
admitted to trading on any national securities exchange, then the Fair
Market Value shall be the closing selling price per share on the date
in question on the securities exchange serving as the primary market
for the Common Stock, as such price is officially quoted in the
composite tape of transactions on such exchange. If there is no
reported sale of Common Stock on such exchange on the date in question,
then the Fair Market Value shall be the closing selling price on the
exchange on the last preceding date for which such quotation exists.

1933 ACT: the Securities Act of 1933, as amended.

1934 ACT: the Securities and Exchange Act of 1934, as amended
from time to time.

NON-STATUTORY OPTION: a stock option not intended to meet the
requirements of Code Section 422.

OPTIONEE: any person to whom an option is granted under the
Automatic Option Grant Program of Article Two.

PARTICIPANT: any person who receives a direct issuance of
Common Stock under the Automatic Stock Issuance Program of Article Three.

B. The following provisions shall be applicable in determining
the parent and subsidiary corporations of the Corporation:

Any corporation (other than the Corporation) in an
unbroken chain of corporations ending with the Corporation shall be
considered to be a PARENT of the Corporation, provided each such
corporation in the unbroken chain (other than the Corporation) owns, at
the time of the determination, stock possessing fifty percent (50%) or
more of the total combined voting power of all classes of stock in one
of the other corporations in such chain.

3.
<PAGE> 4
Each corporation (other than the Corporation) in an
unbroken chain of corporations beginning with the Corporation shall be
considered to be a SUBSIDIARY of the Corporation, provided each such
corporation in the unbroken chain (other than the last corporation)
owns, at the time of the determination, stock possessing fifty percent
(50%) or more of the total combined voting power of all classes of
stock in one of the other corporations in such chain.

III. STRUCTURE OF THE PLAN

A. Stock Programs. The Plan shall be divided into two (2)
separate components: the Automatic Option Grant Program specified in Article Two
and the Automatic Stock Issuance Program specified in Article Three. Under the
Automatic Option Grant Program, non-employee members of the Board will
automatically receive option grants to purchase shares of Common Stock at
periodic intervals over their period of Board service. Under the Automatic Stock
Issuance Program, non-employee members of the Board will automatically receive
direct issuances of Common Stock at periodic intervals over their period of
Board service.

B. General Provisions. Unless the context clearly indicates
otherwise, the provisions of Articles One and Four shall apply to both the
Automatic Option Grant Program and the Automatic Stock Issuance Program and
shall accordingly govern the interests of all individuals under the Plan.

IV. ELIGIBILITY

A. Eligible Directors. The individuals eligible to receive
automatic option grants and direct stock issuances pursuant to the provisions of
this Plan shall be limited to (i) those individuals who are serving as
non-employee members of the Board on the Effective Date, (ii) those individuals
who are first elected or appointed as non-employee Board members after the
Effective Date, whether through appointment by the Board or election by the
Corporation's stockholders, (iii) those individuals who continue to serve as
non-employee Board members at one or more annual stockholders meetings,
beginning with the 1995 Annual Meeting, whether or not such individuals
commenced Board service prior to the Effective Date, and (iv) those individuals
who cease to serve as non-employee Board members at any time after the Effective
Date but who are subsequently re-elected as non-employee Board members, whether
through appointment by the Board or election by the Corporation's stockholders.

With the exception of Mr. C. Robert Enever, a non-employee
Board member shall not be eligible to receive an automatic option grant or stock
issuance under this Plan if such individual is, on the date of the option grant
or direct stock issuance, an Employee of any parent or subsidiary of the
Corporation. Any non-employee Board member eligible to participate in the Plan
pursuant to the foregoing criteria shall be designated an Eligible Director.

4.
<PAGE> 5
B. Limitation. An Eligible Director shall not be entitled to
receive any option grants or stock issuances under any other stock plan of the
Corporation (or its parent or subsidiaries) during his or her period of Board
service.

V. STOCK SUBJECT TO THE PLAN

A. Shares of Common Stock shall be available for issuance
under the Plan and shall be drawn from either the Corporation's authorized but
unissued shares of Common Stock or from reacquired shares of Common Stock,
including shares repurchased by the Corporation on the open market. The maximum
number of shares of Common Stock which may be issued over the term of the Plan
shall not exceed 150,000 shares, subject to adjustment from time to time in
accordance with the provisions of this Section V.

B. In no event shall the aggregate number of shares granted
pursuant to the Automatic Option Grant Program of Article Two and issued
directly pursuant to the Automatic Stock Issuance Program of Article Three
exceed 15,000 shares in any calendar year. Once this limitation is reached in
any calendar year, no further stock option grants or direct stock issuances will
be made under the Plan for the balance of that year. However, any Eligible
Directors who fail to receive their stock option grants or direct stock
issuances in any calendar year by reason of such limitation shall receive those
grants or issuances on the first trading day in the succeeding calendar year,
and such grants and issuances shall have priority over all other grants and
issuances to be made in that calendar year.

C. Should the number of shares which remain available for
issuance under the Plan not be sufficient for the automatic option grants and
stock issuances to be made at a particular time, then the available shares shall
be allocated proportionately among all the automatic option grants and stock
issuances to be made at that time.

D. Should one or more outstanding options under the Automatic
Option Grant Program expire or terminate for any reason prior to exercise in
full, then the shares subject to the portion of each option not so exercised
shall be available for subsequent issuance under the Plan. All share issuances
under the Plan shall reduce on a share-for-share basis the number of shares of
Common Stock available for subsequent issuance under the Plan. In addition,
should the exercise price of an outstanding option under the Automatic Option
Grant Program be paid with shares of Common Stock, then the number of shares of
Common Stock available for issuance under the Plan shall be reduced by the gross
number of shares for which the option is exercised, and not by the net number of
shares actually issued to the holder of such option.

E. Should any change be made to the Common Stock issuable
under the Plan by reason of any stock split, stock dividend, recapitalization,
combination of shares, exchange of shares or other change affecting the
outstanding Common Stock as a class without the Corporation's receipt of
consideration, then appropriate adjustments will be
made to (i) the

5.
<PAGE> 6
maximum number and/or class of securities available for issuance under the Plan,
(ii) the number and/or class of securities to be made the subject of each
subsequent automatic option grant and direct stock issuance, (iii) the number
and/or class of securities purchasable under each outstanding option and the
exercise price payable per share and (iv) the aggregate number and/or class of
securities which may be made the subject of automatic option grants and direct
stock issuances in any calendar year. Such adjustments to the outstanding
options are to be effected in a manner which shall preclude the dilution or
enlargement of rights and benefits under such options.

6.
<PAGE> 7
ARTICLE TWO

AUTOMATIC OPTION GRANT PROGRAM

I. GRANT DATES

Option grants shall be made under this Article Two on the
dates specified below:

A. Initial Grant.

1. On the date of the first Board meeting following the
first annual meeting of the Corporation's stockholders held after the Effective
Date, each individual serving as an Eligible Director on the Effective Date
shall automatically be granted on the date of such Board meeting a Non-Statutory
Option to purchase 1,500 shares of Common Stock upon the terms and conditions of
this Article Two, provided such individual continues to serve as an Eligible
Director through the date of such Board meeting.

2. Each individual who first becomes an Eligible Director
after the Effective Date shall automatically be granted, on the date of the
first Board meeting following the annual meeting of the Corporation's
stockholders at which such individual is first elected as a Board member by the
Corporation's stockholders, a Non-Statutory Option to purchase 1,500 shares of
Common Stock upon the terms and conditions of this Article Two, provided such
individual continues to serve as an Eligible Director through the date of such
Board meeting.

B. Annual Grant. On each anniversary of the later of (i) the
Effective Date or (ii) the date on which the Eligible Director was first elected
or appointed as a Board member, such individual shall automatically be granted a
Non-Statutory Option to purchase an additional 1,500 shares of Common Stock upon
the terms and conditions of this Article Two, provided such individual continues
to serve as an Eligible Director through such anniversary date.

C. Re-election Grant. Each Eligible Director who ceases to
serve on the Board at any time after the Effective Date but who is subsequently
re-elected to the Board, whether through appointment by the Board or election by
the Corporation's stockholders, shall automatically be granted, on the date of
the first Board meeting following the annual meeting of the Corporation's
stockholders at which such individual is re-elected as a Board member by the
stockholders, a Non-statutory Option to purchase 1,500 shares of Common Stock
upon the terms and conditions of this Article Two, provided such individual
continues to serve as an Eligible Director through the date of such Board
meeting.

D. The number of shares for which the automatic option grants
are to be made to each newly elected or continuing Eligible Director shall be
subject to periodic adjustment pursuant to the applicable provisions of Section
V.E. of Article One.

7.
<PAGE> 8
II. EXERCISE PRICE

The exercise price per share of Common Stock subject to each
automatic option grant made under this Article Two shall be equal to one hundred
percent (100%) of the Fair Market Value per share of Common Stock on the
automatic grant date.

III. PAYMENT

The exercise price shall be payable in one of the alternative
forms specified below:

1. full payment in cash or check made payable to the
Corporation's order;

2. full payment in shares of Common Stock held for
the requisite period necessary to avoid a charge to the Corporation's
earnings for financial reporting purposes and valued at Fair Market
Value on the Exercise Date;

3. full payment in a combination of shares of Common
Stock held for the requisite period necessary to avoid a charge to the
Corporation's earnings for financial reporting purposes and valued at
Fair Market Value on the Exercise Date and cash or check made payable
to the Corporation's order; or

4. full payment through a sale and remittance
procedure pursuant to which the option holder shall provide concurrent
irrevocable written instructions (i) to a Corporation-designated
brokerage firm to effect the immediate sale of the purchased shares and
remit to the Corporation, out of the sale proceeds available on the
settlement date, sufficient funds to cover the aggregate exercise price
payable for the purchased shares and (ii) to the Corporation to deliver
the certificates for the purchased shares directly to such brokerage
firm in order to complete the sale transaction.

IV. OPTION TERM

Each automatic grant under this Article Two shall have a
maximum term of ten (10) years measured from the automatic grant date and shall
accordingly terminate and cease to be outstanding for any option shares at the
close of business on the day immediately preceding the tenth (10th) anniversary
of the automatic grant date, unless sooner terminated in accordance with the
provisions of Section VIII of this Article Two.

V. EXERCISABILITY/VESTING

8.
<PAGE> 9
Each automatic grant shall be immediately exercisable for any
or all of the option shares and shall remain so exercisable until the expiration
date of such option, whether or not the Optionee continues to serve as a Board
member. The option shares shall be fully vested.

VI. NON-TRANSFERABILITY

During the lifetime of the Optionee, each automatic option
grant shall be exercisable only by the Optionee and shall not be assignable or
transferable by the Optionee, other than a transfer of the option effected by
will or by the laws of descent and distribution following the Optionee's death.

VII. STOCKHOLDER RIGHTS

The holder of an automatic option grant under this Article Two
shall have none of the rights of a stockholder with respect to the shares
subject to that option until such individual shall have exercised the option and
paid the exercise price for the purchased shares.

VIII. CORPORATE TRANSACTION

A. Immediately following the consummation of a Corporate
Transaction, all automatic option grants outstanding under this Article Two
shall terminate and cease to be outstanding, except to the extent assumed by the
successor corporation or its parent company.

B. Each outstanding option under this Article Two which is
assumed in connection with a Corporate Transaction shall be appropriately
adjusted, immediately after such Corporate Transaction, to apply and pertain to
the number and class of securities which would have been issued to the option
holder in consummation of such Corporate Transaction, had such person exercised
the option immediately prior to such Corporate Transaction. Appropriate
adjustments shall also be made to the exercise price payable per share, provided
the aggregate exercise price payable for such securities shall remain the same.
In addition, the class and number of securities available for issuance under the
Plan on both an aggregate and per calendar year basis following the consummation
of the Corporate Transaction shall be appropriately adjusted.

IX. REMAINING TERMS

The remaining terms and conditions of each automatic option
grant shall be as set forth in the form Automatic Stock Option Agreement
attached as Exhibit A.

9.
<PAGE> 10
ARTICLE THREE

AUTOMATIC STOCK ISSUANCE PROGRAM

I. AWARD DATES

Direct stock issuances shall be made under this Article Three
on the dates specified below:

A. Initial Award.

1. Each individual serving as an Eligible Director of
the Corporation on the Effective Date shall automatically receive on such date a
direct stock issuance of 1,500 shares of Common Stock upon the terms and
conditions of this Article Three (the "Effective Date Awards").

2. Each individual who first becomes an Eligible
Director after the Effective Date, whether through election by the stockholders
or appointment by the Board, shall automatically receive, on the date of the
first Board meeting following the annual meeting of the Corporation's
stockholders at which such individual is first elected as a Board member by the
stockholders, a direct stock issuance of 1,500 shares of Common Stock upon the
terms and conditions of this Article Three, provided such individual continues
to serve as an Eligible Director through the date of such Board meeting.

B. Annual Award. On each anniversary of the later of (i) the
Effective Date or (ii) the date on which the Eligible Director was first elected
or appointed as a Board member, such individual shall automatically receive a
direct stock issuance of an additional number of shares of Common Stock,
provided such individual continues to serve as a Board member through such
anniversary date. The number of shares subject to each such additional stock
issuance shall be determined by dividing the dollar amount of Fifteen Thousand
Dollars ($15,000.00) by the Fair Market Value per share of Common Stock on the
issue date and rounding down to the next whole share.

C. Award on Re-election. Each Eligible Director who ceases to
serve on the Board at any time after the Effective Date but who is subsequently
re-elected to the Board whether through appointment by the Board or election by
the Corporation's stockholders shall, on the date of the first Board meeting
following the annual meeting of the Corporation's stockholders at which such
individual is first re-elected as a Board member by the stockholders,
automatically receive a direct stock issuance of an additional number of shares
of Common Stock, provided such individual continues to serve as an Eligible
Director through the date of such Board meeting. The number of shares subject to
such additional stock issuance shall be determined by dividing the

10.
<PAGE> 11
dollar amount of Fifteen Thousand Dollars ($15,000.00) by the Fair Market Value
per share of Common Stock on the issue date and rounding down to the next whole
share.

D. The number of shares for which the automatic stock
issuances are to be made to each newly elected or continuing Eligible Director
shall be subject to periodic adjustment pursuant to the applicable provisions of
Section V.E. of Article One.

II. CONSIDERATION

The shares of Common Stock issued under this Article Three
shall be issued in consideration for services rendered the Corporation by the
Participant.

III. VESTING PROVISIONS

A. Effective Date Awards. The shares of Common Stock issued
under this Article Three pursuant to the Effective Date Awards shall be fully
vested upon issuance.

B. Awards Made After the Effective Date.

1. The shares of Common Stock issued under this Article
Three after the Effective Date shall be unvested. Upon completion by the
Participant of six (6) months of service as a Board member following the award
date of the shares, such shares shall become fully vested shares of Common
Stock.

2. Any new, substituted or additional securities or other
property (including money paid other than as a regular cash dividend) which the
Participant may have the right to receive with respect to the Participant's
unvested shares of Common Stock by reason of any stock dividend, stock split,
recapitalization, combination of shares, exchange of shares or other change
affecting the outstanding Common Stock as a class without the Corporation's
receipt of consideration shall be issued subject to (i) the same vesting
requirements applicable to the Participant's unvested shares of Common Stock and
(ii) the escrow provisions of Section V of this Article Three.

3. Should the Participant cease to remain in Board service
prior to the expiration of the six (6)-month period specified in Section III.B.1
of this Article Three, then those shares shall be immediately surrendered to the
Corporation for cancellation, and the Participant shall have no further
stockholder rights with respect to those shares.

C. Stockholder Rights. The Participant shall have full
stockholder rights with respect to any shares of Common Stock issued to the
Participant under this Article Three whether or not the Participant's interest
in those shares is vested. Accordingly, the Participant shall have the right to
vote such shares and to receive any regular cash dividends paid on such shares.

11.
<PAGE> 12
IV. CORPORATE TRANSACTION/CHANGE IN CONTROL

In the event of a Corporate Transaction or a Change in
Control, all of the shares of Common Stock issued under this Article Three shall
immediately vest in full.

V. SHARE ESCROW/LEGENDS

Unvested shares shall be held in escrow by the Corporation
until the Participant's interest in such shares vests.

VI. REMAINING TERMS

The remaining terms and conditions of each automatic direct
stock issuance made under this Article Three shall be as set forth in the form
Automatic Direct Stock Issuance Agreements attached as Exhibits B and Exhibit C,
with respect to the Effective Date Awards and the awards made after the
Effective Date, respectively.

12.
<PAGE> 13
ARTICLE FOUR

MISCELLANEOUS PROVISIONS

I. AMENDMENT OF THE PLAN

The provisions of this Plan, together with the automatic
option grants outstanding under Article Two, may not be amended at intervals
more frequently than once every six (6) months, other than to the extent
necessary to comply with applicable requirements of the Federal income tax laws
and regulations. However, no such amendment or modification shall adversely
affect rights and obligations with respect to options on unvested stock
issuances at the time outstanding under the Plan, unless the Optionee consents
to such amendment. In addition, the Board may not, without the approval of the
Corporation's stockholders, amend the Plan to (i) materially increase the
maximum number of shares issuable under the Plan, except for permissible
adjustments under Section V.E. of Article One, (ii) materially modify the
eligibility requirements for Plan participation or (iii) materially increase the
benefits accruing to Plan participants.

II. EFFECTIVE DATE AND TERM OF PLAN

A. The Plan was adopted by the Board on September 23, 1994 and
approved by the Corporation's stockholders on August 9, 1995. The Plan became
effective on August 10, 1995, the date on which the Underwriting Agreement with
respect to the initial public offering of the Corporation's Common Stock was
executed and finally priced.

B. On August 9, 1995, the Board approved an amendment to the
Plan to impose a six (6)-month vesting requirement on all shares issued under
the Automatic Stock Issuance Program after the Effective Date.

C. The Plan shall terminate upon the earliest to occur of (i)
September 22, 2004 unless sooner terminated by the Board and (ii) the date on
which all shares available for issuance under the Plan shall have been issued
pursuant to the exercise of the automatic option grants made under the Automatic
Option Grant Program of Article Two or the direct issuance of shares under the
Automatic Stock Issuance Program of Article Three (whether vested or unvested).
If the date of termination is determined under clause (i) above, then any option
grants and unvested stock issuances outstanding on such date shall not be
affected by the termination of the Plan and shall continue to have force and
effect in accordance with the provisions of the instruments evidencing those
grants.

13.
<PAGE> 14
III. CASH PROCEEDS

Any cash proceeds received by the Corporation from the sale of
shares pursuant to the automatic grants or stock issuances made under the Plan
shall be used for general corporate purposes.

IV. REGULATORY APPROVALS

A. The implementation of the Plan, the granting of any option
under the Automatic Option Grant Program, the issuance of Common Stock upon the
exercise of any such option and the issuance of Common Stock under the Automatic
Stock Issuance Program shall each be subject to the Corporation's procurement of
all approvals and permits required by regulatory authorities having jurisdiction
over the Plan, the stock options granted under it and the Common Stock issued
pursuant to it.

B. No shares of Common Stock or other assets shall be issued
or delivered under this Plan unless and until there shall have been compliance
with all applicable requirements of Federal and state securities laws and all
applicable listing requirements of any securities exchange on which the Common
Stock is then listed for trading.

V. NO IMPAIRMENT OF RIGHTS

No provision of the Plan shall in any way be construed or
interpreted so as to affect adversely or otherwise impair the right of the
Corporation or the stockholders to remove any Optionee or Participant from the
Board at any time in accordance with the provisions of applicable law.

VI. MISCELLANEOUS PROVISIONS

B. The provisions of the Plan relating to the exercise of
options shall be governed by the laws of the State of California without resort
to that State's conflict-of-laws rules, as such laws are applied to contracts
entered into and performed in such State.

C. The provisions of the Plan shall inure to the benefit of,
and be binding upon, the Corporation and its successors or assigns, whether by
Corporate Transaction or otherwise and the Optionees and Participants, the legal
representatives of their respective estates, their respective heirs or legatees
and their permitted assignees.

14.
<PAGE> 15
EXHIBIT A

AUTOMATIC STOCK OPTION AGREEMENT
<PAGE> 16
EXHIBIT B

AUTOMATIC DIRECT STOCK ISSUANCE AGREEMENT

(AWARDS MADE ON THE EFFECTIVE DATE)
<PAGE> 17
EXHIBIT C

AUTOMATIC DIRECT STOCK ISSUANCE AGREEMENT

(AWARDS MADE AFTER THE EFFECTIVE DATE)

<PAGE> 1
EXHIBIT 99.6

SUNSTONE HOTEL INVESTORS, INC.

1994 DIRECTORS PLAN

NOTICE OF GRANT OF AUTOMATIC STOCK OPTION

Notice is hereby given of the following stock option (the
"Option") to purchase shares of the common stock of Sunstone Hotel Investors,
Inc. (the "Corporation") which has been granted pursuant to the Corporation's
1994 Directors Plan (the "Plan"):

OPTIONEE: FIELD (1)

GRANT DATE: FIELD (2)

TYPE OF OPTION: Non-Statutory Stock Option

EXERCISE PRICE: $FIELD (3) per share

NUMBER OF OPTION SHARES: 1,500 shares

EXPIRATION DATE: FIELD (4)

EXERCISE SCHEDULE: The Option is immediately
exercisable for
all the Option Shares.

VESTING SCHEDULE: The Option Shares are fully
vested.

Optionee understands and agrees that the Option is granted
subject to and in accordance with the express terms and conditions of the Plan
governing automatic option grants to Board members. Optionee further agrees to
be bound by the terms and conditions of the Plan and the terms and conditions of
the Option as set forth in the Automatic Stock Option Agreement attached hereto
as EXHIBIT A. Optionee hereby acknowledges receipt of a copy of the Plan Summary
and Prospectus for the Plan in the form attached hereto as EXHIBIT B. A copy of
the Plan is available upon request made to the Corporate Secretary at the
Corporation's principal offices.

No Service Contract. No provision of this Notice of Grant, the
attached agreements or the Plan shall in any way be construed or interpreted so
as to affect adversely or otherwise impair the right of the Corporation or the
stockholders to remove Optionee
<PAGE> 2
from the Board at any time in accordance with the provisions of applicable law.

DATED: ________________ , 199_

SUNSTONE HOTEL INVESTORS, INC.

By:______________________________

Title:__________________

________________________
FIELD (1), OPTIONEE

Address:________________
________________

EXHIBIT A: STOCK OPTION AGREEMENT
EXHIBIT B: PLAN SUMMARY AND PROSPECTUS
<PAGE> 3
EXHIBIT A

STOCK OPTION AGREEMENT

<PAGE> 4
EXHIBIT B

PLAN SUMMARY AND PROSPECTUS

<PAGE> 1
EXHIBIT 99.7

SUNSTONE HOTEL INVESTORS, INC.

1994 DIRECTORS PLAN

AUTOMATIC STOCK OPTION AGREEMENT

RECITALS

A. The Corporation has approved an automatic option grant
program under Article Two of the 1994 Directors Plan (the "Plan"), pursuant to
which special option grants are to be made to eligible non-employee members of
the Corporation's Board of Directors (the "Board") at periodic intervals over
their period of Board service in order to encourage such individuals to remain
in the Corporation's service.

B. Optionee is an eligible non-employee Board member and this
Agreement is executed pursuant to, and is intended to carry out the purposes of,
the Plan in connection with the automatic grant of a stock option to purchase
shares of the Corporation's common stock ("Common Stock") under the Plan.

C. The granted option is intended to be a non-statutory option
which does not meet the requirements of Section 422 of the Internal Revenue Code
and is designed to provide Optionee with a meaningful incentive to continue to
serve as a member of the Board.

NOW, THEREFORE, it is hereby agreed as follows:

1. GRANT OF OPTION. Subject to and upon the terms and
conditions set forth in this Agreement, there is hereby granted to Optionee, as
of the grant date (the "Grant Date") specified in the accompanying Notice of
Grant of Automatic Stock Option (the "Grant Notice"), a stock option to purchase
up to that number of shares of Common Stock (the "Option Shares") as is
specified in the Grant Notice. Such Option Shares shall be purchasable from time
to time during the option term at the price per share (the "Exercise Price")
specified in the Grant Notice.

2. OPTION TERM. This option shall have a maximum term of ten
(10) years measured from the Grant Date and shall expire at the close of
business on the Expiration Date specified in the Grant Notice, unless sooner
terminated in accordance with Paragraph 6.

3. LIMITED TRANSFERABILITY. This option shall be neither
transferable nor assignable by Optionee, other than a transfer of this option
effected by will or by the laws of descent and distribution following Optionee's
death, and may be exercised, during Optionee's lifetime, only by Optionee.
<PAGE> 2
4. EXERCISABILITY. This option shall be immediately
exercisable for any or all of the Option Shares and shall remain so exercisable
until the Expiration Date specified in the Grant Notice, whether or not Optionee
continues to serve as a Board member, unless sooner terminated in accordance
with the provisions of Paragraph 6.

5. DEATH OF OPTIONEE. Should Optionee die while this option is
outstanding, then the personal representative of Optionee's estate or the person
or persons to whom the option is transferred pursuant to Optionee's will or in
accordance with the laws of descent and distribution shall have the right to
exercise the option for any or all of the outstanding Option Shares. Such right
shall lapse, and this option shall terminate and cease to remain outstanding,
upon the Expiration Date specified in the Grant Notice unless sooner terminated
in accordance with the provisions of Paragraph 6.

6. CORPORATE TRANSACTION. In the event of any of the following
stockholder-approved transactions to which the Corporation is a party (a
"Corporate Transaction"):

a. a merger or consolidation in which the Corporation
is not the surviving entity, except for a transaction the principal
purpose of which is to change the state in which the Corporation is
incorporated,

b. the sale, transfer or other disposition of all or
substantially all of the assets of the Corporation in complete
liquidation or dissolution of the Corporation, or

c. any reverse merger in which the Corporation is the
surviving entity but in which securities possessing more than fifty
percent (50%) of the total combined voting power of the Corporation's
outstanding securities are transferred to a person or persons different
from the persons holding those securities immediately prior to such
merger,

this option shall terminate and cease to be outstanding
immediately following the consummation of such Corporate Transaction, except to
the extent assumed by the successor corporation or its parent company.

7. ADJUSTMENT IN OPTION SHARES.

a. In the event any change is made to the Common
Stock issuable under the Plan by reason of any stock split, stock
dividend, recapitalization, combination of shares, exchange of shares
or other change affecting such Common Stock as a class without the
Corporation's receipt of consideration, then the number and class of
securities purchasable under this option and the Exercise Price payable
per share shall be appropriately adjusted to prevent the

2.
<PAGE> 3
dilution or enlargement of Optionee's rights hereunder; provided,
however, the aggregate Exercise Price shall remain the same.

b. If this option is to be assumed in connection with
a Corporate Transaction, then this option shall be appropriately adjusted,
immediately after such Corporate Transaction, to apply and pertain to the number
and class of securities which would have been issuable to Optionee in the
consummation of such Corporate Transaction had the option been exercised
immediately prior to such Corporate Transaction, and appropriate adjustments
shall also be made to the Exercise Price payable per share, provided the
aggregate Exercise Price payable hereunder shall remain the same.

8. PRIVILEGE OF STOCK OWNERSHIP. The holder of this option
shall not have any of the rights of a stockholder with respect to the Option
Shares until such individual shall have exercised this option and paid the
Exercise Price for the purchased shares.

9. MANNER OF EXERCISING OPTION.

a. In order to exercise this option for all or any
part of the Option Shares, Optionee (or in the case of exercise after Optionee's
death, Optionee's executor, administrator, heir or legatee, as the case may be)
must take the following actions:

(1) Deliver to the Secretary of the Corporation a
stock purchase agreement (the "Purchase Agreement") in substantially
the form of Exhibit B to the Grant Notice.

(2) Pay the aggregate Exercise Price for the
purchased shares in one of the following alternative forms:

(a) full payment in cash or check made payable
to the Corporation's order;

(b) full payment in shares of Common Stock held
by Optionee for the requisite period necessary to avoid a
charge to the Corporation's earnings for financial reporting
purposes and valued at Fair Market Value on the Exercise Date
(as defined below);

(c) full payment in a combination of shares of
Common Stock held for the requisite period necessary to avoid
a charge to the Corporation's earnings for financial reporting
purposes and valued at Fair Market Value on the Exercise Date
and cash or check made payable to the Corporation's order; or

3.
<PAGE> 4
(d) full payment effected through a broker-
dealer sale and remittance procedure pursuant to which
Optionee shall provide concurrent irrevocable written
instructions (i) to a Corporation-designated brokerage firm to
effect the immediate sale of the purchased shares and remit to
the Corporation, out of the sale proceeds available on the
settlement date, sufficient funds to cover the aggregate
Exercise Price payable for those shares and (ii) to the
Corporation to deliver the certificates for the purchased
shares directly to such brokerage firm in order to complete
the sale.

(3) Furnish to the Corporation appropriate documentation
evidencing that the person or persons exercising the option (if other
than Optionee) have the right to exercise this Option.

b. For all valuation purposes under this Agreement, the Fair
Market Value per share of Common Stock on any relevant date shall be determined
in accordance with the following provisions:

(1) If the Common Stock is at the time traded on the
Nasdaq National Market, the Fair Market Value shall be the closing
selling price per share on the date in question, as such price is
reported by the National Association of Securities Dealers through the
Nasdaq National Market or any successor system. If there is no reported
closing selling price for the Common Stock on the date in question,
then the closing selling price on the last preceding date for which
such quotation exists shall be determinative of Fair Market Value.

(2) If the Common Stock is at the time listed or
admitted to trading on any national securities exchange, then the Fair
Market Value shall be the closing selling price per share on the date
in question on the securities exchange serving as the primary market
for the Common Stock, as such price is officially quoted in the
composite tape of transactions on such exchange. If there is no
reported sale of Common Stock on such exchange on the date in question,
then the Fair Market Value shall be the closing selling price on the
exchange on the last preceding date for which such quotation exists.

c. The Exercise Date shall be the date on which the executed
Purchase Agreement shall have been delivered to the Secretary of the
Corporation. Except to the extent the sale and remittance procedure specified
above is utilized in connection with the exercise of the option, payment of the
Exercise Price for the purchased shares must accompany the Purchase Agreement.

4.
<PAGE> 5
d. As soon as practical after the Exercise Date, the
Corporation shall issue to or on behalf of Optionee (or other person or persons
exercising this option) a certificate or certificates representing the purchased
Option Shares.

e. In no event may this option be exercised for any
fractional share.

10. NO IMPAIRMENT OF RIGHTS. This Agreement shall not in any way
affect the right of the Corporation to adjust, reclassify, reorganize or
otherwise make changes in its capital or business structure or to merge,
consolidate, dissolve, liquidate or sell or transfer all or any part of its
business or assets. Nor shall this Agreement in any way be construed or
interpreted so as to affect adversely or otherwise impair the right of the
Corporation or the stockholders to remove Optionee from the Board at any time in
accordance with the provisions of applicable law.

11. COMPLIANCE WITH LAWS AND REGULATIONS. The exercise of this
option and the issuance of the Option Shares upon such exercise shall be subject
to compliance by the Corporation and Optionee with all applicable requirements
of law relating thereto and with all applicable regulations of any securities
exchange on which shares of the Common Stock may be listed at the time of such
exercise and issuance.

12. SUCCESSORS AND ASSIGNS. Except to the extent otherwise
provided in Paragraph 3 or 6, the provisions of this Agreement shall inure to
the benefit of, and be binding upon, the successors, administrators, heirs,
legal representatives and assigns of Optionee and the Corporation's successors
and assigns.

13. LIABILITY OF CORPORATION. The inability of the Corporation to
obtain approval from any regulatory body having authority deemed by the
Corporation to be necessary to the lawful issuance and sale of any Common Stock
pursuant to this option shall relieve the Corporation of any liability with
respect to the non-issuance or sale of the Common Stock as to which such
approval shall not have been obtained. However, the Corporation shall use its
best efforts to obtain all such applicable approvals.

14. NOTICES. Any notice required to be given or delivered to the
Corporation under the terms of this Agreement shall be in writing and addressed
to the Corporation in care of the Corporate Secretary at the Corporate Offices
at 300 South El Camino Real, Suite 203, San Clemente, California 92672. Any
notice required to be given or delivered to Optionee shall be in writing and
addressed to Optionee at the address indicated below Optionee's signature line
on the Grant Notice. All notices shall be deemed to have been given or delivered
upon personal delivery or upon deposit in the U.S. mail, postage prepaid and
properly addressed to the party to be notified.

15. CONSTRUCTION/GOVERNING LAW. This Agreement and the option
evidenced hereby are made and granted pursuant to the Plan and are in all
respects limited by and subject

5.
<PAGE> 6
to the express terms and provisions of the Plan, including the automatic option
grant provisions of Article Two of the Plan. The interpretation, performance and
enforcement of this Agreement shall be governed by the laws of the State of
California, as such laws are applied to contracts entered into and performed in
such State, without resort to that State's conflict-of-laws rules.

16. STOCKHOLDER APPROVAL. Notwithstanding any provision to the
contrary in this Agreement, this option may not be exercised in whole or in part
at any time prior to the approval of the Plan by the Corporation's stockholders.
Should such stockholder approval not be obtained within twelve (12) months after
the date the Plan was adopted by the Board, this option shall terminate and
cease to remain outstanding without ever becoming exercisable for any of the
Option Shares.

<PAGE> 1
EXHIBIT 99.8

SUNSTONE HOTEL INVESTORS, INC.

1994 DIRECTORS PLAN

AUTOMATIC DIRECT STOCK ISSUANCE AGREEMENT

AGREEMENT made as of this _______ day of __________, 199__ by
and between Sunstone Hotel Investors, Inc., a Maryland corporation (the
"Corporation"), and 1~ ("Participant"), a participant in the Corporation's 1994
Directors Plan.

All capitalized terms in this Agreement shall have the meaning
assigned to them in this Agreement or in the attached Appendix.

A. ISSUANCE OF SHARES.

1. ISSUANCE. In consideration for services rendered the
Corporation by Participant in his or her capacity as a non-employee member of
the Board, 2~ shares of Common Stock (the "Shares") are hereby issued to
Participant pursuant to the terms and conditions of the Automatic Stock Issuance
Program of Article Three of the Plan.

2. ASSIGNMENT SEPARATE FROM CERTIFICATE. Concurrently with the
delivery of this Agreement to the Corporation, Participant shall deliver a
duly-executed blank Assignment Separate from Certificate (in the form attached
hereto as Exhibit I) with respect to the Shares.

3. PLAN SUMMARY AND PROSPECTUS. Participant acknowledges
receipt of a copy of the Plan Summary and Prospectus for the Plan attached
hereto as Exhibit II.

B. VESTING OF SHARES.

1. SHARES SUBJECT TO CANCELLATION. The Shares shall be
unvested as of the date hereof. Should Participant cease to remain in Board
service prior to the expiration of the six (6)-month period measured from the
date hereof, the Shares shall be immediately surrendered to the Corporation for
cancellation, and Participant shall have no further stockholder rights with
respect to such shares. Upon completion by Participant of six (6) months of
service as a Board member following the date hereof, the Shares shall become
fully vested shares of Common Stock.

2. ESCROW. Until such time as Participant has vested in the
Shares, the stock certificates evidencing such shares shall be held in escrow by
the Corporation.

3. STOCKHOLDER RIGHTS. Until such time as Participant has
vested in the Shares, Participant (or any successor in interest) shall have all
the rights of a stockholder
<PAGE> 2
(including voting, dividend and liquidation rights) with respect to the Shares,
subject, however, to the transfer restrictions of Article C.

4. RESTRICTIVE LEGEND. The stock certificates for the Shares
shall be endorsed with the following restrictive legend;

"These securities are subject to cancellation by the Issuer
during the six (6)-month period beginning ____________, 199__
pursuant to the terms and conditions of a written agreement
dated as of such date between the Issuer and the registered
holder of the securities (or the predecessor in interest to
the securities). A copy of such agreement is maintained at the
Issuer's principal corporate offices."

5. RECAPITALIZATION. Any new, substituted or additional
securities or other property (including money paid other than as a regular cash
dividend) which the Participant may have the right to receive with respect to
the Shares by reason of any stock dividend, stock split, recapitalization,
combination of shares, exchange of shares or other change affecting the
outstanding Common Stock as a class without the Corporation's receipt of
consideration shall be issued subject to (i) the same vesting requirements
applicable to the Shares and (ii) the same escrow provisions applicable to the
Shares.

6. CORPORATE TRANSACTION/CHANGE IN CONTROL. In the event of a
Corporate Transaction or a Change in Control, the Shares shall immediately vest
in full.

C. TRANSFER RESTRICTIONS.

1. RESTRICTIONS ON TRANSFER. Except for any Permitted
Transfer, Participant shall not transfer, assign, encumber or otherwise dispose
of any of the Shares until Participant shall have vested in such shares.

2. TRANSFEREE OBLIGATIONS. Each person (other than the
Corporation) to whom the Shares are transferred by means of a Permitted Transfer
must, as a condition precedent to the validity of such transfer, acknowledge in
writing to the Corporation that such person is bound by the provisions of this
Agreement and that the transferred shares are subject to cancellation by the
Corporation in accordance with the terms of the Plan and this Agreement, to the
same extent such shares would be so subject if retained by Participant.

D. SPECIAL TAX ELECTION.

The acquisition of the Shares may result in adverse tax
consequences which may be avoided or mitigated by filing an election under Code
Section 83(b). Such election must be filed within thirty (30) days after the
date of this Agreement. A description of the tax

2.
<PAGE> 3
consequences applicable to the acquisition of the Shares and the form for making
the Code Section 83(b) election are set forth in Exhibit III. PARTICIPANT SHOULD
CONSULT WITH HIS OR HER TAX ADVISOR TO DETERMINE THE TAX CONSEQUENCES OF
ACQUIRING THE SHARES AND THE ADVANTAGES AND DISADVANTAGES OF FILING THE CODE
SECTION 83(B) ELECTION. PARTICIPANT ACKNOWLEDGES THAT IT IS PARTICIPANT'S SOLE
RESPONSIBILITY, AND NOT THE CORPORATION'S, TO FILE A TIMELY ELECTION UNDER CODE
SECTION 83(B), EVEN IF PARTICIPANT REQUESTS THE CORPORATION OR ITS
REPRESENTATIVES TO MAKE THIS FILING ON HIS OR HER BEHALF.

E. MISCELLANEOUS PROVISIONS.

1. NO IMPAIRMENT OF RIGHTS. Nothing in this Agreement or in
the Plan shall in any way be construed or interpreted so as to affect adversely
or otherwise impair the right of the Corporation or the stockholders to remove
Participant from the Board at any time in accordance with the provisions of
applicable law.

2. PARTICIPANT UNDERTAKING. Participant hereby agrees to take
whatever additional action and execute whatever additional documents the
Corporation may deem necessary or advisable in order to carry out or effect one
or more of the obligations or restrictions imposed on either Participant or the
Shares pursuant to the express provisions of this Agreement.

3. AGREEMENT IS ENTIRE CONTRACT. This Agreement constitutes
the entire contract between the parties hereto with regard to the subject matter
hereof. This Agreement is made pursuant to the provisions of the Plan and shall
in all respects be construed in conformity with the express terms and provisions
of the Plan.

4. GOVERNING LAW. This Agreement shall be governed by, and
construed in accordance with, the laws of the State of California, as such laws
are applied to contracts entered into and performed in such State, without
resort to that State's conflict-of-laws rules.

5. COUNTERPARTS. This Agreement may be executed in
counterparts, each of which shall be deemed to be an original, but all of which
together shall constitute one and the same instrument.

6. SUCCESSORS AND ASSIGNS. The provisions of this Agreement
shall inure to the benefit of, and be binding upon, the Corporation and its
successors and assigns and Participant and Participant's legal representatives,
heirs, legatees, distributees, assigns and transferees by operation of law,
whether or not any such person shall have become a party to this Agreement and
have agreed in writing to join herein and be bound by the terms and conditions
hereof.

3.
<PAGE> 4
IN WITNESS WHEREOF, the parties have executed this Agreement
on the day and year first indicated above.

SUNSTONE HOTEL INVESTORS, INC.

By:
----------------------------------------

Title:
-------------------------------------

Address: 300 South El Camino Real, Suite 203
San Clemente, California 92672

-------------------------------------------
FIELD (1) PARTICIPANT

Address:
-----------------------------------

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

Print name in exact manner
it is to appear on the
stock certificate:

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

Address to which certificate
is to be sent, if different
from address above:

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

Social Security Number:
-----------------------------------

4.
<PAGE> 5
EXHIBIT I

ASSIGNMENT SEPARATE FROM CERTIFICATE

FOR VALUE RECEIVED FIELD (1) hereby sell(s), assign(s) and
transfer(s) unto Sunstone Hotel Investors, Inc. (the "Corporation"), __________
(________) shares of the Common Stock of the Corporation standing in his or her
name on the books of the Corporation represented by Certificate No.___________
herewith and do hereby irrevocably constitute and appoint ______________Attorney
to transfer the said stock on the books of the Corporation with full power of
substitution in the premises.

Dated: __________ ____________________________
Signature

INSTRUCTION: Please do not fill in any blanks other than the signature line.
Please sign exactly as you would like your name to appear on the issued stock
certificate. The purpose of this

5.
<PAGE> 6
assignment is to enable the Corporation to transfer any shares which are
surrendered for cancellation upon your early termination of Board service
without requiring additional signatures.

6.
<PAGE> 7
EXHIBIT II

PLAN SUMMARY AND PROSPECTUS - 1994 DIRECTORS PLAN
<PAGE> 8
EXHIBIT III

SECTION 83(b) TAX ELECTION

This statement is being made under Section 83(b) of the Internal Revenue Code,
pursuant to Treas. Reg. Section 1.83-2.

(1) The taxpayer who performed the services is:

Name:
Address:
Taxpayer Ident. No.:

(2) The property with respect to which the election is being made
is __________ shares of the common stock of Sunstone Hotel Investors,
Inc.

(3) The property was issued on ____________, 199__.

(4) The taxable year in which the election is being made is the calendar
year 199 .

(5) The property is subject to cancellation by the issuer in the event the
taxpayer's service with the issuer terminates prior to ____________,
199__.

(6) The fair market value at the time of transfer (determined without
regard to any restriction other than a restriction which by its terms
will never lapse) is $ per share.

(7) The amount paid for such property is $______________ per share.

(8) A copy of this statement was furnished to Sunstone Hotel Investors,
Inc. for whom taxpayer rendered the services underlying the transfer of
property.

(9) This statement is executed on ________________________, 199_.

__________________________ __________________________________
Spouse (if any) Taxpayer

This election must be filed with the Internal Revenue Service Center with which
taxpayer files his or her Federal income tax returns and must be made within
thirty (30) days after the execution date of the Stock Issuance Agreement. This
filing should be made by registered or certified mail, return receipt requested.
Participant must retain two (2) copies of the completed form for filing with his
or her Federal and state tax returns for the current tax year and an additional
copy for his or her records.
<PAGE> 9
APPENDIX

The following definitions shall be in effect under the
Agreement:

A. AGREEMENT shall mean this Automatic Direct Stock Issuance
Agreement.

B. BOARD shall mean the Corporation's Board of Directors.

C. CHANGE IN CONTROL shall mean a change in ownership or control
of the Corporation effected through either of the following
transactions:

(i) the acquisition, directly or indirectly, by any
person or related group of persons (other than the Corporation or a
person that directly or indirectly controls, is controlled by, or is
under common control with, the Corporation) of beneficial ownership
(within the meaning of Rule 13d-3 of the 1934 Act) of securities
possessing more than fifty percent (50%) of the total combined voting
power of the Corporation's outstanding securities pursuant to a tender
or exchange offer made directly to the Corporation's stockholders which
the Board does not recommend such stockholders to accept, or

(ii) a change in the composition of the Board over a
period of thirty-six (36) consecutive months or less such that a
majority of the Board members ceases, by reason of one or more
contested elections for Board membership, to be comprised of
individuals who either (A) have been Board members continuously since
the beginning of such period or (B) have been elected or nominated for
election as Board members during such period by at least a majority of
the Board members described in clause (A) who were still in office at
the time the Board approved such election or nomination.

D. CODE shall mean the Internal Revenue Code of 1986, as amended.

E. COMMON STOCK shall mean the Corporation's common stock.

F. CORPORATE TRANSACTION shall mean any of the following
stockholder-approved transactions to which the Corporation is
a party:

(i) a merger or consolidation in which the Corporation
is not the surviving entity, except for a transaction the principal
purpose of which is to change the state in which the Corporation is
incorporated;
<PAGE> 10
(ii) the sale, transfer or other disposition of all or
substantially all of the assets of the Corporation in complete
liquidation or dissolution of the Corporation; or

(iii) any reverse merger in which the Corporation is the
surviving entity but in which securities possessing more than fifty
percent (50%) of the total combined voting power of the Corporation's
outstanding securities are transferred to a person or persons different
from the persons holding those securities immediately prior to such
merger.

G. CORPORATION shall mean Sunstone Hotel Investors, Inc., a Maryland
corporation.

H. PERMITTED TRANSFER shall mean (i) a gratuitous transfer of the
Shares, provided and only if Participant obtains the Corporation's prior written
consent to such transfer, or (ii) a transfer of title to the Shares effected
pursuant to Participant's will or the laws of intestate succession following
Participant's death.

I. PLAN shall mean the Corporation's 1994 Directors Plan.

J. SHARES shall have the meaning assigned to such term in Paragraph
A.1.