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                                 UNITED STATES

                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                   FORM 10-K

(MARK ONE)

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
    OF 1934.........................FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000,

                                       OR

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES

FOR THE TRANSITION PERIOD FROM           TO

                          COMMISSION FILE NO. 1-12030

                            STRATOSPHERE CORPORATION
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

<TABLE>
<S>                                    <C>
               DELAWARE                              88-0292318
   (STATE OR OTHER JURISDICTION OF                (I.R.S. EMPLOYER
    INCORPORATION OR ORGANIZATION)              IDENTIFICATION NO.)
    2000 LAS VEGAS BOULEVARD SOUTH                     89104
          LAS VEGAS, NEVADA                          (ZIP CODE)
   (ADDRESS OF PRINCIPAL EXECUTIVE
               OFFICES)
</TABLE>

REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (702) 382-4446

SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:

<TABLE>
<CAPTION>
       TITLE OF EACH CLASS                                      NAME OF EACH EXCHANGE ON WHICH REGISTERED
       -------------------                                      -----------------------------------------
       <S>                                                      <C>
       Common Stock, par value $0.01 per share
</TABLE>

SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: COMMON STOCK, PAR
VALUE $0.01 PER SHARE.
                            ------------------------

     Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.

                                Yes  X   No  ___

     Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.  [ ]

     As of March 12, 2001, 2,030,000 shares of the Registrant's Common Stock
were outstanding. The aggregate market value of the Common Stock held by
non-affiliates of the Registrant on such date, based upon the last sale price of
the Common Stock as reported on the over the counter bulletin board on March 12,
2001, was $9,090,000. For purposes of this computation, affiliates of the
Registrant are deemed to be the Registrant's executive officers and directors
and American Real Estate Partners, L.P.
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ITEM 1.  BUSINESS

     The following discussion contains trend information and other
forward-looking statements that involve a number of risks and uncertainties. The
actual results of Stratosphere Corporation (the "Company") could differ
materially from the Company's historical results of operations and those
discussed in the forward-looking statements. Factors that could cause actual
results to differ materially include, but are not limited to, those identified
in "Certain Factors."

OVERVIEW

     On January 27, 1997 ("Petition Date"), Stratosphere Corporation and its
wholly-owned subsidiary Stratosphere Gaming Corp. ("SGC" and collectively with
Stratosphere Corporation, the "Debtors") filed voluntary petitions for Chapter
11 Reorganization pursuant to the United States Bankruptcy Code. As of that
date, the United States Bankruptcy Court for the District of Nevada ("Bankruptcy
Court") assumed jurisdiction over the assets of Stratosphere Corporation and
SGC. Stratosphere Corporation and SGC were acting as debtors-in-possession on
behalf of their respective bankrupt estates, and were authorized as such to
operate their business subject to Bankruptcy Court supervision. On June 9, 1998,
the Bankruptcy Court entered an order (the "Confirmation Order") confirming the
Restated Second Amended Plan of Reorganization filed by the Debtors (the
"Restated Second Amended Plan"). On October 14, 1998, the Restated Second
Amended Plan became effective. All material conditions precedent to the Restated
Second Amended Plan becoming binding were satisfied on or before September 27,
1998. Accordingly, the Company has reflected the effect of the Restated Second
Amended Plan as of September 27, 1998.

     As a result of the restructuring, the Company implemented the guidance
provided by the American Institute of Certified Public Accountants Statement of
Position 90-7 "Financial Reporting By Entities In Reorganization Under The
Bankruptcy Code" ("AICPA SOP 90-7") and as such, adopted "fresh start reporting"
as of September 27, 1998. The Company's emergence from its Chapter 11
proceedings resulted in a new reporting entity with no retained earnings or
accumulated deficit as of September 27, 1998. Accordingly, the Company's
consolidated financial statements for periods prior to September 27, 1998 are
not comparable to consolidated financial statements presented on or subsequent
to September 27, 1998. Column headings have been included on the accompanying
Consolidated Statements of Operations and Consolidated Statement of Cash Flows
to distinguish between the predecessor and successor entities.

     Pursuant to the Restated Second Amended Plan becoming effective on October
14, 1998, the Company canceled all prior equity interests (including the 58.4
million outstanding shares of Common Stock, options and warrants) and exchanged
2,030,000 shares of New Common Stock for the secured portion of the 14 1/4%
First Mortgage Notes (estimated at $120.6 million). Approximately 89.6% of the
New Common Stock was issued to Carl C. Icahn related entities. The remaining
portion of the 14 1/4% First Mortgage Notes claim (approximately $104 million),
the balance of the note due Grand Casinos, Inc. (approximately $52.4 million)
and all other general unsecured claims would be discharged in exchange of a cash
payment of $6.0 million. Certain priority claims (estimated at $.9 million) were
paid in full. The discharge and settlement of these claims resulted in a gain of
$153.4 million, which was reflected as an extraordinary item on the September
27, 1998, consolidated statements of operations. The amount of the gain was
based on the Company's estimate of the amount of claims that would ultimately be
allowable by the Bankruptcy Court, and was based on the total of actual claims
filed. In the event additional unsecured claims are allowed by the Bankruptcy
Court, it will not increase the Company's cash required for full debt discharge.
A portion of the $6.9 million to be distributed has been reserved for potential
future settlement of unsecured claim disputes (approximately $1.9 million).

     The Company owns and operates the Stratosphere Tower, Casino & Hotel
("Stratosphere") which is centered around the Stratosphere Tower (the "Tower"),
the tallest free-standing observation tower in the United States. Standing 1,149
feet above the Las Vegas Strip, the Tower is visible from all directions,
including visitors flying into Las Vegas. The Tower's Pod (the "Pod"), a
12-story building that begins at the 771-foot level, features a 360-seat
revolving restaurant, a 220-seat cocktail lounge, indoor and outdoor

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observation decks and two amusement rides located over 900 feet in the air, a
roller coaster and a simulated "Big Shot" collectively (the "Thrill Rides").

     The Company operates, among other things, the Tower, a hotel with 1,444
rooms and suites, a 97,000 square foot casino featuring approximately 1,558 slot
machines, 45 table games, a race and sports book, a keno lounge, a 160,000
square foot second level containing a retail center (the "Retail Center") of
approximately 46 shops and a 650 seat Broadway Showroom, a 120-seat
entertainment lounge and parking for approximately 4,000 cars. Stratosphere
opened for business on April 29, 1996.

THE TOWER

     At 1,149 feet in height, the Tower is the tallest free-standing observation
tower in the United States and the tallest free-standing structure west of the
Mississippi River. From the indoor and outdoor observation decks, lounge and
restaurant, Tower visitors have dramatic views of the Las Vegas Strip, downtown
and the surrounding Las Vegas Valley. Visitors travel to the observation decks
in four high speed, double-decked elevators, which travel at 1,800 feet per
minute, and which have an aggregate capacity of 128 visitors.

     The Pod is a 12-story 105,000 square foot building that begins at the
771-foot level of the Tower. The Pod, which has a maximum capacity of 2,700
visitors at any one time, has an indoor and outdoor observation deck and is
currently open from 10:00 a.m. to 1:00 a.m. Sunday through Thursday and 10:00
a.m. to 2:00 a.m. on Friday and Saturday.

     The Pod's third and fourth levels contain conference and meeting rooms that
are rented out for business or social occasions. Level six contains a 360-seat
revolving restaurant. Levels seven, eight and nine feature a 220-seat cocktail
lounge and indoor and outdoor observation decks. The indoor observation deck
contains two gift shops, free-standing vending featuring souvenirs and food
products designed to capitalize on the unique nature of the Tower and eight
virtual reality games.

     Level twelve is the staging area for the Thrill Rides. The first ride, the
"Big Shot," propels riders from the 921-foot level of the Pod approximately 180
feet straight up the mast of the Tower, in a harnessed seat, and allows for a
controlled free fall back to the landing platform. The second ride, a roller
coaster, the "High Roller," begins at the 909-foot level and transports up to 36
passengers at a time along tracks wrapped around the top portion of the Pod.

THE CASINO AREA

     Stratosphere's casino contains approximately 97,000 square feet of gaming
space, with approximately 1,558 slot machines, 45 table games, a race and sports
book and keno lounge. The race and sports book, deli and entertainment lounge
and bar opened August 15, 1999. These facilities have been designed for
convenient access to the casino.

     Although the Company does not emphasize credit play, credit is available to
high-stakes wagerers on a discretionary basis. Slot and table game customers are
able to join a frequent players club, which awards benefits including cash and
complimentary room, food and beverage based upon the customer's level of play.

RETAIL AND ENTERTAINMENT CENTER

     The Retail Center, located on the second floor of the base building,
occupies approximately 160,000 square feet, of which 57,000 square feet remains
undeveloped. The Retail Center offers various "fast food" restaurants and shops.
Adjacent to the Retail Center is the 650-seat show room that currently offers
afternoon and evening shows, which are designed to appeal to the wide spectrum
of value-minded visitors who come to Las Vegas. An escalator has been
constructed from the showroom to the casino to make exiting the showroom more
convenient. The new escalator became operational December 31, 1999.

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HOTEL, FOOD AND BEVERAGE

     The Hotel currently has 1,444 rooms and suites. The Hotel has six themed
restaurants, "The Top of The World" located in the Pod, the 434-seat
"Stratosphere Buffet," a 200-seat "Montana's Steak House," "Roxy's 50's Diner,"
"Tower of Pasta," a restaurant serving Italian cuisine, and "Hamada's", a
restaurant serving Asian cuisine. The Company plans on adding an additional
restaurant offering American cuisine during the spring of 2001. In addition, a
New York style deli is located adjacent to the race and sports book.

NEW CONSTRUCTION

     In mid-1996, Stratosphere Corporation suspended construction of the
1,002-room hotel tower (the "Hotel Expansion"), which had reached a height of
approximately 14 stories. In April 2000, construction was resumed to complete
the unfinished hotel tower with a total construction budget of $65.0 million.
The hotel project includes 1,002 new guestrooms and guest amenities such as a
67,000-square foot pool and recreation area with a new snack and cocktail bar,
private cabanas and a large spa. The new 24-floor hotel tower will also house a
350-seat coffee shop, new porte-cochere and valet parking entrance, gift shop
and new tour bus entrance and lobby. The Company is also refurbishing, expanding
and upgrading the existing Stratosphere Buffet, Montana's Steak House and Roxy's
50's Diner for an estimated construction budget of $3.0 million.

     In June 2000, the Company and two entities owned and controlled by Mr. Carl
C. Icahn, including Arizona Charlie's, Inc. and Fresca LLC /d.b.a./ Arizona
Charlie's East created Stratosphere Development, LLC ("Development"), to provide
development and construction management services for construction related
projects to these properties. Development was formed as a series Limited
Liability Company under Delaware law. Development's financial results are
included in the accompanying consolidated financial statements since the Company
exercises control over Development.

     The Company obtained a commitment for a construction loan from related
parties. See discussion related to debt in Item 7.

BUSINESS AND MARKETING STRATEGY

     The Company utilizes the unique characteristics of the Tower to attract
visitors. Hotel rooms, entertainment and food and beverage products are priced
to appeal to the value-conscious, mid-market Las Vegas visitor. The Company
offers competitive gambling odds for its slots, table games and sports book
products. Aggressive advertising and promotional campaigns are maintained to
maximize hotel room occupancy, visitation to the Tower and retention of guests
on property. The Company employs a direct mail program targeting customers in
its database with a variety of product offerings, including incentives to visit
the Company's facilities on a frequent basis.

COMPETITION

     The casino/hotel industry is highly competitive. The Las Vegas market
includes many world class destination resorts, with numerous other tourist
attractions. Major Las Vegas casino/hotels are themselves tourist attractions,
including Bellagio, Venetian, Paris, Mandalay Bay, Mirage, Caesars Palace, MGM
Grand, Treasure Island, Monte Carlo, New York New York, Aladdin, Luxor and the
Rio. Each of these resorts competes with the Company in its ability to attract
visitors to the Tower. The Paris Hotel and Casino also offers a free-standing
Eiffel Tower replica with an observation deck similar to that of the Company's
Tower.

     The Company's hotel and food and beverage operations compete directly with
the Excalibur, Circus Circus, Stardust, Sahara, Riviera and Palace Station, as
each of these properties target the budget-minded, mid-market Las Vegas visitor.
Management believes that its ability to expand its target market is limited due
to the lack of major recreational facilities, meeting and convention facilities.
In addition, future visitation to the Tower could be negatively impacted as more
visitors will have previously visited the Tower and do not intend to repeat the
experience.

     On March 8, 2000, California residents voted to expand Native American
gaming operations within that state. The Native American gaming expansion could
result in up to 43,000 slot machines on 57 tribal
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reservations. The Company estimates that approximately 35% of its hotel
occupancy are from guests traveling from southern California. The potential
proliferation of gaming in southern California could have a material adverse
effect on the Company's business. Management is presently unable, however, to
assess the magnitude of the impact to the Company.

EMPLOYEES

     The Company currently employs approximately 2,150 full and part-time
associates, of which approximately 1,000 are covered by a collective bargaining
agreement.

     On December 10, 1998, the Company and Culinary Workers and Bartenders Union
reached an agreement that became effective on June 1, 1997. Pursuant to the
agreement, future pay rate increases will range from 3% to 4% annually. The
agreement expires on May 31, 2002.

     On December 18, 2000, Stratosphere was notified by the National Labor
Relations Board ("NLRB") that an RC-Certification of Representation Petition had
been filed on behalf of the full-time and part-time Table Games Dealers. This
petition had been filed by the Transport Workers Union of America, headquartered
in New York City, NY. On December 28, 2000, a Stipulated Election Agreement was
entered into between the Union and the Employer permitting a secret ballot
election for the bargaining unit to be conducted on January 27, 2001. On January
27, 2001, the NLRB election was held at Stratosphere with 116 Dealers voting
"Yes" for representation with 48 voting "No" or against representation. A total
of 174 Dealers were eligible to participate in this election.

     Furthermore, an RD-Certification Petition was filed by the National Labor
Relations Board on January 26, 2001, whereby a substantial number of employees
asserted that Operating Engineers Local 501 ("Union") was no longer their
certified or currently recognized collective bargaining representative. On March
21, 2001, the NLRB election was held at Stratosphere with 39 employees voting in
favor of retaining the Union and 13 employees voting against retaining the Union
as their collective bargaining representative.

     The Company has historically had good relationships with unions
representing its employees and the Company does not anticipate any business
disruption as a result of these elections.

INSURANCE

     The Company carries insurance of the type customary in the hotel and casino
industry and in amounts deemed adequate by management to protect the property.
The policies provide business and commercial coverage, including third party
liability, property damage, boiler and machinery, business interruption and
stop-loss coverage for self-insured worker's compensation and medical benefit
programs.

NEW LAWS AND REGULATIONS

     Changes in existing applicable state and federal laws and regulations and
new laws and regulations could have a significant effect on operations. As a
result of federal legislation passed in 1996, the National Gambling Impact Study
Commission conducted a two-year study of the gaming industry in the United
States and reported its findings and recommendations to Congress in June 1999.
It is possible that this report may result in additional regulation and taxation
of the gaming industry. In addition, any imposed limitations on college sports
betting by either the Congress of the United States or the National Collegiate
Athletic Association could adversely impact future revenues of the Company.

RELIANCE ON CERTAIN MARKETS

     The interstate highway between Las Vegas and Southern California, where
large numbers of our customers reside, has experienced excessive traffic delays
during peak periods. Such delays may affect the number of customers who visit
our Company's property.

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KEY EMPLOYEES

     There is intense competition to attract and retain management and key
employees in the gaming industry. The Company's business could be adversely
affected in the event of the inability to recruit or retain key personnel.

ENVIRONMENTAL MATTERS

     The Company is subject to various federal, state and local laws, ordinances
and regulations that (i) govern activities or operations that may have adverse
environmental effects, such as discharges to air and water or (ii) may impose
liability for the costs of cleaning up and certain damages resulting from, sites
of past spills, disposals or other releases of hazardous or toxic substances or
wastes (together "Environmental Laws"). The Company endeavors to maintain
compliance with Environmental Laws, but from time to time, current or historical
operations on the property may have resulted or may result in noncompliance or
liability for cleanup pursuant to Environmental Laws. In that regard, the
Company may incur costs for cleaning up contamination relating to historical
uses of certain of its properties.

NEVADA GAMING REGULATION

     The ownership and operation of casino gaming facilities in Nevada are
subject to: (i) the Nevada Gaming Control Act and the regulations promulgated
thereunder (collectively, the "Nevada Act"); and (ii) various local ordinances
and regulations. Gaming operations in Nevada are subject to the licensing and
regulatory control of the Nevada Gaming Commission ("Nevada Commission"), the
Nevada State Gaming Control Board ("Nevada Board") and various other county and
city regulatory agencies, including the City of Las Vegas, collectively referred
to as the "Nevada Gaming Authorities."

     The laws, regulations and supervisory procedures of the Nevada Gaming
Authorities are based upon declarations of public policy which are concerned
with, among other things: (i) the prevention of unsavory or unsuitable persons
from having a direct or indirect involvement with gaming at any time or in any
capacity; (ii) the establishment and maintenance of responsible accounting
practices and procedures; (iii) the maintenance of effective controls over the
financial practices of licensees, including the establishment of minimum
procedures for internal fiscal affairs and the safeguarding of assets and
revenues, providing reliable record keeping and requiring the filing of periodic
reports with the Nevada Gaming Authorities; (iv) the prevention of cheating and
fraudulent practices; and (v) providing a source of state and local revenues
through taxation and licensing fees. Changes in such laws, regulations and
procedures could have an adverse effect on the Company's gaming operations.

     The Company is registered with the Nevada Commission as a publicly traded
corporation (a "Registered Corporation") and has been found suitable to own the
stock of SGC. SGC is licensed by the Nevada Gaming Authorities to conduct
nonrestricted gaming operations and is a corporate licensee under the terms of
the Nevada Act (a "Corporate Licensee"). The gaming license requires the
periodic payment of fees and taxes and is not transferable. The Company and SGC
have obtained the various registrations, approvals, permits, findings of
suitability and licenses required in order to engage in gaming activities in
Nevada.

     As a Registered Corporation, the Company is required periodically to submit
detailed financial and operating reports to the Nevada Commission and furnish
any other information that the Nevada Commission may require. In addition, no
person may become a stockholder of, or receive, any percentage of profits from
SGC without first obtaining licenses and approvals from the Nevada Gaming
Authorities.

     The Nevada Gaming Authorities may investigate any individual who has a
material relationship to, or material involvement with, the Company or SGC in
order to determine whether such individual is suitable or should be licensed as
a business associate of SGC. Officers, directors and certain key employees of
SGC must file applications with the Nevada Gaming Authorities and may be
required to be licensed or found suitable by the Nevada Gaming Authorities.
Officers, directors and key employees of the Company who are actively and
directly involved in the activities of SGC may be required to be licensed or
found suitable by the Nevada Gaming Authorities. The Nevada Gaming Authorities
may deny an application for licensing for any cause

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which they deem reasonable. A finding of suitability is comparable to licensing,
and both require submission of detailed personal and financial information
followed by a thorough investigation. The applicant for licensing or a finding
of suitability must pay all the costs of the investigation. Changes in licensed
positions must be reported to the Nevada Gaming Authorities and, in addition to
their authority to deny an application for a finding of suitability or
licensure, the Nevada Gaming Authorities have jurisdiction to disapprove a
change in a corporate position.

     If the Nevada Gaming Authorities were to find an officer, director or key
employee unsuitable for licensing or unsuitable to continue having a
relationship with the Company or SGC, the companies involved would have to sever
all relationships with such person. In addition, the Nevada Commission may
require the Company or SGC to terminate the employment of any person who refuses
to file appropriate applications. Determinations of suitability or of questions
pertaining to licensing are not subject to judicial review in Nevada.

     The Company and SGC are required to submit detailed financial and operating
reports to the Nevada Commission. Substantially all material loans, liens, sales
of securities and similar financing transactions by the Company and SGC are
required to be reported to or approved by the Nevada Commission.

     If it were determined that the Nevada Act was violated by SGC, the gaming
licenses it holds could be limited, conditioned, suspended or revoked, subject
to compliance with certain statutory and regulatory procedures. In addition, the
Company, SGC and the persons involved could be subject to substantial fines for
each separate violation of the Nevada Act at the discretion of the Nevada
Commission. Further, a supervisor could be appointed by the Nevada Commission to
operate the Company's gaming property and, under certain circumstances, earnings
generated during the supervisor's appointment (except for reasonable rental
value of the premises) could be forfeited to the state of Nevada. Limitation,
conditioning or suspension of the licenses of SGC could (and revocation of any
gaming license of SGC would) materially adversely affect the Company.

     Any beneficial holder of a Registered Corporation's voting securities,
regardless of the number of shares owned, may be required to file an
application, be investigated and have his suitability as a beneficial holder of
the Registered Corporation's voting securities determined if the Nevada
Commission has reason to believe that such ownership would otherwise be
inconsistent with the declared policies of the state of Nevada. The applicant
must pay all costs of investigation incurred by the Nevada Gaming Authorities in
conducting any such investigation.

     The Nevada Act requires any person who acquires beneficial ownership of
more than 5% of a Registered Corporation's voting securities to report the
acquisition to the Nevada Commission. The Nevada Act requires that beneficial
owners of more than 10% of a Registered Corporation's voting securities apply to
the Nevada Commission for a finding of suitability within thirty days after the
Chairman of the Nevada Board mails the written notice requiring such filing. Mr.
Icahn has been approved as a shareholder and controlling shareholder. Under
certain circumstances, an "institutional investor," as defined in the Nevada
Act, which acquires more than 10%, but not more than 15%, of a Registered
Corporation's voting securities, or more than 10% of a Registered Corporation's
voting securities as a result of a proceeding under the United States Bankruptcy
Code, may apply to the Nevada Commission for a waiver of such finding of
suitability if such institutional investor holds the voting securities for
investment purposes only. An institutional investor shall not be deemed to hold
voting securities for investment purpose unless the voting securities were
acquired and are held in the ordinary course of business as an institutional
investor and not for the purpose of causing, directly or indirectly, the
election of a majority of the members of the Board of Directors of the
Registered Corporation, any change in the Registered Corporation's corporate
charter, bylaws, management, policies or operations, or any of its gaming
affiliates, or any other action which the Nevada Commission finds to be
inconsistent with holding the Registered Corporation's voting securities for
investment purposes only. Activities which are not deemed to be inconsistent
with holding voting securities for investment purposes only include: (i) voting
on all matters voted on by stockholders; (ii) making financial and other
inquiries of management of the type normally made by securities analysts for
informational purposes and not to cause a change in its management, policies or
operations; and (iii) such other activities as the Nevada Commission may
determine to be consistent with such investment intent. If the beneficial holder
of voting securities who must be found suitable is

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a corporation, partnership or trust, it must submit detailed business and
financial information including a list of beneficial owners. The applicant is
required to pay all costs of investigation.

     Any person who fails or refuses to apply for a finding of suitability or a
license within thirty days after being ordered to do so by the Nevada Commission
or the Chairman of the Nevada Board, may be found unsuitable. The same
restrictions apply to a record owner if the record owner, after request, fails
to identify the beneficial owner. Any stockholder found unsuitable and who
holds, directly or indirectly, any beneficial ownership of the voting securities
of the Company beyond such period of time as may be prescribed by the Nevada
Commission may be found guilty of a criminal offense. The Company is subject to
disciplinary action if, after it receives notice that a person is unsuitable to
be a stockholder or to have any other relationship with it, it (i) pays that
person any dividend or interest upon voting securities of the Company, (ii)
allows that person to exercise, directly or indirectly, any voting right
conferred through securities held by that person, (iii) pays remuneration in any
form to that person for services rendered or otherwise, or (iv) fails to pursue
all lawful efforts to require such unsuitable person to relinquish his voting
securities including, if necessary, the immediate purchase of said voting
securities for cash at fair market value.

     The Nevada Commission may, in its discretion, require the holder of any
debt security of a Registered Corporation to file applications, be investigated
and be found suitable to own the debt security of a Registered Corporation if it
has reason to believe that such ownership would otherwise be inconsistent with
the declared policies of the state of Nevada. If the Nevada Commission
determines that a person is unsuitable to own such security, then pursuant to
the Nevada Act, the Registered Corporation can be sanctioned, including the cost
of its approvals, if without the prior approval of the Nevada Commission, it:
(i) pays to the unsuitable person any dividend, interest, or any distribution
whatsoever; (ii) recognizes any voting right by such unsuitable person in
connection with such securities; (iii) pays the unsuitable person remuneration
in any form; or (iv) makes any payment to the unsuitable person by way of
principal, redemption, conversion, exchange, liquidation, or similar
transaction.

     The Company is required to maintain a current stock ledger in Nevada which
may be examined by the Nevada Gaming Authorities at any time. If any securities
are held in trust by an agent or by a nominee, the record holder may be required
to disclose the identity of the beneficial owner to the Nevada Gaming
Authorities. A failure to make such disclosure may be grounds for finding the
record holder unsuitable. The Company will also be required to render maximum
assistance in determining the identity of the beneficial owner. The Nevada
Commission has the power to require the stock certificates of the Company to
bear a legend indicating that the securities are subject to the Nevada Act.
However, to date, the Nevada Commission has not imposed such a requirement on
the Company.

     The Company may not make a public offering of its securities without the
prior approval of the Nevada Commission if the securities or proceeds therefrom
are intended to be used to construct, acquire or finance gaming facilities in
Nevada, or to retire or extend obligations incurred for such purposes. Approval
of a public offering does not constitute a finding, recommendation or approval
by the Nevada Commission or the Nevada Board as to the accuracy or adequacy of
the prospectus or the investment merits of the securities offered. Any
representation to the contrary is unlawful.

     Changes in control of a Registered Corporation through merger,
consolidation, stock or asset acquisitions, management or consulting agreements,
or any act or conduct by a person whereby he obtains control, may not occur
without the prior approval of the Nevada Commission. Entities seeking to acquire
control of a Registered Corporation must satisfy the Nevada Board and Nevada
Commission in a variety of stringent standards prior to assuming control of such
Registered Corporation. The Nevada Commission may also require controlling
stockholders, officers, directors and other persons having a material
relationship or involvement with the entity proposing to acquire control, to be
investigated and licensed as part of the approval process relating to the
transaction. The acquisition of control of the Company, as a result of the
Restated Second Amended Plan, received the prior approval of the Nevada
Commission upon the recommendation of the Nevada Board.

     The Nevada legislature has declared that some corporate acquisitions
opposed by management, repurchases of voting securities and corporate defense
tactics affecting Nevada corporate gaming licensees,
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and Registered Corporations that are affiliated with those operations, may be
injurious to stable and productive corporate gaming. The Nevada Commission has
established a regulatory scheme to ameliorate the potentially adverse effects of
these business practices upon Nevada's gaming industry and to further Nevada's
policy to: (i) assure the financial stability of corporate gaming licensees and
their affiliates; (ii) preserve the beneficial aspects of conducting business in
the corporate form; and (iii) promote a neutral environment for the orderly
governance of corporate affairs. Approvals are, in certain circumstances,
required from the Nevada Commission before the Registered Corporation can make
exceptional repurchases of voting securities above the current market price
thereof and before a corporate acquisition opposed by management can be
consummated. The Nevada Act also requires prior approval of a plan of
recapitalization proposed by the Registered Corporation's Board of Directors in
response to a tender offer made directly to the Registered Corporation's
stockholders for the purposes of acquiring control of the Registered
Corporation.

     License fees and taxes, computed in various ways depending on the type of
gaming or activity involved, are payable to the state of Nevada and to the
counties and cities in which the Nevada licensee's respective operations are
conducted. Depending upon the particular fee or tax involved, these fees and
taxes are payable either monthly, quarterly or annually and are based upon
either: (i) a percentage of the gross revenues received; (ii) the number of
gaming devices operated; or (iii) the number of table games operated. A casino
entertainment tax is also paid by casino operations where entertainment is
furnished in connection with the serving or selling of food or refreshments or
the selling of merchandise. Nevada licensees that hold a license to manufacture
or distribute gaming devices also pay certain fees and taxes to the state of
Nevada.

     Any person who is licensed, required to be licensed, registered, required
to be registered, or is under common control with such persons (collectively,
"Licensees"), and who proposes to become involved in a gaming venture outside of
Nevada, is required to deposit with the Nevada Board, and thereafter maintain, a
revolving fund in the amount of $10,000 to pay the expenses of investigation by
the Nevada Board of their participation in such foreign gaming. The revolving
fund is subject to increase or decrease at the discretion of the Nevada
Commission. Thereafter, Licensees are required to comply with certain reporting
requirements imposed by the Nevada Act. Licensees are also subject to
disciplinary action by the Nevada Commission if they knowingly violate any laws
of the foreign jurisdiction pertaining to the foreign gaming operation, fail to
conduct the foreign gaming operation in accordance with the standards of honesty
and integrity required of Nevada gaming operations, engage in activities or
associations that are harmful to the state of Nevada or its ability to collect
gaming taxes and fees, employ, contract with or associate with a person in the
foreign operation who has been denied a license or finding of suitability in
Nevada on the grounds of personal unsuitability.

NEVADA LIQUOR REGULATIONS

     The sale of alcoholic beverages at Stratosphere is subject to licensing and
regulation by the City of Las Vegas. All licenses are revocable and are
transferable only with prior approval of the City of Las Vegas. The City of Las
Vegas has full power to limit, condition, suspend or revoke any such license,
and any such disciplinary action may (and revocation would) have a material
adverse effect on the operations of the Company.

LEVERAGE AND DEBT SERVICE

     As of December 31, 2000, the Company had long-term debt, less current
maturities of $42.1 million, which represents approximately 24% of total
capitalization of the Company at such date. Upon completion of the Hotel
Expansion, estimated to be on or about June 30, 2001, long-term debt, less
current maturates is expected to total approximately $88.5 million or
approximately 40% of the estimated capitalization of the Company at that date.
Estimated debt service primarily will consist of annual payments of interest and
principal totaling approximately $13.0 million until maturity in March 2002.

     The Company's ability to service its debt will be dependent on its future
performance which will be affected by prevailing economic conditions and
financial, business and other factors, certain of which are beyond the Company's
control. Accordingly, no assurance can be given that the Company will maintain a
level

                                        9
<PAGE>   10

of operating cash flow that will be sufficient to service its obligations. If
the Company is unable to generate sufficient cash flow or is unable to refinance
or extend outstanding borrowings, it will have to adopt one or more
alternatives, such as reducing or delaying planned expansion and capital
expenditures, selling assets, restructuring debt, obtaining additional equity or
debt financing or joint venture partners. There can be no assurance that any of
these financing strategies could be effected on satisfactory terms, if at all.
See Management's Discussion and Analysis of operations.

CERTAIN FACTORS

     In addition to factors discussed elsewhere in this Annual Report on Form
10-K, the following are important factors that could cause results or events to
differ materially from those contained in any forward-looking statements made by
or on behalf of the Company.

     BANKRUPTCY.  On January 27, 1997 ("Petition Date"), Stratosphere
Corporation and its wholly-owned subsidiary Stratosphere Gaming Corp. ("SGC" and
collectively with Stratosphere Corporation, the "Debtors") filed voluntary
petitions for Chapter 11 Reorganization pursuant to the United States Bankruptcy
Code. As of that date, the United States Bankruptcy Court for the District of
Nevada ("Bankruptcy Court") assumed jurisdiction over the assets of Stratosphere
Corporation and SGC. Stratosphere Corporation and SGC were acting as
debtors-in-possession on behalf of their respective bankrupt estates, and were
authorized as such to operate their business subject to Bankruptcy Court
supervision. On June 9, 1998, the Bankruptcy Court entered an order (the
"Confirmation Order") confirming the Restated Second Amended Plan of
Reorganization filed by the Debtors (the "Restated Second Amended Plan"). On
October 14, 1998, the Restated Second Amended Plan became effective. All
material conditions precedent to the Restated Second Amended Plan becoming
binding were satisfied on or before September 27, 1998. Accordingly, the Company
has reflected the effect of the Restated Second Amended Plan as of September 27,
1998.

     As a result of the restructuring, the Company implemented the guidance
provided by the American Institute of Certified Public Accountants Statement of
Position 90-7 "Financial Reporting By Entities In Reorganization Under The
Bankruptcy Code" ("AICPA SOP 90-7") and as such, adopted "fresh start reporting"
as of September 27, 1998. The Company's emergence from its Chapter 11
proceedings resulted in a new reporting entity with no retained earnings or
accumulated deficit as of September 27, 1998. Accordingly, the Company's
consolidated financial statements for periods prior to September 27, 1998 are
not comparable to consolidated financial statements presented on or subsequent
to September 27, 1998. Column headings have been included on the accompanying
Consolidated Statements of Operations and Consolidated Statements of Cash Flows
to distinguish between the predecessor and successor entities.

     Pursuant to the Restated Second Amended Plan becoming effective on October
14, 1998, the Company canceled all prior equity interests (including the 58.4
million outstanding shares of Common Stock, options and warrants) and exchanged
2,030,000 shares of New Common Stock for the secured portion of the 14 1/4%
First Mortgage Notes (estimated at $120.6 million). Approximately 89.6% of the
New Common Stock was issued to Carl C. Icahn related entities. The remaining
portion of the 14 1/4% First Mortgage Notes claim (approximately $104 million),
the balance of the note due Grand Casinos, Inc. (approximately $52.4 million)
and all other general unsecured claims will be discharged in exchange of a cash
payment of $6.0 million. Certain priority claims (estimated at $.9 million) were
paid in full. The discharge and settlement of these claims resulted in a gain of
$153.4 million, which was reflected as an extraordinary item on the September
27, 1998 consolidated statements of operations. The amount of the gain was based
on the Company's estimate of the amount of claims that will ultimately be
allowable by the Bankruptcy Court, and was based on the total of actual claims
filed. In the event additional unsecured claims are allowed by the Bankruptcy
Court, it will not increase the Company's cash required for full debt discharge.
A portion of the $6.9 million to be distributed has been reserved for potential
future settlement of unsecured claim disputes (approximately $1.9 million). The
only significant claim dispute was the rejection claim filed by Strato-Retail,
LLC ("Strato-Retail"). (See Item 3. Legal proceedings). Effective September 30,
2000, the Company and Strato-Retail executed a Settlement Agreement, Purchase
and Sale Agreement and Mutual General Release, whereby the parties resolved all
pending disputes, among other things, and dismissed the above referenced appeal
and adversary complaint.
                                        10
<PAGE>   11

     NEED FOR ADDITIONAL FINANCING.  The Company has obtained bridge financing
from American Real Estate Holdings, L.P. ("AREH"), a wholly-owned affiliate of
American Real Estate Partners, L.P. ("AREP"). AREP is a publicly held entity,
which is 85% owned by Mr. Carl C. Icahn. The proceeds of the financing are being
used to complete the construction of the Hotel Expansion and related amenities
(with an estimated total cost of $73.0 million) and to purchase the property
under a master lease agreement (the "Master Lease") from Strato-Retail ($12.5
million). The bridge financing will be due and payable in early 2002. The
Company is currently seeking funding to refinance the bridge financing and is
considering various alternatives. There can be no assurance that the Company
will ultimately be able to obtain adequate funding or, if available, will be on
favorable terms to the Company.

     RISKS OF NEW CONSTRUCTION.  Major construction projects (and particularly
of the size, complexity and scale of the Hotel Expansion) entail significant
risks, including shortages of materials or skilled labor, unforeseen
engineering, environmental and/or geological problems, work stoppages, weather
interference, unanticipated cost increases and non-availability of construction
equipment. Construction, equipment or staffing problems or difficulties in
obtaining any of the requisite licenses, permits, allocations and authorizations
from regulatory authorities could increase the total cost, or delay or prevent
the construction or opening of the Hotel Expansion, or otherwise affect its
design and features. Delays in completing the Hotel Expansion may also result in
increased completion costs.

     COMPETITION.  The casino/hotel industry is highly competitive. Hotels
located on or near the Las Vegas Strip compete primarily with other Las Vegas
strip hotels and with a few major hotels in downtown Las Vegas. The Hotel and
the Casino also competes with a large number of hotels and motels located in and
near Las Vegas. The Tower competes with all other forms of entertainment,
recreational activities and other attractions in and near Las Vegas. Many of the
Company's competitors offer more products than the Company and have greater name
recognition and may have greater resources. Lack of completion of Phase II may
put the Company at a competitive disadvantage.

     POSSIBLE CONFLICTS OF INTEREST.  Mr. Icahn (including certain related
entities) is actively involved in the gaming industry and currently owns 89.6%
of Stratosphere Corporation Common Stock. Casinos owned or managed by Mr. Icahn
may directly or indirectly compete with the Company. In addition, the potential
for conflicts of interest exists among the Company and Mr. Icahn for future
business opportunities. Mr. Icahn may intend to pursue other business
opportunities and there is no agreement requiring that such additional business
opportunities be presented to the Company.

OTHER INFORMATION

     On April 25, 2000, Mr. Icahn, owner and controlling person of NYBOR and
AREH (together Icahn Entities), respectively, submitted a written offer to the
Company to purchase the remaining outstanding shares not owned by Icahn
Entities. Icahn Entities collectively own 89.6% of the Company's outstanding
common stock. If the purchase is successful, it is anticipated that the Company
would then be merged into Icahn Entities. Pursuant to the offer, shareholders of
the Company, other than Icahn Entities, would receive approximately $44.33 per
share based upon the offer's stated valuation of $90 million for the equity of
the entire Company. Icahn Entities would thereafter be the Company's sole
shareholder and together own 100% of the Company's common stock.

     On September 19, 2000, the Company announced a proposed going private
transaction, which has been approved by the Board of Directors of the Company.
The Company would be merged with a newly-formed subsidiary of AREP. Pursuant to
the terms of the proposed merger, shareholders of the Company that are not
affiliated with Carl Icahn will receive $45.32 per share. Mr. Icahn's companies,
other than AREP, will receive $44.33 per share. It is expected the transaction
will close in the third quarter of 2001.

ITEM 2.  PROPERTIES

     The Company currently owns approximately 24.5 acres of land on or near the
Las Vegas Strip. The Company entered into an Owner Participation Agreement (the
"Owner Participation Agreement") with the City of Las Vegas Downtown
Redevelopment Agency (the "Redevelopment Agency") in December 1994. In
                                        11
<PAGE>   12

the reorganization proceedings referred to above, the Owner Participation
Agreement was assumed prior to confirmation of the Restated Second Amended Plan.
This property and the property the Company is seeking to acquire pursuant to the
Owner Participation Agreement (approximately 1 acre) lie within the downtown
redevelopment district, an area designated by the City for economic
redevelopment and urban renewal, and the Company believes that it will be
successful in its acquisition. While the Company believes that through the
City's power of eminent domain or through negotiations with current owners, all
remaining property will be acquired, there can be no assurance that all such
property will be acquired or that such property will be acquired within the
Company's budget. The Company has acquired all but two parcels of property being
sought by the City for the Company. The City is currently taking all steps
necessary to acquire these two parcels but there can be no assurance that it
will succeed in acquiring such parcels. The City's right to acquire these two
properties was determined to be invalid in Nevada District Court and is
currently on appeal to the Nevada Supreme Court. On January 23, 1998, the Nevada
Supreme Court issued an Order of Limited Remand ordering the District Court to
hold an evidentiary hearing within sixty (60) days of the date of the Order on
the issues of the Debtors' intent to accept or reject the Owner Participation
Agreement and, if the Owner Participation Agreement is rejected, whether the
City of Las Vegas Downtown Redevelopment Agency intends to acquire the property
independently of the Company. The Company informed the District Court that it
intended to assume the Owner Participation Agreement and the District Court
concluded its evidentiary hearing. The Company believes that, if necessary, it
can independently acquire the remaining parcels although the asking price may be
more than the Company is willing to pay or, in the alternative, continue
operating with the facility and property it currently owns.

     The Company has also built a park, which was deeded to the City of Las
Vegas. Additionally, as required by the Owner Participation Agreement, the
Company acquired and has conveyed to the City a building known as the Stupak
Center, which is used by the City as a community center. The Company previously
donated $100,000 to the Redevelopment Agency pursuant to the Owner Participation
Agreement to fund renovation of the Stupak Center as a multi-use facility,
including a day care center.

     The Company entered into the Master Lease with Strato-Retail pursuant to
which Strato-Retail was required to develop approximately 160,000 square feet of
the second floor of the building in which the Tower is located into a retail and
entertainment center. The Master Lease provided for base rent plus percentage
rent. Strato-Retail paid the Company approximately $9.9 million for the
construction of the Phase I retail shell and, pursuant to the Master Lease was
obligated to pay $7.9 million for the construction of the Phase II expansion of
the retail shell. Strato-Retail failed to pay any portion of the Phase II
expansion costs and construction of Phase II was halted prior to completion. The
Company, as part of the Restated Second Amended Plan, sought to assume the
Master Lease. Strato-Retail opposed the assumption of the Master Lease and the
Bankruptcy Court allowed confirmation and consummation of the Restated Second
Amended Plan to occur prior to concluding the hearings on the Company's motion
to assume the Master Lease. After evidentiary hearings, in June 1999, the
Bankruptcy Court determined that the Company could not assume the Master Lease
because of certain non-curable, prepetition date defaults under the Master
Lease. As a result of the decision of the Bankruptcy Court, Strato-Retail was
not required to reimburse the Company for the $7.9 million, and Strato-Retail
asserted both a prepetition unsecured claim for breach of the Master Lease and a
postpetition administrative claim for ongoing damages as a result of the breach
of the Master Lease.

     ACQUISITION OF RETAIL CENTER.  In September 2000, the Company created
Stratosphere Leasing, LLC ("Leasing"), a wholly-owned limited liability company
to lease and manage the retail shops located in the Stratosphere. Leasing was
formed as a Limited Liability Company under Delaware law.

     By agreement dated September 30, 2000, between the Company and
Strato-Retail the parties (i) agreed to dismiss various litigation actions
pending between them; (ii) exchanged mutual releases; and (iii) agreed that
Strato-Retail's rights, as tenant, under the Master Lease would be assigned to
Leasing and the related construction agreement between the Company and
Strato-Retail would be terminated. In connection with the transaction, the
Company acquired the property under the Master Lease for $12,987,000. This
transaction was financed with the proceeds of an unsecured, demand loan from
AREH in the amount of $12,500,112 with an interest rate of 9.5% per annum.

                                        12
<PAGE>   13

     On October 4, 2000, the Company obtained an unsecured, demand note of
$12,500,112 to acquire the property under the Master Lease from Strato-Retail.
AREH initially provided the funding for this transaction with a 9.5% interest
rate. Similar to the construction loan, beginning with the third month after
receipt of the certificate of occupancy on the Hotel Expansion the loan shall be
repaid in equal monthly installments based upon a twenty (20) year amortization
schedule and continuing through and including April 4, 2002, when all remaining
balances shall be due. Interest shall begin to accrue on each distribution
received at the fluctuation rate per annum equal to the sum of (i) three hundred
(350) basis points plus (ii) the ninety (90) day London Interbank Offered Rate
("LIBOR"). An extension fee of 1% or $125,000 is payable upon issuance of an
acceptable commitment to the Company. The loan is to be collateralized by a
second mortgage against the real estate.

     In connection with the acquisition, Leasing acquired by assignment all of
the subleases of Strato-Retail including the lease with McDonald's Corporation
("McDonald's"). The lease with McDonald's provides Leasing guarantees that
McDonald's shall, for the initial term of the lease, achieve annual net income
of approximately $494,000 or in the case of a partial calendar year, the
prorated portion of $494,000 ("GANI"). The initial term of the lease expires on
October 20, 2006. In the event that the annual net income (as defined) reported
to landlord is less than the GANI, the landlord will refund the difference to
McDonald's within 30 days of the determination of such difference. McDonald's
has not notified Leasing of the annual net income for the year ended December
31, 2000; however, the terms of the acquisition provided that Strato-Retail
would pay the entire difference for fiscal year 2000. The cash payment for the
purchase was reduced by $500,000 to cover the income guarantee and such amount
is recorded as a current liability as of December 31, 2000. Estimated future
commitments under this guarantee are recorded as a long-term liability titled
Accrued Lease Incentive in the amount of approximately $2.0 million.

ITEM 3.  LEGAL PROCEEDINGS

     The Company's complaint for the avoidance of preferential transfers made to
McDonald's (the "Complaint") and the Company's objection to the proof of claim
filed by McDonald's Corporation came to trial June 24, 1999. On September 20,
1999, the Bankruptcy Court entered its Notice of Entry of Findings of Fact,
Conclusions of Law and Judgment Re Debtors' Complaint for Avoidance of
Preferential Transfer Pursuant to 11 U.S.C. ss. 547 and Order Re Objection To
McDonald's Proof of Claim ("Judgment"). The Judgment ordered that payments made
in January 1997, by the Company to McDonald's in the amount of $.7 million
("Judgment Amount"), were preferential payments pursuant to Section 547(b) of
the Bankruptcy Code and were thereby recoverable by the Company. Regarding the
Company's objection to the proof of claim filed by McDonald's, the Bankruptcy
Court held that McDonald's was not entitled to an administrative claim and that
it was not entitled to any claim for damages. On September 29, 1999, McDonald's
filed its notice of appeal to the Bankruptcy Appellate Panel for the Ninth
Circuit Court of Appeals where it is currently pending.

     The Company has filed a complaint for the avoidance of preferential
transfers made to Grand Casinos, Inc. ("Grand"). Included in the complaint are
approximately $5.9 million of payments made to Grand prior to the Company
beginning bankruptcy proceedings. The parties have conducted discovery and no
trial date has been set. Management anticipates that trial will be set after
August 1, 2001 and before December 31, 2001.

     On February 26, 1998, the Company filed its Motion for Approval of
Assumption of Unexpired Lease ("Assumption Motion") seeking to assume the
Development and Lease Agreement ("Lease") with Strato-Retail. Strato-Retail
opposed the Assumption Motion claiming that the cessation of Phase II
construction was an incurable breach of the Lease by the Company. Strato-Retail
also claimed damages due to the Company's alleged failure to timely tender the
Phase II shell. After evidentiary hearing, the Bankruptcy Court entered its
Order Re Motion for Approval of Assumption of Unexpired Lease ("Order") finding
in pertinent part that the Company's failure to complete construction and the
ramifications following therefrom are incurable "historical facts" and that the
Company could not assume the Lease. The Bankruptcy Court's ruling was affirmed
by the Bankruptcy Appellate Panel for the United States District Court of
Appeals, Ninth Circuit on March 21, 2000. Further appeal to the Ninth Circuit
Court of Appeals was filed by the Company. On July 16, 1999, Strato-Retail filed
its protective proof of claim in excess of $139.5 million. The basis for the
                                        13
<PAGE>   14

amount of the proof of claim is Strato-Retail's calculation of its alleged cash
flow if Phase II had been completed as contemplated by the Lease. Strato-Retail
acknowledged that it is only entitled to offset damages against the rent
reserved under the Lease (approximately $1.3 million annually); however,
Strato-Retail claims that the prepetition failure to complete Phase II is an
ongoing breach by the Company because the incompletion of Phase II was found by
the Bankruptcy Court to be incurable. On February 1, 2000, Strato-Retail filed
an adversary complaint alleging prepetition damages in excess of $1 million plus
a claimed right to set off future damages against future rent. Effective
September 30, 2000, the Company and Strato-Retail executed a Settlement
Agreement, Purchase and Sale Agreement and Mutual General Release, whereby the
parties resolved all pending disputes, among other things, and dismissed the
above referenced appeal and adversary complaint.

     On January 31, 2001, the Company was named in an action styled Disabled
Rights Action Committee v. Stratosphere Gaming Corp., Case No A430070, in the
Eighth Judicial District Court of the State of Nevada. The Complaint alleges a
number of violations of the Americans with Disabilities Act ("ADA"), including
inadequate room selection, door widths and other similar items. Simultaneously
with the Complaint, plaintiffs filed a Motion for Preliminary Injunction,
seeking to have construction halted on the new tower until the property fully
complies with the ADA. The Company removed the action to the United States
District Court in Nevada and it is now styled as Disabled Rights Action
Committee v. Stratosphere Gaming Corp., Case No. CV-S-01-0162-RAH (PAL). The
Company has moved to dismiss one of the counts of plaintiffs' Complaint. The
Company also opposed plaintiff's Motion for Preliminary Injunction. On March 7,
2001, the Court held a hearing on the plaintiffs' Motion for Preliminary
Injunction and denied the motion, focusing upon what the Court believed to be
the plaintiffs' lack of irreparable injury. At present, the parties are awaiting
the Court's ruling on the Motion to Dismiss. If the case is not resolved by
motion or by some other method, discovery will then commence. While management
intends to vigorously contest this action, at this time it is not possible to
estimate the eventual outcome of this matter.

     In addition, in the ordinary course of business, the Company is party to
various legal actions. In management's opinion, the ultimate outcome of such
legal actions will not have a material effect on the results of operations or
the financial position of the Company.

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

     None.

                                        14
<PAGE>   15

                                    PART II

ITEM 5.  MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

     Prior to February 24, 1994, there was no established trading market for the
Company's securities. On February 24, 1994, the Company's Common Stock ("Old
Common Stock") commenced trading on the NASDAQ Small Cap Market under the symbol
TOWV and the Pacific Stock Exchange under the symbol TOW. On June 24, 1994, the
Old Common Stock commenced trading on the NASDAQ National Market. The symbol was
changed to TOWVQ to indicate that the Company had begun operating under
Bankruptcy Proceedings on January 27, 1997. The Old Common Stock was delisted
from the Pacific Stock Exchange on December 3, 1996, and was delisted from the
National Market System on March 31, 1997, and began trading on the over the
counter bulletin board. All trading of the Company's Old Common Stock ceased as
of October 14, 1998, when such Old Common Stock was canceled pursuant to the
Restated Second Amended Plan. On October 14, 1998, pursuant to the Restated
Second Amended Plan, the Company issued 2,030,000 shares of New Common Stock
("New Common Stock"). There has been extremely limited trading volume of the New
Common Stock since October 14, 1998. During 1999 and 2000, prices as reported on
the over the counter bulletin board have ranged from $20 to $33 in 1999 and from
$21 to $47 in 2000.

     The Company has never paid any cash dividends with respect to the Old
Common Stock or New Common Stock. The Company had eight stockholders of record
as of January 24, 2001 for New Common Stock.

ITEM 6.  SELECTED CONSOLIDATED FINANCIAL DATA

STATEMENT OF OPERATIONS DATA

<TABLE>
<CAPTION>
                                             SUCCESSOR COMPANY                                  PREDECESSOR COMPANY
                              -----------------------------------------------     -----------------------------------------------
                                 FISCAL           FISCAL        SEPTEMBER 28,     DECEMBER 29,         FISCAL           FISCAL
                               YEAR ENDED       YEAR ENDED      1998 THROUGH      1997 THROUGH       YEAR ENDED       YEAR ENDED
                              DECEMBER 31,     DECEMBER 26,     DECEMBER 27,      SEPTEMBER 27,     DECEMBER 28,     DECEMBER 29,
                                  2000             1999             1998              1998              1997             1996
                              ------------     ------------     -------------     -------------     ------------     ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                           <C>              <C>              <C>               <C>               <C>              <C>
Net revenues(a).............    $132,762         $123,227          $30,586          $ 99,386          $137,516        $ 108,739
Costs and expenses..........     125,387          120,035           30,636            93,802           134,711          439,905(b)
                                --------         --------          -------          --------          --------        ---------
Income (loss) from
  operations................       7,375            3,192              (50)            5,584             2,805         (331,166)
Income taxes and other
  expense...................       2,547              972              134             2,022            22,120           17,677
                                --------         --------          -------          --------          --------        ---------
Income (loss) before
  extraordinary item........       4,828            2,220             (184)            3,562           (19,315)        (348,843)
                                --------         --------          -------          --------          --------        ---------
Extraordinary item:
  Gain on pre-petition debt
    discharge...............          --               --               --           153,437(c)             --               --
                                --------         --------          -------          --------          --------        ---------
Net income (loss)...........    $  4,828         $  2,220          $  (184)         $156,999          $(19,315)       $(348,843)
                                ========         ========          =======          ========          ========        =========
Basic income (loss) per
  common share:
  Before extraordinary
    item....................    $   2,38         $   1.09          $ (0.09)                *          $  (0.33)       $   (6.00)
Extraordinary item..........          --               --               --                 *                --               --
                                --------         --------          -------          --------          --------        ---------
Net income (loss) per
  share.....................    $   2.38         $   1.09          $ (0.09)                *          $  (0.33)       $   (6.00)
                                ========         ========          =======          ========          ========        =========
Weighted average common
  shares outstanding........       2,030            2,030            2,030                 *            58,393           58,135
                                ========         ========          =======          ========          ========        =========
</TABLE>

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

*    Earnings per share is not presented for the nine months ended September 27,
     1998 because such presentation would not be meaningful. The Old Common
     Stock was canceled and the New Common Stock was issued pursuant to the
     Restated Second Amended Plan.

                                        15
<PAGE>   16

BALANCE SHEET DATA

<TABLE>
<CAPTION>
                                         SUCCESSOR COMPANY                            PREDECESSOR COMPANY
                             ------------------------------------------   -------------------------------------------
                             DECEMBER 31,   DECEMBER 26,   DECEMBER 27,   SEPTEMBER 27,   DECEMBER 28,   DECEMBER 29,
                                 2000           1999           1998           1998            1997           1996
                             ------------   ------------   ------------   -------------   ------------   ------------
(IN THOUSANDS)
<S>                          <C>            <C>            <C>            <C>             <C>            <C>
Total Assets...............    $210,376       $157,488       $155,546       $165,109        $155,976       $181,080(b)
Capital lease                     5,778          8,445          8,979         11,150              --(d)      19,540
  obligations..............
Notes Payable..............      39,750             87            242            288             444(d)     253,000
</TABLE>

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

(a)  The Company began operations on April 29, 1996.

(b)  The reduction of total assets and increase in costs and expenses is the
     result of a $295.9 million write-down of fixed assets recorded pursuant to
     adoption of Statement of Financial Accounting Standards No. 121,
     "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
     Assets to Be Disposed Of," for the year ended December 29, 1996.

(c)  Represents gain on the discharge of pre-petition debt pursuant to the
     Restated Second Amended Plan becoming effective.

(d)  As a result of the restructuring and implementation of the guidance
     provided by the AICPA Statement of Position 90-7 "Financial Reporting by
     Entities in Reorganization Under the Bankruptcy Code," all pre-petition
     liabilities including long-term debt and obligations under capital leases
     have been included in liabilities subject to compromise from the Petition
     Date to the Effective Date. Liabilities subject to compromise totaled
     $299,208,988 on December 28, 1997.

ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
         RESULTS OF OPERATIONS

     The following discussion contains trend information and other
forward-looking statements that involve a number of risks and uncertainties. The
actual results of the Company could differ materially from the Company's
historical results of operations and those discussed in the forward-looking
statements.

OVERVIEW

     The Company operates an integrated casino, hotel, retail, and entertainment
facility and a 1,149 foot, free-standing observation tower in Las Vegas, Nevada.
As of March 12, 2001, the operations included approximately 1,558 slot machines,
45 table games, a race and sports book, keno lounge, 1,444 hotel rooms and six
themed restaurants.

RESTRUCTURING

     On January 27, 1997 ("Petition Date"), Stratosphere Corporation and its
wholly-owned subsidiary Stratosphere Gaming Corp. ("SGC" and collectively with
Stratosphere Corporation, the "Debtors") filed voluntary petitions for Chapter
11 Reorganization pursuant to the United States Bankruptcy Code. As of that
date, the United States Bankruptcy Court for the District of Nevada ("Bankruptcy
Court") assumed jurisdiction over the assets of Stratosphere Corporation and
SGC. Stratosphere Corporation and SGC were acting as debtors-in-possession on
behalf of their respective bankrupt estates, and were authorized as such to
operate their business subject to Bankruptcy Court supervision. On June 9, 1998,
the Bankruptcy Court entered an order (the "Confirmation Order") confirming the
Restated Second Amended Plan of Reorganization filed by the Debtors (the
"Restated Second Amended Plan"). On October 14, 1998, the Restated Second
Amended Plan became effective. All material conditions precedent to the Restated
Second Amended Plan becoming binding were satisfied on or before September 27,
1998. Accordingly, the Company has reflected the effect of the Restated Second
Amended Plan as of September 27, 1998.

     As a result of the restructuring, the Company implemented the guidance
provided by the American Institute of Certified Public Accountants Statement of
Position 90-7 "Financial Reporting By Entities In Reorganization Under The
Bankruptcy Code" ("AICPA SOP 90-7") and as such, adopted "fresh start reporting"
as of September 27, 1998. The Company's emergence from its Chapter 11
proceedings resulted in a new reporting entity with no retained earnings or
accumulated deficit as of September 27, 1998. Accordingly,

                                        16
<PAGE>   17

the Company's consolidated financial statements for periods prior to September
27, 1998 are not comparable to consolidated financial statements presented on or
subsequent to September 27, 1998. Column headings have been included on the
accompanying Consolidated Statements of Operations and Consolidated Statement of
Cash Flows to distinguish between the predecessor and successor entities.

     Pursuant to the Restated Second Amended Plan becoming effective on October
14, 1998, the Company canceled all prior equity interests (including the 58.4
million outstanding shares of Common Stock, options and warrants) and exchanged
2,030,000 shares of New Common Stock for the secured portion of the 14 1/4%
First Mortgage Notes (estimated at $120.6 million). Approximately 89.6% of the
New Common Stock was issued to Carl C. Icahn related entities. The remaining
portion of the 14 1/4% First Mortgage Notes claim (approximately $104 million),
the balance of the note due Grand Casinos, Inc. (approximately $52.4 million)
and all other general unsecured claims will be discharged in exchange of a cash
payment of $6.0 million. Certain priority claims (estimated at $.9 million) were
paid in full. The discharge and settlement of these claims resulted in a gain of
$153.4 million, which was reflected as an extraordinary item on the September
27, 1998, consolidated statements of operations. The amount of the gain was
based on the Company's estimate of the amount of claims that will ultimately be
allowable by the Bankruptcy Court, and was based on the total of actual claims
filed. In the event additional unsecured claims are allowed by the Bankruptcy
Court, it will not increase the Company's cash required for full debt discharge.
A portion of the $6.9 million to be distributed has been reserved for potential
future settlement of unsecured claim disputes (approximately $1.9 million). The
only significant claim dispute was the rejection claim filed by Strato-Retail
(see Item 3. Legal Proceedings). Effective September 30, 2000, the Company and
Strato-Retail executed a Settlement Agreement, Purchase and Sale Agreement and
Mutual General Release, whereby the parties resolved all pending disputes, among
other things, and dismissed the above referenced appeal and adversary complaint.

RESULTS OF OPERATIONS

     The following discussion regarding the operating results of the Company
will be a comparison of fiscal years 2000 to 1999 and 1999 to 1998. The
comparison of operating results for fiscal year 1999 and 1998 is performed by
comparing the operating results for the 1998 combined pre and
post-reorganization periods to the actual results of fiscal year 1999 since
operations have remained similar and such comparison would not be misleading.

<TABLE>
<CAPTION>
                                                                                   COMBINED POST AND
                                                        SUCCESSOR COMPANY          PRE-REORGANIZATION
                                                   ----------------------------    ------------------
                                                   FISCAL YEAR     FISCAL YEAR        FISCAL YEAR
                                                      ENDED           ENDED              ENDED
                                                   DECEMBER 31,    DECEMBER 26,       DECEMBER 27,
                                                       2000            1999               1998
                                                   ------------    ------------    ------------------
(IN THOUSANDS)                                                                        (UNAUDITED)
<S>                                                <C>             <C>             <C>
REVENUES:
  Casino.......................................      $ 53,104        $ 48,491           $ 55,534
  Hotel........................................        26,168          24,640             23,998
  Food and beverage............................        36,157          33,230             33,760
  Tower, retail and other income...............        28,612          26,893             29,296
                                                     --------        --------           --------
Gross Revenues.................................       144,041         133,254            142,588
  Less: Promotional allowances.................        11,279          10,027             12,616
                                                     --------        --------           --------
Net Revenues...................................       132,762         123,227            129,972
                                                     --------        --------           --------
</TABLE>

                                        17
<PAGE>   18

<TABLE>
<CAPTION>
                                                                                   COMBINED POST AND
                                                        SUCCESSOR COMPANY          PRE-REORGANIZATION
                                                   ----------------------------    ------------------
                                                   FISCAL YEAR     FISCAL YEAR        FISCAL YEAR
                                                      ENDED           ENDED              ENDED
                                                   DECEMBER 31,    DECEMBER 26,       DECEMBER 27,
                                                       2000            1999               1998
                                                   ------------    ------------    ------------------
(IN THOUSANDS)                                                                        (UNAUDITED)
<S>                                                <C>             <C>             <C>
COSTS AND EXPENSES:
  Casino.......................................        30,009          28,079             30,424
  Hotel........................................        14,088          13,843             12,636
  Food and beverage............................        27,074          25,880             25,554
  Other operating expenses.....................        13,183          11,486             13,373
  Depreciation and amortization................         8,582           8,337              8,108
  Selling, general and administrative..........        32,451          32,410             34,343
                                                     --------        --------           --------
     Total Costs and Expenses..................       125,387         120,035            124,438
                                                     --------        --------           --------
INCOME FROM OPERATIONS.........................         7,375           3,192              5,534
                                                     --------        --------           --------
OTHER INCOME (EXPENSE):
  Interest income..............................         1,047             741                203
  Interest expense.............................        (1,057)           (867)            (1,532)
  Loss on sale of assets.......................            (4)            (71)               (72)
                                                     --------        --------           --------
     Total Other Expense, net..................           (14)           (197)            (1,401)
                                                     --------        --------           --------
INCOME BEFORE REORGANIZATION ITEMS, INCOME
  TAXES AND EXTRAORDINARY ITEM.................         7,361           2,995              4,133
REORGANIZATION ITEMS...........................            --              --               (754)
                                                     --------        --------           --------
INCOME BEFORE INCOME TAXES AND
  EXTRAORDINARY ITEM...........................         7,361           2,995              3,379
PROVISION FOR INCOME TAXES.....................         2,533             775                 --
                                                     --------        --------           --------
INCOME BEFORE EXTRAORDINARY ITEM...............         4,828           2,220              3,379
EXTRAORDINARY GAIN ON PREPETITION DEBT
  DISCHARGE....................................            --              --            153,437
                                                     --------        --------           --------
NET INCOME.....................................      $  4,828        $  2,220           $156,816
                                                     ========        ========           ========
</TABLE>

COMPARISON OF OPERATING RESULTS FOR THE FISCAL YEAR 2000 AND 1999

REVENUES

     Casino revenues increased $4.6 million (10%) from $48.5 million in fiscal
year 1999 to $53.1 million for fiscal year 2000. Slot revenues increased $3.2
million from $36.0 million in fiscal year 1999 to $39.3 million for fiscal year
2000. Management attributes this increase to decreased disruption caused by
escalator and race and sports book construction in 1999. Increased hotel
occupancy also contributed to the increase. Race and sports book revenues
increased $1.4 million from fiscal year 1999 to fiscal year 2000. The race and
sports book opened in August, 1999.

     Hotel revenues increased $1.6 million (6%) from $24.6 million in fiscal
year 1999 to $26.2 million for fiscal year 2000. Hotel occupancy increased from
92.1% in 1999 to 95.8% in 2000 and was the major contributing factor for the
increase in hotel revenues. Hotel Average Daily Room Rate ("ADR") decreased from
$51.87 in fiscal year 1999 to $51.42 in fiscal year 2000.

     Food and beverage revenues increased $2.9 million (9%) from $33.2 million
in fiscal year 1999 to $36.1 million for fiscal year 2000. Increased hotel
occupancy and food and beverage prices were the major contributors to the
overall increase in food and beverage revenues in 2000.

                                        18
<PAGE>   19

     Tower, retail and other revenues increased $1.7 million from $26.9 million
in fiscal year 1999 to $28.6 million for fiscal year 2000. An increase in
entertainment revenues from aggressive showroom marketing and pricing
contributed $1.5 million to the overall increase in Tower, retail and other
revenues.

     Promotional allowances increased $1.3 million (12%) from $10.0 million in
fiscal 1999 to $11.3 million for fiscal year 2000. Management attributes the
increase to direct marketing efforts and special events offered to casino guests
intended to increase hotel and showroom occupancy.

     Management expects to complete the Hotel Expansion, which includes an
additional 1,002 rooms, a 350-seat coffee shop and related amenities by late
June 2001. Accordingly, management expects casino, hotel, food, beverage, tower,
retail, other revenues and promotional allowances to increase in 2001; however
management also expects the hotel occupancy percentage and ADR to decline in
2001 as a result of the additional rooms.

COST AND EXPENSES

     Casino operating costs increased $1.9 million (7%) from $28.1 million in
fiscal year 1999 to $30.0 million in fiscal year 2000. Additional gaming
activity, including having the race and sports book open the entire year, lead
to a $.8 million increase in labor costs. The Company also increased the number
of slot machines on the floor, which are provided by manufacturers with
participation agreements. In 2000, this increased slot lease percentage costs
$.6 million from $1.6 million in fiscal year 1999 to $2.2 million in fiscal year
2000. Costs from casino marketing promotional events and the costs of providing
complimentary rooms, food and beverage increased $.5 million in fiscal year
2000.

     Hotel operating costs increased $.3 million (2%) from $13.8 million in
fiscal year 1999 to $14.1 million in fiscal year 2000. Increased hotel occupancy
lead to a $.7 million increase in labor costs while room complimentary expenses
decreased $.4 million.

     Food and beverage costs increased $1.2 million (5%) from $25.9 million in
fiscal year 1999 to $27.1 million in fiscal year 2000. Increased food and
beverage revenues lead to a $.8 million increase in food costs and a $.7 million
increase in labor costs.

     Other operating expenses increased $1.7 million (15%) from $11.5 million in
fiscal year 1999 to $13.2 million in fiscal year 2000. The costs of providing
casino guests with complimentary entertainment and beverages increased $1.4
million and entertainer fees increased $.3 million in fiscal year 2000.

     In connection with the opening of the Hotel Expansion, management expects
casino, hotel, food, beverage and certain other operating expenses to increase
accordingly.

OTHER FACTORS IMPACTING EARNINGS

     Interest income increased $.3 million (41%) from $.7 million in fiscal year
1999 to $1.0 million for fiscal year 2000 due to investment of increased cash
balances.

     Interest expense increased $.2 million (22%) from $.9 million in fiscal
year 1999 to $1.1 million in fiscal year 2000. Interest from the Company's notes
associated with the purchase of the retail lease from Strato-Retail increased
expenses $.3 million while amortization of deferred financing costs decreased
$.1 million for fiscal year 2000. Management expects interest expense to
increase significantly in 2001 as additional notes are secured for financing the
Company's Hotel Expansion.

COMPARISON OF OPERATING RESULTS FOR THE FISCAL YEARS 1999 AND 1998

REVENUES

     Casino revenues of $48.5 million for fiscal year 1999 were $7.0 million
(13%) less than fiscal year 1998. Management attributes the continued decline in
casino revenues to increased competition with the opening of four new mega
resorts on the Las Vegas Strip (Bellagio, Mandalay Bay, Venetian and Paris),
which resulted in a decline in overall visitation to the property. The casino
product was enhanced with the addition of the new

                                        19
<PAGE>   20

5,000 square foot race and sports book, deli and entertainment lounge and bar on
August 15, 1999. Casino marketing efforts have been directed toward the
development of several new table games, slots and race and sports book
promotions targeting value conscious casino customers.

     Tower, retail and other revenues of $26.9 million for fiscal year 1999 were
$2.4 million (8%) less than the same period in 1998. Tower visitation (including
the Top of The World Dining) totaled 2.2 million during fiscal year 1999, as
compared to 2.4 million for the same period in 1998. The decline in Tower
visitation (10%) is attributable to the increase in new attractions on the Las
Vegas Strip. In addition, the Tower revenues and visitation was negatively
impacted with the closure of the "High Roller" roller coaster for maintenance
during April 1999.

COSTS AND EXPENSES

     Promotional allowances decreased from $12.6 million during fiscal year 1998
to $10.0 million for the same period in 1999. The reduction in promotional
allowances was the result of less direct mail promotions that include room, food
and beverage being offered to guests on a complimentary basis.

     Casino operating costs declined approximately 8% from $30.4 million for the
fiscal year 1998 to $28.1 million for the same period in 1999. The majority of
the decline in casino operating expenses resulted from a $2.0 million reduction
in the cost of providing complimentary room, food and beverage to casino guests
and a $.4 million reduction in bad debt expense.

     Hotel operating costs increased 10% from $12.6 million for fiscal year 1998
to $13.8 million for 1999. Approximately $1.2 million of the increase is due to
fewer room nights being provided to casino guests on a complimentary basis, the
cost of which is charged to casino operations.

     Other operating expenses decreased 14% from $13.4 million for fiscal year
1998 to $11.5 million for 1999. The majority of this reduction is due to reduced
entertainer fees and payroll costs associated with the showroom and Tower
operations.

     Selling, general and administrative expenses decreased 6% from $34.3
million for fiscal year 1998 to $32.4 million for 1999. The reduction was the
result of the implementation of a lower cost advertising campaign and a
reduction in other fixed expenses.

OTHER FACTORS IMPACTING EARNINGS

     Interest income was approximately $.7 million for fiscal year 1999.
Interest income earned during the same period in 1998 was approximately $1.0
million, of which $.8 million was classified as a Reorganization item.

     Interest expense decreased 43% from $1.5 million for fiscal year 1998 to
$.9 million for 1999. The decrease was due to a reduction in interest associated
with the Company's capital lease obligations. The Company refinanced its capital
lease obligations in the amount of $10.0 million on May 28, 1999. The current
rate of interest is 8.5%.

     The Company recorded expense from Reorganization items totaling $.8 million
during fiscal year 1998. Since the Effective Date, any unaccrued professional
fees related to the reorganization will be classified as a selling, general and
administrative expense. There were no such items incurred during fiscal year
1999.

     The Company recorded a provision for income taxes of $.8 million for fiscal
year 1999. In the event the Company is able to utilize any of its deferred tax
assets in future periods, any such tax benefit will be reported as a direct
addition to contributed capital.

     The Company recorded a $153.4 million extraordinary gain on the discharge
of debt associated with the Company's emergence from Chapter 11 bankruptcy
proceedings in fiscal year 1998. There were no extraordinary gains or losses
recorded during fiscal year 1999.

                                        20
<PAGE>   21

LIQUIDITY AND CAPITAL RESOURCES

DEBT

     On July 21, 2000, AREH and NYBOR, provided $1,138,000 and $862,000,
respectively, to the Company to fund the construction of the Hotel Expansion.
Each note payable was an unsecured, demand note paying 9.5% interest. Both of
the notes were paid in full on September 12, 2000.

     In September 2000, the Company obtained a commitment for a construction
loan in the amount of $73,000,000 from AREH in order to finance the hotel
construction. The construction loan includes a reserve for interest during
construction of up to $5,000,000, which will terminate upon receipt of the
certificate of occupancy on the hotel project. Beginning with the third month
thereafter, the loan shall be repaid in equal monthly installments based upon a
twenty (20) year amortization schedule and continuing through and including
March 31, 2002, when all remaining balances shall be due. Interest shall begin
to accrue on each distribution received at the fluctuating rate per annum equal
to the sum of (i) three hundred (300) basis points plus (ii) the LIBOR rate. A
commitment fee of 1% or $730,000 is payable upon issuance of an acceptable
commitment to the Company. The loan is to be collateralized by a first mortgage
against the real estate, including assignment of all development architectural,
engineering and construction rights and contracts.

     On September 1, 2000, September 12, 2000, October 20, 2000, November 9,
2000 and December 18, 2000, AREH provided funding of $2.0 million, $5.0 million,
$4.75 million, $5.5 million and $10.0 million, respectively, to the Company to
fund additional Phase II construction and to payoff the $1,138,000 and $862,000
demand notes referred to above. Each note payable is an unsecured, demand note
paying 9.5% interest. These notes have been classified as long-term as bridge
financing has been secured from AREH to complete the Hotel Expansion.

     On October 4, 2000, the Company borrowed $12,500,112 under an unsecured,
demand note to acquire the property under the Master Lease from Strato-Retail.
AREH initially provided the funding for this transaction with a 9.5% interest
rate. Similar to the construction loan, beginning with the third month after
receipt of the certificate of occupancy on the Hotel Expansion the loan shall be
repaid in equal monthly installments based upon a twenty (20) year amortization
schedule and continuing through and including April 4, 2002, when all remaining
balances shall be due. Interest shall begin to accrue on each distribution
received at the fluctuation rate per annum equal to the sum of (i) three hundred
(350) basis points plus (ii) the LIBOR rate. An extension fee of 1% or $125,000
is payable upon issuance of an acceptable commitment to the Company. The loan is
to be collateralized by a second mortgage against the real estate.

     On April 30, 1999, the Company made a final payment of approximately $6.9
million on its then existing capital lease obligation.

     On May 28, 1999, the Company entered into a new $10.0 million capital lease
("New Capital Lease Obligation") in which certain existing gaming and other
equipment was financed over a thirty-six month period. Interest will be
calculated based on the LIBOR rate for each period plus 2.5%. The current rate
of interest for the period ended December 31, 2000, was 9.25%. A $2.0 million
balloon payment will be due upon conclusion of the thirty-six month term. The
New Capital Lease Obligation contains certain covenants that effectively would
create an event of default if the current controlling stockholder of the Company
were to cease to be the beneficial owner of at least 51% of the Company's Common
Stock. The covenants also restrict the Company from incurring more than $5.0
million in additional debt without the consent of the creditors of the New
Capital Lease Obligation. In connection with the funding provided by AREH, on
November 20, 2000, the Company obtained a waiver on the debt covenant
restriction.

SHAREHOLDERS' EQUITY

     On October 4, 1999, AREH repurchased 985,286 shares of the Company from
entities owned or controlled by Carl C. Icahn. On March 24, 2000, AREH purchased
50,000 shares of the Company's common stock from NYBOR, an entity controlled by
Mr. Icahn. Upon completion of the transaction, Mr. Icahn continues to control
approximately 89.6% of the Company's 2,030,000 Common Stock shares outstanding.

     The Company has not implemented a stock option plan and has not paid any
dividends.

                                        21
<PAGE>   22

CASH FLOW, WORKING CAPITAL AND CAPITAL EXPENDITURES

     The Company had unrestricted cash balances of $23.4 million as of December
31, 2000. The Company has relied on unrestricted cash balances and its ability
to generate cash flow from operations to fund its working capital needs.

     The Company generated $14.6 million from operating activities and borrowed
$41.8 million from related parties in fiscal year 2000. These funds were used to
pay $28.1 million for construction of the Hotel Expansion, $12.5 million for the
acquisition of the property under the Master Lease from Strato-Retail, $3.8
million for capital expenditures, $2.7 million for payments on the New Capital
Lease Obligation and $2.0 million to repay short-term notes to related parties.

     Management anticipates that recurring capital expenditures during fiscal
year 2001 will be approximately $4.3 million and will be funded from operating
activities.

     In mid-1996, Stratosphere Corporation suspended construction of the
1,002-room hotel tower, which had reached a height of about 14 stories. In April
2000, construction was resumed to complete the unfinished hotel tower for a
total construction budget of $65.0 million. The tower project includes 1,002 new
guestrooms and guest amenities such as a 67,000-square foot pool and recreation
area with a new snack and cocktail bar, private cabanas and a large spa. The new
24-floor tower will also house a 350-seat coffee shop, new porte-cochere and
valet parking entrance, gift ship and new tour bus entrance and lobby. The
Company is also refurbishing, expanding and upgrading the existing Stratosphere
Buffet, Montana's Steak House and Roxy's 50's Diner for an estimated
construction budget of $3.0 million.

     In September 2000, the Company obtained a commitment for a construction
loan in the amount of $73.0 million from American Real Estate Holdings, L.P.
("AREH") a wholly-owned affiliate of American Real Estate Partners, L.P.
("AREP"), in order to finance this construction. AREP is a publicly held entity,
which is 85% owned by Mr. Icahn. AREP and Mr. Icahn own 89.6% of Stratosphere.

     The construction loan includes a reserve for interest during construction
up to $5.0 million, which will terminate upon receipt of the certificate of
occupancy on the project. Beginning with the third month thereafter, the loan
should be repaid in equal monthly installments based upon a twenty (20) year
amortization schedule and continuing through and including March 31, 2002, when
all remaining balances shall be due. Interest shall begin to accrue on each
distribution received at the fluctuating rate per annum equal to the sum of (i)
three hundred (300) basis points plus (ii) the LIBOR rate. A commitment fee of
1% or $730,000 is payable upon issuance of an acceptable commitment to the
Company. The loan is to be collateralized by a first mortgage against the real
estate including assignment of all development architectural, engineering and
construction rights and contracts.

YEAR 2000

     The Company has completed an extensive program to ensure its computer
systems are Year 2000 compliant and has experienced no significant problems to
date associated with the Year 2000 issue. Additionally, to the best of
management's knowledge, there are no claims pending or threatened against the
Company arising from the Year 2000 issue.

OTHER

     On March 8, 2000, California residents voted to expand Native American
gaming operations within that state. The Native American gaming expansion could
result in up to 43,000 slot machines on 57 tribal reservations. The Company
estimates that approximately 35% of its hotel occupancy is from guests traveling
from southern California. The potential proliferation of gaming in southern
California could have a material adverse effect on the Company's business. In
addition, any limitations imposed on college sports betting could adversely
impact future revenues of the Company.

                                        22
<PAGE>   23

PRIVATE SECURITIES LITIGATION REFORM ACT

     The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for forward-looking statements. Certain information included in this
Form 10-K and other materials filed or to be filed by the Company with the
Securities and Exchange Commission (as well as information included in oral
statements or other written statements made or to be made by the Company)
contains statements that are forward-looking, such as statements relating to
plans for future expansion, future construction costs and other business
development activities as well as other capital spending, financing sources and
the effects of regulation (including gaming and tax regulation) and competition.
Such forward-looking information involves important risks and uncertainties that
could significantly affect anticipated results in the future and, accordingly,
such results may differ from those expressed in any forward-looking statements
made by or on behalf of the Company. These risks and uncertainties include, but
are not limited to, those relating to development and construction activities,
dependence on existing management, leverage and debt service (including
sensitivity to fluctuations in interest rates), domestic or global economic
conditions, changes in federal or state tax laws or the administration of such
laws and changes in gaming laws or regulations (including the legalization of
gaming in certain jurisdictions).

ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     The United States Securities and Exchange Commission requires that
registrants include information about primary market risk exposure relating to
financial instruments. Management does not believe that changes in interest
rates would have a material effect on the Company's financial instruments.

                                        23
<PAGE>   24

ITEM 8.  FINANCIAL STATEMENTS

                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
                                                              PAGE
                                                              ----
<S>                                                           <C>
Report of Independent Auditors -- December 31, 2000.........   25
Report of Independent Public Accountants -- December 26,
  1999......................................................   26
Consolidated Balance Sheets at December 31, 2000 and
  December 26, 1999.........................................   27
Consolidated Statements of Operations for fiscal year ended
  December 31, 2000 (Successor Company), December 26, 1999
  (Successor Company), for the period September 28, 1998
  through December 27, 1998 (Successor Company) and for the
  period December 29, 1997 through September 27, 1998
  (Predecessor Company).....................................   28
Consolidated Statements of Shareholders' Equity (Deficit)
  for the year ended December 31, 2000 (Successor Company),
  December 26, 1999 (Successor Company), September 28, 1998
  through December 27, 1998 (Successor Company) and for the
  period, December 29, 1997 through September 27, 1998
  (Predecessor Company).....................................   29
Consolidated Statements of Cash Flows for fiscal year ended
  December 31, 2000 (Successor Company), December 26, 1999
  (Successor Company), for the period September 28, 1998
  through December 27, 1998 (Successor Company) and for the
  period December 29, 1997 through September 27, 1998
  (Predecessor Company).....................................   30
Notes to Consolidated Financial Statements..................   33
</TABLE>

                                        24
<PAGE>   25

                         REPORT OF INDEPENDENT AUDITORS

The Board of Directors and Shareholders
Stratosphere Corporation:

     We have audited the accompanying consolidated balance sheet of Stratosphere
Corporation (a Delaware Corporation) and subsidiaries as of December 31, 2000,
and the related consolidated statements of operations, shareholders' equity
(deficit), and cash flows for the year then ended. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audit.

     We conducted our audit in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.

     In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Stratosphere
Corporation and subsidiaries as of December 31, 2000, and the results of their
operations and their cash flows for the year then ended, in conformity with
accounting principles generally accepted in the United States of America.

                                          KPMG LLP

Phoenix, Arizona
February 23, 2001

                                        25
<PAGE>   26

                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Board of Directors and Shareholders
of Stratosphere Corporation:

     We have audited the accompanying consolidated balance sheets of
Stratosphere Corporation (a Delaware corporation) and subsidiaries as of
December 26, 1999 (the "Successor Company" see Note 2), and the related
consolidated statements of operations, shareholders' equity (deficit) and cash
flows for the years ended December 26, 1999 and the three months ended December
27, 1998 (Successor Company) and the nine months ended September 27, 1998
(Predecessor Company). These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.

     We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

     As more fully described in Note 2 to the consolidated financial statements,
effective October 14, 1998, the Company emerged from protection under Chapter 11
of the U.S. Bankruptcy Code pursuant to a Reorganization Plan, which was
confirmed by the Bankruptcy Court on June 9, 1998. In accordance with AICPA
Statement of Position 90-7, the Company adopted "Fresh Start Reporting" whereby
its assets, liabilities and new capital structure were adjusted to reflect
estimated fair values as of September 27, 1998. As a result, the consolidated
financial statements for the periods subsequent to September 27, 1998 reflect
the Successor Company's new basis of accounting and are not comparable to the
Predecessor Company's pre-reorganization consolidated financial statements.

     In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Stratosphere
Corporation and subsidiaries as of December 26, 1999 (Successor Company), and
the results of their operations and their cash flows for the year ended December
26, 1999, and the three months ended December 27, 1998 (Successor Company), and
the nine months ended September 27, 1998, (Predecessor Company), in conformity
with accounting principles generally accepted in the United States.

                                          ARTHUR ANDERSON LLP

Las Vegas, Nevada
February 11, 2000

                                        26
<PAGE>   27

                   STRATOSPHERE CORPORATION AND SUBSIDIARIES

                          CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                              DECEMBER 31,    DECEMBER 26,
                                                                  2000            1999
                                                              ------------    ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                                                           <C>             <C>
ASSETS
Current Assets:
  Cash and cash equivalents.................................    $ 23,441        $ 16,422
  Cash and cash equivalents-restricted......................       1,926           1,926
  Marketable securities.....................................       4,459           3,459
  Investments-restricted....................................         988           2,278
  Accounts receivable, net..................................       2,592           1,414
  Related party receivable..................................          73              --
  Other current assets......................................       5,191           5,284
                                                                --------        --------
Total Current Assets........................................      38,670          30,783
                                                                --------        --------
Property and Equipment, Net.................................     166,619         123,461
                                                                --------        --------
Other Assets:
  Deferred financing costs-net..............................         137             244
  Lessee incentive..........................................       1,950              --
  Other receivable..........................................       3,000           3,000
                                                                --------        --------
Total Other Assets..........................................       5,087           3,244
                                                                --------        --------
TOTAL ASSETS................................................    $210,376        $157,488
                                                                ========        ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
  Accounts payable-trade....................................    $  1,599        $  1,203
  Accounts payable-construction.............................       6,943              --
  Current portion of long-term note payable.................          --              87
  Current portion of capital lease obligations..............       2,667           2,667
  Current portion of notes payable to related party.........         713              --
  Accrued payroll and related expenses......................       4,912           5,212
  Other accrued expenses....................................      12,744          13,427
                                                                --------        --------
Total Current Liabilities...................................      29,578          22,596
                                                                --------        --------
Long-Term Liabilities:
  Accrued lessee incentive..................................       1,950              --
  Capital lease obligations-less current portion............       3,111           5,778
  Notes payable to related party-less current portion.......      39,037              --
                                                                --------        --------
Total Long-Term Liabilities.................................      44,098           5,778
                                                                --------        --------
TOTAL LIABILITIES...........................................      73,676          28,374
                                                                --------        --------
Commitments and Contingencies (Notes 14 and 15)
Shareholders' Equity:
  Preferred stock, $.01 par value; authorized 3,000,000; no
    shares issued...........................................          --              --
  Common stock, $.01 par value; authorized 10,000,000
    shares; issued and outstanding 2,030,000................          20              20
  Additional paid-in-capital................................     129,816         127,058
  Retained earnings.........................................       6,864           2,036
                                                                --------        --------
Total Shareholders' Equity..................................     136,700         129,114
                                                                --------        --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY..................    $210,376        $157,488
                                                                ========        ========
</TABLE>

                See notes to consolidated financial statements.
                                        27
<PAGE>   28

                   STRATOSPHERE CORPORATION AND SUBSIDIARIES
                     CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                                                                              PREDECESSOR
                                                                            SUCCESSOR COMPANY                   COMPANY
                                                               -------------------------------------------   -------------
                                                               FISCAL YEAR    FISCAL YEAR    SEPTEMBER 28,   DECEMBER 29,
                                                                  ENDED          ENDED       1998 THROUGH    1997 THROUGH
                                                               DECEMBER 31,   DECEMBER 26,   DECEMBER 27,    SEPTEMBER 27,
                                                                   2000           1999           1998            1998
                                                               ------------   ------------   -------------   -------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                                                            <C>            <C>            <C>             <C>
REVENUES:
  Casino....................................................     $ 53,104       $ 48,491        $13,147        $ 42,387
  Hotel.....................................................       26,168         24,640          5,929          18,069
  Food and beverage.........................................       36,157         33,230          8,328          25,433
  Tower, retail and other income............................       28,612         26,893          6,397          22,899
                                                                 --------       --------        -------        --------
Gross Revenues..............................................      144,041        133,254         33,801         108,788
  Less: Promotional allowances..............................       11,279         10,027          3,215           9,401
                                                                 --------       --------        -------        --------
NET REVENUES................................................      132,762        123,227         30,586          99,387
                                                                 --------       --------        -------        --------
COSTS AND EXPENSES:
  Casino....................................................       30,009         28,079          7,275          23,149
  Hotel.....................................................       14,088         13,843          3,268           9,368
  Food and beverage.........................................       27,074         25,880          6,531          19,023
  Other operating expenses..................................       13,183         11,486          3,158          10,215
  Depreciation and amortization.............................        8,582          8,337          2,116           5,993
  Selling, general and administrative.......................       32,451         32,410          8,288          26,055
                                                                 --------       --------        -------        --------
    Total Costs and Expenses................................      125,387        120,035         30,636          93,803
                                                                 --------       --------        -------        --------
INCOME (LOSS) FROM OPERATIONS...............................        7,375          3,192            (50)          5,584
                                                                 --------       --------        -------        --------
OTHER INCOME (EXPENSE):
  Interest income...........................................        1,047            741            203              --
  Interest expense..........................................       (1,057)          (867)          (307)         (1,226)
  Loss on sale of assets....................................           (4)           (71)           (30)            (42)
                                                                 --------       --------        -------        --------
    Total Other Expense, net................................          (14)          (197)          (134)         (1,268)
                                                                 --------       --------        -------        --------
INCOME (LOSS) BEFORE REORGANIZATION ITEMS, INCOME TAXES AND
  EXTRAORDINARY ITEM........................................        7,361          2,995           (184)          4,316
REORGANIZATION ITEMS........................................           --             --             --            (754)
                                                                 --------       --------        -------        --------
INCOME (LOSS) BEFORE INCOME TAXES AND EXTRAORDINARY ITEM....        7,361          2,995           (184)          3,562
PROVISION FOR INCOME TAXES..................................        2,533            775             --              --
                                                                 --------       --------        -------        --------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM.....................        4,828          2,220           (184)          3,562
EXTRAORDINARY GAIN ON PREPETITION DEBT DISCHARGE............           --             --             --         153,437
                                                                 --------       --------        -------        --------
NET INCOME (LOSS)...........................................     $  4,828       $  2,220        $  (184)       $156,999
                                                                 ========       ========        =======        ========
BASIC AND DILUTED INCOME (LOSS) PER COMMON SHARE
  Before extraordinary item.................................     $   2,38       $   1,09        $ (0,09)              *
  Extraordinary item........................................           --             --             --               *
                                                                 --------       --------        -------        --------
  Net.......................................................     $   2,38       $   1,09        $ (0,09)              *
                                                                 ========       ========        =======        ========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING..................        2,030          2,030          2,030               *
                                                                 ========       ========        =======        ========
</TABLE>

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

*    Earnings per share is not presented for the nine months ended September 27,
     1998 because such presentation would not be meaningful. The Old Common
     Stock was cancelled and the New Common Stock was issued pursuant to the
     Restated Second Amended Plan.

                See notes to consolidated financial statements.
                                        28
<PAGE>   29

                   STRATOSPHERE CORPORATION AND SUBSIDIARIES

           CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)

<TABLE>
<CAPTION>
                                                                             RETAINED
                                                              ADDITIONAL     EARNINGS          TOTAL
                                          COMMON   TREASURY    PAID-IN     (ACCUMULATED    SHAREHOLDERS'
                                          STOCK     STOCK      CAPITAL       DEFICIT)     EQUITY (DEFICIT)
                                          ------   --------   ----------   ------------   ----------------
(IN THOUSANDS)
<S>                                       <C>      <C>        <C>          <C>            <C>
Balances at December 28, 1997
  (Predecessor Company).................  $ 584      $ --     $ 218,546     $(376,129)       $(156,999)
Purchase of treasury stock resulting
  from Vegas World Vacation Package
  settlement............................     --       (30)           30            --               --
Net income..............................     --        --            --       156,999          156,999
                                          -----      ----     ---------     ---------        ---------
Balances at September 27, 1998
  (Predecessor Company).................  $ 584      $(30)    $ 218,576     $(219,130)       $      --
                                          =====      ====     =========     =========        =========
Balances at September 27, 1998
  (Predecessor Company).................  $ 584      $(30)    $ 218,576     $(219,130)       $      --
Cancellation of old common stock
  pursuant to the plan of
  reorganization........................   (584)       30           554            --               --
Issuance of new common stock pursuant to
  the plan of reorganization............     20        --            --            --               20
Elimination of accumulated deficit
  pursuant to the plan of
  reorganization........................     --        --      (219,130)      219,130               --
Additional paid-in-capital pursuant to
  the plan of reorganization............     --        --       127,058            --          127,058
                                          -----      ----     ---------     ---------        ---------
Balances at September 27, 1998
  (Successor Company)...................     20        --       127,058            --          127,078
Net loss................................     --        --            --          (184)            (184)
                                          -----      ----     ---------     ---------        ---------
Balances at December 27, 1998 (Successor
  Company)..............................     20        --       127,058          (184)         126,894
Net income..............................     --        --            --         2,220            2,220
                                          -----      ----     ---------     ---------        ---------
Balances at December 26, 1999 (Successor
  Company)..............................     20        --       127,058         2,036          129,114
Change in deferred tax asset valuation
  allowance related to book-tax
  differences existing at time of
  bankruptcy............................     --        --         2,758            --            2,758
Net income..............................     --        --            --         4,828            4,828
                                          -----      ----     ---------     ---------        ---------
Balances at December 31, 2000 (Successor
  Company)..............................  $  20      $ --     $ 129,816     $   6,864        $ 136,700
                                          =====      ====     =========     =========        =========
</TABLE>

                See notes to consolidated financial statements.
                                        29
<PAGE>   30

                   STRATOSPHERE CORPORATION AND SUBSIDIARIES

                     CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                                               PREDECESSOR
                                                             SUCCESSOR COMPANY                   COMPANY
                                                -------------------------------------------   -------------
                                                FISCAL YEAR    FISCAL YEAR    SEPTEMBER 28,   DECEMBER 29,
                                                   ENDED          ENDED       1998 THROUGH    1997 THROUGH
                                                DECEMBER 31,   DECEMBER 26,   DECEMBER 27,    SEPTEMBER 27,
                                                    2000           1999           1998            1998
                                                ------------   ------------   -------------   -------------
(IN THOUSANDS)
<S>                                             <C>            <C>            <C>             <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net income (loss)...........................    $  4,828       $ 2,220         $  (184)       $ 156,999
  Adjustments to reconcile net income (loss)
     to net cash provided by (used in)
     operating activities:
     Depreciation and amortization............       8,679         8,559           2,216            6,299
     Extraordinary gain on prepetition debt
       discharge..............................          --            --              --         (153,437)
     Reorganization Items:
       Professional Fees......................          --            --              --            3,492
       Management Retention Expense...........          --            --              --              233
       Vegas World Vacation Package
          Settlement..........................          --            --              --            3,347
       Adjust accounts to fair value..........          --            --              --           (8,598)
       Increase in allowed claims.............          --            --              --            3,708
       Interest Earned on Accumulated Cash
          During Chapter 11 Proceedings.......          --            --              --             (814)
     Provision (recoveries) for doubtful
       accounts...............................         137          (240)             24              139
     Loss on sale or disposal of assets.......           4            71              30               42
     Changes in operating assets and
       liabilities:
       Accounts and other receivable..........      (1,315)        1,444             136           (2,638)
       Other current assets...................          93           142           1,388           (1,061)
       Accounts payable-trade.................         396          (204)           (127)             410
       Accrued expenses.......................       1,775         1,033          (1,865)          12,363
                                                  --------       -------         -------        ---------
  Net Cash Provided by Operating Activities
     Before Reorganization Items..............      14,597        13,025           1,618           20,484
                                                  --------       -------         -------        ---------
  Increases (decreases) to Cash Resulting from
     Reorganization Items:
     Prepetition claims payable pursuant to
       amended plan...........................          --            --              --           (7,383)
     Professional fees paid...................          --            --              --           (2,783)
     Management Retention Disbursements.......          --            --              --             (836)
     Interest Earned on Accumulated Cash
       During Chapter 11 Proceedings..........          --            --              --              814
                                                  --------       -------         -------        ---------
  Net Cash Used in Reorganization Items.......          --            --              --          (10,188)
                                                  --------       -------         -------        ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES.....      14,597        13,025           1,618           10,296
                                                  --------       -------         -------        ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
  Decrease (increase) in cash and cash
     equivalents-restricted...................          --           292           5,165           (6,912)
  Purchase of marketable securities...........      (1,000)       (4,459)             --               --
  Proceeds from the sale of marketable
     securities...............................          --         1,000              --               --
  Decrease (increase) in
     investments-restricted...................       1,290         1,013             (38)            (114)
</TABLE>

                                        30
<PAGE>   31

<TABLE>
<CAPTION>
                                                                                               PREDECESSOR
                                                             SUCCESSOR COMPANY                   COMPANY
                                                -------------------------------------------   -------------
                                                FISCAL YEAR    FISCAL YEAR    SEPTEMBER 28,   DECEMBER 29,
                                                   ENDED          ENDED       1998 THROUGH    1997 THROUGH
                                                DECEMBER 31,   DECEMBER 26,   DECEMBER 27,    SEPTEMBER 27,
                                                    2000           1999           1998            1998
                                                ------------   ------------   -------------   -------------
(IN THOUSANDS)
<S>                                             <C>            <C>            <C>             <C>
  Payments for property and equipment.........     (16,790)       (6,596)         (2,658)          (1,062)
  Payments for construction in progress.......     (28,135)           --              --               --
  Increase in related party receivable........         (73)           --              --               --
  Cash proceeds from sale of property and
     equipment................................         124           551              40              308
                                                  --------       -------         -------        ---------
NET CASH PROVIDED BY (USED IN) INVESTING
  ACTIVITIES..................................     (44,584)       (8,199)          2,509           (7,780)
                                                  --------       -------         -------        ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
  Payments to creditors pursuant to plan of
     reorganization...........................          --           (67)         (5,165)              --
  Payments on long-term debt..................         (77)         (155)            (46)            (156)
  Proceeds from related party notes payable...      41,750            --              --               --
  Payments of related party notes payable.....      (2,000)           --              --               --
  Final payments on capital lease obligations
     -- original..............................          --        (8,979)         (2,171)          (6,807)
  Payments on capital lease obligations --
     new......................................      (2,667)       (1,556)             --               --
  Proceeds from capital lease obligations.....          --        10,000              --               --
  Increase in deferred financing costs........          --          (272)             --               --
                                                  --------       -------         -------        ---------
NET CASH PROVIDED BY (USED IN) FINANCING
  ACTIVITIES..................................      37,006        (1,029)         (7,382)          (6,963)
                                                  --------       -------         -------        ---------
Net increase (decrease) in cash and cash
  equivalents.................................       7,019         3,797          (3,255)          (4,447)
Cash and cash equivalents -- beginning of
  period......................................      16,422        12,624          15,879           20,326
                                                  --------       -------         -------        ---------
CASH AND CASH EQUIVALENTS -- END OF PERIOD....    $ 23,441       $16,422         $12,624        $  15,879
                                                  ========       =======         =======        =========
</TABLE>

                See notes to consolidated financial statements.
                                        31
<PAGE>   32

                   STRATOSPHERE CORPORATION AND SUBSIDIARIES

                CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED

<TABLE>
<CAPTION>
                                                                                                  PREDECESSOR
                                                              SUCCESSOR COMPANY                     COMPANY
                                                ---------------------------------------------    -------------
                                                FISCAL YEAR     FISCAL YEAR     SEPTEMBER 28,    DECEMBER 29,
                                                   ENDED           ENDED        1998 THROUGH     1997 THROUGH
                                                DECEMBER 31,    DECEMBER 26,    DECEMBER 27,     SEPTEMBER 27,
                                                    2000            1999            1998             1998
(IN THOUSANDS)                                  ------------    ------------    -------------    -------------
<S>                                             <C>             <C>             <C>              <C>
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
  INFORMATION:
Cash paid during the period for:
  Interest-net of capitalized
     interest...............................       $  656          $ 750            $240           $   1,005
  Income taxes..............................       $  509          $ 400            $ --           $      --
Non-Cash Investing and Financing Activities:
  Change in deferred tax asset valuation
     allowance related to book-tax
     differences existing at time of
     bankruptcy.............................       $2,758          $  --            $ --           $      --
  Decrease in land and building from
     donation of Bob Stupak Center..........       $   --          $(350)           $ --           $      --
  Increase in land and building from
     reduction in notes receivable from
     stockholder............................       $   --          $  --            $ --           $     350
  Cancellation of old common stock pursuant
     to the plan of reorganization..........       $   --          $  --            $ --           $    (584)
  Issuance of new common stock pursuant to
     the plan of reorganization.............       $   --          $  --            $ --           $      20
  Discharge of first mortgage
     notes..................................       $   --          $  --            $ --           $(203,000)
  Discharge of note payable -- affiliate....       $   --          $  --            $ --           $ (50,000)
</TABLE>

                See notes to consolidated financial statements.
                                        32
<PAGE>   33

                   STRATOSPHERE CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                               DECEMBER 31, 2000

(1)  DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

THE COMPANY

     The accompanying consolidated financial statements present the financial
position, results of operations and cash flows of Stratosphere Corporation and
its wholly-owned subsidiaries, Stratosphere Gaming Corp., Stratosphere Land
Corporation, Stratosphere Advertising Agency, Stratosphere Leasing, LLC, 2000
Las Vegas Boulevard Retail Corporation and Stratosphere Development, LLC, an
entity controlled by Stratosphere Corporation, (collectively the "Company"). The
Company operates an integrated casino, hotel, retail and entertainment facility
and a 1,149 foot, free-standing observation tower located in Las Vegas, Nevada.

     In June 2000, the Company and two entities owned and controlled by Mr. Carl
C. Icahn, including Arizona Charlie's, Inc. and Fresca LLC /d.b.a./ Arizona
Charlie's East created Stratosphere Development, LLC ("Development"), to provide
development and construction management services for construction related
projects. Development was formed as a series Limited Liability Company under
Delaware law.

     On January 27, 1997 ("Petition Date"), Stratosphere Corporation and its
wholly-owned subsidiary Stratosphere Gaming Corp. ("SGC" and collectively with
Stratosphere Corporation, the "Debtors") filed voluntary petitions for Chapter
11 Reorganization pursuant to the United States Bankruptcy Code. As of that
date, the United States Bankruptcy Court for the District of Nevada ("Bankruptcy
Court") assumed jurisdiction over the assets of Stratosphere Corporation and
SGC. Stratosphere Corporation and SGC had been acting as debtors-in-possession
on behalf of their respective estates, and have been authorized as such to
operate their business subject to Bankruptcy Court supervision. On June 9, 1998,
the Bankruptcy Court entered an order (the "Confirmation Order") confirming the
Restated Second Amended Plan of Reorganization filed by the Debtors (the
"Restated Second Amended Plan"). On October 14, 1998, the Restated Second
Amended Plan became effective ("Effective Date"). All material conditions
precedent to the Restated Second Amended Plan becoming binding were satisfied on
or before September 27, 1998. Accordingly, the Company has reflected the effect
of the Restated Second Amended Plan as of September 27, 1998, in the
accompanying consolidated financial statements.

BASIS OF PRESENTATION

     The Company has implemented the guidance provided by the American Institute
of Certified Public Accountants Statement of Position 90-7 "Financial Reporting
By Entities In Reorganization Under The Bankruptcy Code" ("AICPA SOP 90-7") and
as such, adopted "fresh start reporting" as of September 27, 1998, in the
preparation of the accompanying consolidated financial statements. The Company's
emergence from Chapter 11 proceedings resulted in a new reporting entity with no
retained earnings or accumulated deficit as of September 27, 1998. Accordingly,
the Company's consolidated financial statements for periods prior to September
27, 1998 are not comparable to consolidated financial statements presented on or
subsequent to September 27, 1998. Column headings have been included on the
accompanying Consolidated Statements of Operations and Consolidated Statements
of Cash Flows to distinguish between the predecessor and successor entities.

PRINCIPLES OF CONSOLIDATION

     The consolidated financial statements include the accounts of Stratosphere
Corporation and all subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation.

                                        33
<PAGE>   34

CASINO REVENUES AND PROMOTIONAL ALLOWANCES

     The Company recognizes revenues in accordance with industry practice.
Casino revenue is the net win from gaming activities (the difference between
gaming wins and losses). Casino revenues are net of accruals for anticipated
payouts of progressive and certain other slot machine jackpots. Revenues include
the retail value of rooms, food and beverage and other items that are provided
to customers on a complimentary basis. A corresponding amount is deducted as
promotional allowances. The cost of such complimentaries included as casino
expenses is as follows (in thousands):

<TABLE>
<CAPTION>
                                                                                           PREDECESSOR
                                                                                             COMPANY
                                                          SUCCESSOR COMPANY                ------------
                                             -------------------------------------------   DECEMBER 29,
                                                FISCAL         FISCAL      SEPTEMBER 28,      1997,
                                              YEAR ENDED     YEAR ENDED    1998, THROUGH     THROUGH
                                             DECEMBER 31,   DECEMBER 26,   DECEMBER 27,    SEPTEMBER 1,
                                                 2000           1999           1998            1998
                                             ------------   ------------   -------------   ------------
<S>                                          <C>            <C>            <C>             <C>
Food and Beverage.........................      $4,245         $4,075         $1,011          $3,316
Rooms.....................................       1,636          1,456            465           1,276
Other.....................................          48             85             20             155
                                                ------         ------         ------          ------
                                                $5,929         $5,616         $1,496          $4,747
                                                ======         ======         ======          ======
</TABLE>

CASH AND CASH EQUIVALENTS

     Cash and cash equivalents include cash on hand and in banks, interest
bearing deposits, money market funds and debt instruments purchased with an
original maturity of 90 days or less. Cash and cash equivalents-restricted as of
December 31, 2000 and December 26, 1999, consist primarily of funds reserved for
final settlement of unsecured claims pursuant to the Restated Second Amended
Plan.

MARKETABLE SECURITIES

     The Company's marketable securities represent investments in high quality
U.S. government agency and Portland, Oregon bonds. These securities are
currently reported at cost, which approximates fair market value, and are
considered available for sale.

INVESTMENTS RESTRICTED

     Investments-restricted at December 31, 2000 and December 26, 1999, consist
primarily of funds pledged for Nevada sales and use tax, unpaid sports book
tickets and workers' compensation benefits.

INVENTORIES

     Inventories, consisting primarily of food and beverage, retail merchandise
and operating supplies, are stated at the lower of cost or market and included
in other current assets. Cost is determined using the first-in, first-out
method.

PROPERTY AND EQUIPMENT

     Property and equipment purchased prior to September 27, 1998 are stated at
adjusted cost (see Note 2). Property and equipment purchased after September 27,
1998 are stated at cost. Capitalized lease assets are stated at the lower of the
present value of the future minimum lease payments or fair market value at the
inception of the lease (See note 6). Expenditures for additions, renewals and
improvements are capitalized and depreciated over their useful lives. Costs of
repairs and maintenance are expensed when incurred. Leasehold acquisition costs
are amortized over the shorter of their estimated useful lives or the term of
the respective leases once the assets are placed in service.

                                        34
<PAGE>   35

     Depreciation and amortization of property and equipment is computed using
the straight-line method over the following useful lives:

<TABLE>
<S>                                                             <C>
Buildings and improvements..................................    36-39 years
Furniture, fixtures and equipment...........................     3-15 years
Land improvements...........................................       15 years
</TABLE>

     The Company's policy is to capitalize interest incurred on debt during the
course of qualifying construction projects. Such costs are amortized over the
related assets' estimated useful lives. The Company recorded capitalized
interest of $457,781 during fiscal year 2000. There was no capitalized interest
during fiscal years 1999 and 1998.

RECOVERABILITY OF LONG-LIVED ASSETS TO BE HELD AND USED IN THE BUSINESS

     The Company reviews its long-lived assets for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset or a
group of assets may not be recoverable. Assets are grouped and evaluated for
impairment at the lowest level for which there are identifiable cash flows that
are largely independent of the cash flows of other groups of assets. The Company
deems an asset to be impaired if a forecast of undiscounted future operating
cash flows directly related to the asset, including disposal value if any, is
less than its carrying amount. If an asset is determined to be impaired, the
loss is measured as the amount by which the carrying amount of the asset exceeds
fair value. The Company generally estimates fair value by discounting estimated
cash flows. Considerable management judgment is necessary to estimate discounted
future cash flows. Accordingly, actual results could vary significantly from
such estimates.

SALES, ADVERTISING AND PROMOTION

     Sales, advertising and promotion costs are expensed as incurred and totaled
$6,419,864; $6,438,065; $1,823,198 and $5,826,080 for the twelve month periods
ended December 31, 2000 and December 26, 1999, the three months ended December
27, 1998 and the nine months ended September 27, 1998, respectively.

USE OF ESTIMATES

     The preparation of the consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Based on the application of
significant judgment, actual results could differ from those estimates.

EARNINGS (LOSS) PER SHARE

     The Company adopted Statement of Financial Accounting Standards No. 128
("SFAS 128") in 1997. However, there is no EPS calculation prior to the
Effective Date as all Common Stock and equivalents were canceled as of that
date. Pursuant to the Restated Second Amended Plan 2,030,000 New Common Stock
shares were issued on the Effective Date. There were no Common Stock equivalents
as of December 31, 2000.

RECLASSIFICATIONS

     Certain reclassifications have been made to the prior years consolidated
financial statements to conform to the current fiscal year presentation.

FISCAL YEAR-END

     The Company has adopted a 52- or 53-week accounting period. The Company's
fiscal year is the 52 weeks ending on the last Sunday in December. The fiscal
years ended December 26, 1999 and December 27, 1998 comprised 52-week years.
Fiscal year ended December 31, 2000 was a 53-week year. Beginning in year 2001,
the Company has adopted a calendar year reporting period.
                                        35
<PAGE>   36

(2)  RESTRUCTURING

     On January 27, 1997 ("Petition Date"), Stratosphere Corporation and its
wholly-owned subsidiary Stratosphere Gaming Corp. ("SGC" and collectively with
Stratosphere Corporation, the "Debtors") filed voluntary petitions for Chapter
11 Reorganization pursuant to the United States Bankruptcy Code. As of that
date, the United States Bankruptcy Court for the District of Nevada ("Bankruptcy
Court") assumed jurisdiction over the assets of Stratosphere Corporation and
SGC. Stratosphere Corporation and SGC were acting as debtors-in-possession on
behalf of their respective bankrupt estates, and were authorized as such to
operate their business subject to Bankruptcy Court supervision. On June 9, 1998,
the Bankruptcy Court entered an order (the "Confirmation Order") confirming the
Restated Second Amended Plan of Reorganization filed by the Debtors (the
"Restated Second Amended Plan"). On October 14, 1998, the Restated Second
Amended Plan became effective. All material conditions precedent to the Restated
Second Amended Plan becoming binding were satisfied on or before September 27,
1998. Accordingly, the Company has reflected the effect of the Restated Second
Amended Plan as of September 27, 1998.

     As a result of the restructuring, the Company implemented the guidance
provided by the American Institute of Certified Public Accountants Statement of
Position 90-7 "Financial Reporting By Entities In Reorganization Under The
Bankruptcy Code" ("AICPA SOP 90-7") and as such, adopted "fresh start reporting"
as of September 27, 1998. The Company's emergence from its Chapter 11
proceedings resulted in a new reporting entity with no retained earnings or
accumulated deficit as of September 27, 1998. Accordingly, the Company's
consolidated financial statements for periods prior to September 27, 1998 are
not comparable to consolidated financial statements presented on or subsequent
to September 27, 1998. Column headings have been included on the accompanying
Consolidated Statements of Operations and Consolidated Statements of Cash Flows
to distinguish between the predecessor and successor entities.

     Pursuant to the Restated Second Amended Plan becoming effective on October
14, 1998, the Company canceled all prior equity interests (including the 58.4
million outstanding shares of Common Stock, options and warrants) and exchanged
2,030,000 shares of New Common Stock for the secured portion of the 14 1/4%
First Mortgage Notes (estimated at $120.6 million). Approximately 89.6% of the
New Common Stock was issued to Carl C. Icahn related entities. The remaining
portion of the 14 1/4% First Mortgage Notes claim (approximately $104 million),
the balance of the note due Grand Casinos, Inc. (approximately $52.4 million)
and all other general unsecured claims will be discharged in exchange of a cash
payment of $6.0 million. Certain priority claims (estimated at $.9 million) were
paid in full. The discharge and settlement of these claims resulted in a gain of
$153.4 million, which was reflected as an extraordinary item on the September
27, 1998, consolidated statement of operations. The amount of the gain was based
on the Company's estimate of the amount of claims that will ultimately be
allowable by the Bankruptcy Court, and was based on the total of actual claims
filed. In the event additional unsecured claims are allowed by the Bankruptcy
Court, it will not increase the Company's cash required for full debt discharge.
A portion of the $6.9 million to be distributed has been reserved for potential
future settlement of unsecured claim disputes (approximately $1.9 million). The
only significant claim dispute was the rejection claim filed by Strato-Retail,
LLC ("Strato-Retail"). (See Item 3, Legal Proceedings) On October 4, 2000, the
Company and Strato-Retail executed a Settlement Agreement, Purchase and Sale
Agreement and Mutual General Release, whereby the parties resolved all pending
disputes, among other things, and dismissed the above referenced appeal and
adversary complaint.

FRESH START REPORTING

     Pursuant to the guidance of AICPA SOP 90-7, "fresh start reporting" has
been reflected as of September 27, 1998, in the accompanying consolidated
financial statements, since: i) the sum of the allowed claims, plus
post-petition liabilities, exceeded the reorganization value of the
pre-confirmation assets of the emerging entity; and ii) the Company experienced
a change of control as defined in AICPA SOP 90-7. AICPA SOP 90-7 requires that
under these circumstances a new reporting entity be created (referred to as the
"Successor Company" in the Consolidated Financial Statements) and the assets and
liabilities be recorded at their fair values.

                                        36
<PAGE>   37

     In support of the restructuring process, the Debtors retained an
independent valuation advisor (the "Valuation Advisor") to appraise the
Stratosphere Hotel & Casino Complex (the "Resort"). On March 24, 1997, the
Valuation Advisor issued an appraisal report (hereinafter, the "Appraisal
Report") to the Company's bankruptcy counsel. The Appraisal Report estimates the
"as is" market value range of the fee simple interest in the real and personal
property (of the Resort) to be $105 million to $130 million with the final point
estimate of value being $120 million (as of March 24, 1997). The Appraisal
Report assumes a marketing exposure period of 12 to 18 months would be required
in order to realize a sales price at or about the level of the concluded value
estimate.

     In preparing the Appraisal Report, standard appraisal techniques were used
in conformity with the guidelines of the Uniform Standards of Appraisal Practice
as promulgated by the Appraisal Foundation. The Appraisal Report utilizes two of
the typical appraisal approaches to value; the "Income Approach" and the "Sales
Comparison Approach." The "Cost Approach" was omitted from the Appraisal Report
because it was viewed that, in this instance, it did not provide a reliable
indication of value. The ultimate valuation conclusions contained in the
Appraisal Report were based primarily on the Income Approach, with only limited
weight given to the Sales Comparison Approach. The value estimate included in
the Appraisal Report was relied upon by management in determining the
reorganization value and relates solely to the assets that are directly relevant
to the operation of the Resort (exclusive of the working capital account
balances) and does not include, or relate to, "peripheral" or "extraneous"
assets owned by the Company. The primary examples of such assets are the parcels
of land (which total approximately 5 acres) located on and near Las Vegas
Boulevard South, directly across the street from the Resort (collectively, the
"Sulinda Parcels"). Accordingly, management has separately analyzed the assets
that are not covered by the Appraisal Report and have estimated the value
thereof for the purpose of determining the reorganization value of the emerging
entity ($45.1 million). Underlying management's estimate of reorganization value
are a number of assumptions (including those contained in the Appraisal Report)
that, although considered reasonable by management, are inherently subject to
significant economic and competitive uncertainties beyond the control of
management, and are based upon business decisions which could be subject to
change.

     The discharge of debt and "fresh start reporting" have been reflected in
the accompanying September 27, 1998, consolidated financial statements. The
Company's post-reorganization consolidated balance sheet as of September 27,
1998 reflects the adoption of "fresh start reporting" and becomes the opening
balance sheet for "reorganized" Stratosphere Corporation. The effect on the
consolidated balance sheet as of September 27, 1998, is reflected in the
following table:

<TABLE>
<CAPTION>
                                               ADJUSTMENTS TO RECORD THE PLAN OF REORGANIZATION
                                           --------------------------------------------------------
                                            PREDECESSOR                                 SUCCESSOR
                                              COMPANY         DEBT         FRESH         COMPANY
                                           BALANCE SHEET    DISCHARGE      START      BALANCE SHEET
                                           -------------    ---------    ---------    -------------
                                                                (IN THOUSANDS)
<S>                                        <C>              <C>          <C>          <C>
Assets
Current Assets:
  Cash & cash equivalents................    $  26,516      $      --    $      --      $ 26,516
  Accounts Receivable, net...............        2,779             --           --         2,779
  Other current assets...................        6,814             --           --         6,814
                                             ---------      ---------    ---------      --------
Total Current Assets.....................       36,109             --           --        36,109
                                             ---------      ---------    ---------      --------
Property & Equipment, Net................      117,102             --        8,598       125,700
                                             ---------      ---------    ---------      --------
Other Assets (includes Other
  Receivables)...........................          300          3,000           --         3,300
                                             ---------      ---------    ---------      --------
Total Assets.............................    $ 153,511      $   3,000    $   8,598      $165,109
                                             =========      =========    =========      ========
</TABLE>

                                        37
<PAGE>   38

<TABLE>
<CAPTION>
                                               ADJUSTMENTS TO RECORD THE PLAN OF REORGANIZATION
                                           --------------------------------------------------------
                                            PREDECESSOR                                 SUCCESSOR
                                              COMPANY         DEBT         FRESH         COMPANY
                                           BALANCE SHEET    DISCHARGE      START      BALANCE SHEET
                                           -------------    ---------    ---------    -------------
                                                                (IN THOUSANDS)
<S>                                        <C>              <C>          <C>          <C>
Liabilities & Shareholders' Equity
  (Deficit)
Current Liabilities:
  Accounts payable-trade.................    $   1,534      $      --    $      --      $  1,534
  Current installments of long-term
     debt................................          148             --           --           148
  Current installments of capital
     lease...............................           --          8,979           --         8,979
  Accrued interest.......................           --            163           --           163
  Accrued payroll & related..............        6,958             --           --         6,958
  Other accrued expenses.................       10,554          7,383           --        17,937
                                             ---------      ---------    ---------      --------
Total Current Liabilities................       19,194         16,525           --        35,719
                                             ---------      ---------    ---------      --------
Long-Term Liabilities:
  Long-term note payable-less current....          141             --           --           141
  Capital lease obligations-less
     current.............................           --          2,171           --         2,171
                                             ---------      ---------    ---------      --------
Total Long-Term Liabilities..............          141          2,171           --         2,312
                                             ---------      ---------    ---------      --------
Liabilities Subject to Compromise:
  Accounts payable -- trade..............          348           (348)          --            --
  Accrued payroll & related exp..........           58            (58)          --            --
  Affiliate payable......................        4,708         (4,708)          --            --
  Other accrued expenses.................        5,688         (5,688)          --            --
  Capital lease obligations..............       11,313        (11,313)          --            --
  14 1/4% First Mortgage Notes...........      224,096       (224,096)          --            --
  Note payable to affiliate..............       50,000        (50,000)          --            --
                                             ---------      ---------    ---------      --------
Total Liabilities Subject to
  Compromise.............................      296,211       (296,211)          --            --
Total Liabilities........................      315,546       (277,515)          --        38,031
                                             ---------      ---------    ---------      --------
Shareholders' Equity (Deficit):
  Common Stock -- old....................          584           (584)          --            --
  Common Stock -- new (2,030,000
     shares).............................           --             20           --            20
  Treasury Stock.........................          (30)            30           --            --
  Additional Paid in Capital.............      218,576        127,612     (219,130)      127,058
  Accumulated earnings (deficit).........     (381,165)       153,437      227,728            --
                                             ---------      ---------    ---------      --------
Total Shareholders' Equity (Deficit).....     (162,035)       280,515        8,598       127,078
                                             ---------      ---------    ---------      --------
Total Liabilities & Shareholders' Equity
  (Deficit)..............................    $ 153,511      $   3,000    $   8,598      $165,109
                                             =========      =========    =========      ========
</TABLE>

                                        38
<PAGE>   39

     The following proforma consolidated statements of operations reflect the
results of operations as if the reorganization had been effective December 29,
1997 (the beginning of the 1998 fiscal year):

                 CONSOLIDATED PRO FORMA STATEMENT OF OPERATIONS

<TABLE>
<CAPTION>
                                                         FOR THE FISCAL YEAR ENDED DECEMBER 27, 1998
                                                         --------------------------------------------
                                                         AS REPORTED     ADJUSTMENTS       PRO FORMA
                                                         ------------    ------------      ----------
                                                                        (IN THOUSANDS)
<S>                                                      <C>             <C>               <C>
Net Revenues...........................................    $129,972       $      --         $129,972
Costs and Expenses:
  Other expenses.......................................      68,400              --           68,400
  Depreciation and amortization........................       8,108             228(1)         8,336
  Selling, general and administrative..................      47,930              --           47,930
                                                           --------       ---------         --------
Total costs and expenses...............................     124,438             228          124,666
                                                           --------       ---------         --------
Income From Operations.................................       5,534            (228)           5,306
                                                           --------       ---------         --------
Other income (expense):
  Interest expense.....................................      (1,532)             --           (1,532)
  Other income (expense)...............................         131              --              131
                                                           --------       ---------         --------
Total other expense, net...............................      (1,401)             --           (1,401)
                                                           --------       ---------         --------
Reorganization Items...................................        (754)            754(2)            --
Income (Loss) Before Income Taxes and Extraordinary
  Item.................................................       3,379             526            3,905
                                                           --------       ---------         --------
Provision for Income Taxes.............................          --              --               --
Extraordinary gain on discharge of Prepetition
  liabilities..........................................     153,437        (153,437)(3)           --
Net Income (Loss)......................................    $156,816       $(152,911)        $  3,905
                                                           ========       =========         ========
Basic Income (Loss) per Common Share (2,030,000 new
  common shares).......................................          --              --         $   1.92
                                                           ========       =========         ========
</TABLE>

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

(1)  Estimated depreciation effect of adjustments to asset fair values for the
     fiscal year ended December 27, 1998

(2)  Elimination of effect of reorganization items

(3)  Elimination of the gain on pre-petition debt discharge

(3)  REORGANIZATION ITEMS

     Reorganization items consisted of the following for the nine-month period
ended September 27, 1998 (in thousands):

<TABLE>
<CAPTION>
                                                                PREDECESSOR COMPANY
                                                                   SEPTEMBER 27,
                                                                       1998
                                                                -------------------
<S>                                                             <C>
Adjust accounts to fair value...............................          $(8,598)
Settlement of vacation package claims.......................            3,347
Professional fees...........................................            2,916
Interest earned on accumulated cash during Chapter 11
  proceedings...............................................             (814)
Increase in allowed claims..................................            3,708
Management retention compensation...........................              195
                                                                      -------
                                                                      $   754
                                                                      =======
</TABLE>

                                        39
<PAGE>   40

Cash interest earned since the Petition Date, January 27, 1997 through September
27, 1998, totaled $1,665,711.

     Costs and expenses related to the reorganization of the Company have been
separately classified as Reorganization Items in the consolidated statements of
operations since the Petition Date. Prior to the Petition Date, such costs and
expenses (to the extent incurred) were classified as selling, general and
administrative in the consolidated statement of operations. Future unreserved
professional fees, if any, have again been classified as selling, general and
administrative expense beginning September 28, 1998 (the post-effective date
period).

(4)  ACCOUNTS RECEIVABLE

     Accounts receivable consists of the following as of December 31, 2000 and
December 26, 1999 (in thousands):

<TABLE>
<CAPTION>
                                                              DECEMBER 31,    DECEMBER 26,
                                                                  2000            1999
                                                              ------------    ------------
<S>                                                           <C>             <C>
Hotel and related...........................................     $1,315          $  712
Gaming......................................................        346             317
Income Taxes................................................        359              --
Other.......................................................        926             602
                                                                 ------          ------
                                                                  2,946           1,631
Less allowance for doubtful accounts........................       (354)           (217)
                                                                 ------          ------
                                                                 $2,592          $1,414
                                                                 ======          ======
</TABLE>

(5)  OTHER CURRENT ASSETS

     Other current assets consist of the following as of December 31, 2000 and
December 26, 1999 (in thousands):

<TABLE>
<CAPTION>
                                                                DECEMBER 31,       DECEMBER 26,
                                                                    2000               1999
                                                              -----------------    ------------
<S>                                                           <C>                  <C>
Inventory...................................................       $2,102             $2,938
Prepaid expenses............................................        3,089              2,346
                                                                   ------             ------
                                                                   $5,191             $5,284
                                                                   ======             ======
</TABLE>

(6)  PROPERTY AND EQUIPMENT -- NET

     Property and equipment consist of the following as of December 31, 2000 and
December 26, 1999 (in thousands):

<TABLE>
<CAPTION>
                                                                DECEMBER 31,       DECEMBER 26,
                                                                    2000               1999
                                                              -----------------    ------------
<S>                                                           <C>                  <C>
Land and improvements, including land held for
  development...............................................      $ 21,510           $ 21,510
Building and improvements...................................        83,412             69,037
Furniture, fixtures and equipment...........................        27,757             25,699
Construction in progress....................................        52,520             17,442
                                                                  --------           --------
                                                                   185,199            133,688
Less accumulated deprecation and amortization...............       (18,580)           (10,227)
                                                                  --------           --------
                                                                  $166,619           $123,461
                                                                  ========           ========
</TABLE>

                                        40
<PAGE>   41

     Included in property and equipment at December 31, 2000 and December 26,
1999, are assets recorded under capital leases of $17.2 million. Accumulated
depreciation and amortization at December 31, 2000 and December 26, 1999
includes amounts recorded for capital leases of $4,480,032 and $2,594,131,
respectively.

     In mid-1996, the Company suspended construction of the 1,002-room hotel
tower, which had reached a height of approximately 14 stories. In April 2000,
construction was resumed to complete the unfinished hotel tower for a total
construction budget of $65.0 million. The tower project includes 1,002 new
guestrooms and guest amenities such as a 67,000-square foot pool and recreation
area with a new snack and cocktail bar, private cabanas and a large spa. The new
24-floor tower will also house a 350-seat coffee shop, new porte-cochere and
valet parking entrance, gift shop and new tour bus entrance and lobby. The
Company is also refurbishing, expanding and upgrading the existing Stratosphere
Buffet, Montana's Steak House and Roxy's 50's Diner for an estimated
construction budget of $3.0 million.

(7)  OTHER ACCRUED EXPENSES

     Other accrued expenses consist of the following as of December 31, 2000 and
December 26, 1999 (in thousands):

<TABLE>
<CAPTION>
                                                              DECEMBER 31,    DECEMBER 26,
                                                                  2000            1999
                                                              ------------    ------------
<S>                                                           <C>             <C>
Vacation packages...........................................    $ 2,815         $ 2,973
Accrued liabilities.........................................      3,203           3,220
Accrued restructuring costs.................................        825           1,244
Cash reserved for unpaid bankruptcy claims..................      1,926           1,926
Accrued taxes...............................................        744           1,127
Accrued/unclaimed sports tickets/prizes.....................        605           1,465
Other.......................................................      2,626           1,472
                                                                -------         -------
                                                                $12,744         $13,427
                                                                =======         =======
</TABLE>

(8)  LONG TERM DEBT

     Long term debt consists of the following as of December 31, 2000 and
December 26, 1999 (in thousands):

<TABLE>
<CAPTION>
                                                                DECEMBER 31,    DECEMBER 26,
                                                                    2000            1999
                                                                ------------    ------------
<S>                                                             <C>             <C>
Related party...............................................      $39,750           $ --
Other.......................................................           --             87
                                                                  -------           ----
                                                                   39,750             87
Less current portion........................................         (713)           (87)
                                                                  -------           ----
Long-term debt-less current portion.........................      $39,037           $ --
                                                                  =======           ====
</TABLE>

     The future aggregate annual maturities of related party long-term debt at
December 31, 2000 are as follows (in thousands):

<TABLE>
<CAPTION>
YEARS ENDING DECEMBER 31,
-------------------------
<S>                                  <C>
          2001...................    $   713
          2002...................     39,037
                                     -------
          Total..................    $39,750
                                     =======
</TABLE>

                                        41
<PAGE>   42

     In September 2000, the Company obtained a commitment for a construction
loan in the amount of $73.0 million from American Real Estate Holdings, L.P.
("AREH") a wholly-owned affiliate of American Real Estate Partners, L.P.
("AREP"), in order to finance the construction of the unfinished 1,002-room
hotel tower and other amenities including the new pool area and coffee shop (the
"Hotel Expansion"). AREP is a publicly held entity, which is 85% owned by Mr.
Icahn. AREP and Mr. Icahn collectively own 89.6% of Stratosphere.

     The construction loan includes a reserve for interest during construction
up to $5.0 million, which will terminate upon receipt of the certificate of
occupancy on the project. Beginning with the third month thereafter, the loan
should be repaid in equal monthly installments based upon a twenty (20) year
amortization schedule and continuing through and including March 31, 2002, when
all remaining balances shall be due. Interest shall begin to accrue on each loan
advance at the fluctuating rate per annum equal to the sum of (i) three hundred
(300) basis points plus (ii) the ninety (90) day London Interbank Offered Rate
("LIBOR"). A commitment fee of 1% or $730,000 is payable upon issuance of an
acceptable commitment to the Company. The loan is to be collateralized by a
first mortgage against the real estate including assignment of all development
architectural, engineering and construction rights and contracts.

     On September 1, 2000, September 12, 2000, October 20, 2000, November 9,
2000 and December 18, 2000, AREH provided funding of $2.0 million, $5.0 million,
$4.75 million, $5.5 million and $10.0 million, respectively, to the Company to
fund additional Hotel Expansion construction and to payoff the $1,138,000 and
$862,000 demand notes referred to following. Each note payable is an unsecured,
demand note paying 9.5% interest. These notes have been classified as long-term
as bridge financing has been secured from AREH to complete the Hotel Expansion.

     On July 21, 2000, AREH and NYBOR, an entity controlled by Mr. Icahn,
provided $1,138,000 and $862,000, respectively, to the Company to fund the Hotel
Expansion. Each note payable was an unsecured, demand note paying 9.5% interest.
Both of the notes were paid off on September 12, 2000.

     On October 4, 2000, the Company obtained an unsecured, demand note of
$12,500,112 to acquire the property under a Master Lease agreement, (the "Master
Lease") with Strato-Retail. AREH initially provided the funding for this
transaction with a 9.5% interest rate. Similar to the construction loan,
beginning with the third month after receipt of the certificate of occupancy on
the Hotel Expansion the loan shall be repaid in equal monthly installments based
upon a twenty (20) year amortization schedule and continuing through and
including April 4, 2002, when all remaining balances shall be due. Interest
shall begin to accrue on each distribution received at the fluctuation rate per
annum equal to the sum of (i) three hundred (350) basis points plus (ii) the
LIBOR rate. An extension fee of 1% or $125,000 is payable upon issuance of an
acceptable commitment to the Company. The loan is to be collateralized by a
second mortgage against the real estate.

     In connection with the acquisition, Stratosphere Leasing, LLC ("Leasing")
acquired by assignment all of the subleases of Strato-Retail including the lease
with McDonald's Corporation ("McDonald's"). The lease with McDonald's provides
that the landlord (Leasing) guarantee that McDonald's shall, for the initial
term of the lease, achieve annual net income of approximately $494,000 or in the
case of a partial calendar year, the prorated portion of $494,000 ("GANI"). The
initial term of the lease expires on October 20, 2006. In the event that the
annual net income (as defined) reported to landlord is less than the GANI, the
landlord will refund the difference to McDonald's within 30 days of the
determination of such difference. McDonald's has not notified Leasing of the
annual net income for the year ended December 31, 2000; however, the terms of
the acquisition provided that Strato-Retail would pay the entire difference for
fiscal year 2000. The cash payment for the purchase was reduced by $500,000 to
cover the income guarantee and such amount is recorded as a current liability as
of December 31, 2000. Estimated future commitments under this guarantee are
recorded as a long-term liability titled accrued lease incentive in the amount
of approximately $2.0 million. This amount will be amortized evenly over the
remaining term of the lease.

                                        42
<PAGE>   43

(9)  LEASES, INCOME AND CAPITAL LEASE OBLIGATIONS

     In connection with the purchase of the Master Lease from Strato-Retail, the
Company assumed lessor responsibilities for various operating leases for certain
retail space. The future minimum lease income required under these leases for
years subsequent to December 31, 2000 are as follows (in thousands):

<TABLE>
<CAPTION>
         YEAR ENDING DECEMBER 31,
         ------------------------
<S>                                            <C>
     2001..................................    $ 2,159
     2002..................................      2,328
     2003..................................      2,384
     2004..................................      2,223
     2005..................................      2,258
     Thereafter............................      2,376
                                               -------
                                               $13,728
                                               =======
</TABLE>

     Management is currently renegotiating the terms of various leases, which
will likely result in a reduction of the expected lease income stated above.

     The Company leases certain equipment under a non-cancelable capital lease.
Future minimum lease payments, excluding contingent rentals, due under the
non-cancelable capital lease for years subsequent to December 31, 2000, are as
follows (in thousands):

<TABLE>
<CAPTION>
         YEAR ENDING DECEMBER 31,
         ------------------------
<S>                                            <C>
     2001..................................    $ 3,093
     2002..................................      3,215
                                               -------
     Total minimum lease payments..........      6,308
     Less: amounts representing interest at
       9.25%...............................       (530)
                                               -------
     Present value of minimum capital lease
       payments............................      5,778
     Less: current installment.............     (2,667)
                                               -------
     Obligations under capital lease.......    $ 3,111
                                               =======
</TABLE>

     Rent expense from operating leases was $-0-, $593,847, $310,171, and
$1,148,761 for the twelve months ended December 31, 2000, December 26, 1999,
three months ended December 27, 1998 and nine months ended September 27, 1998,
respectively.

     The prime rate of interest was 9.50%, 8.50% and 7.75% at December 31, 2000,
December 26, 1999 and December 27, 1998, respectively.

(10)  SHAREHOLDERS' EQUITY

     Pursuant to the Restated Second Amended Plan becoming effective, all equity
interests issued prior to October 14, 1998, were canceled including the Old
Common Stock, options and warrants. New Common Stock of 2,030,000 shares,
representing 100% of the Company's equity, was issued to the holders of the
Company's 14 1/4% First Mortgage Notes (see Note 2).

     On October 4, 1999, AREH repurchased 985,286 shares from entities owned or
controlled by Mr. Icahn. On March 24, 2000, AREH purchased 50,000 shares of the
Company's common stock from NYBOR. Upon completion of the transaction, Mr. Icahn
continues to control approximately 89.6% of the Company's Common Stock.

     On September 19, 2000, the Company announced a proposed going private
transaction, which was approved by the Board of Directors of the Company. If the
going private transaction is successful, it is anticipated that the Company
would be merged with a newly formed subsidiary of AREP. Pursuant to the

                                        43
<PAGE>   44

terms of the proposed merger, shareholders of the Company that are not
affiliated with Carl Icahn will receive $45.32 per share. Mr. Icahn's companies,
other than AREP, will receive $44.33 per share. It is expected the transaction
will close in the third quarter of 2001.

     The Company has not implemented a stock option plan.

(11)  INCOME TAXES

     The income tax provision (benefit) attributable to income (losses) from
operations for the fiscal years ended December 3, 2000 and December 26, 1999;
the three month period ended December 27, 1998, and the nine month period ended
September 27, 1998, differed from the amounts computed by applying the federal
income tax rate of 35% as a result of the following (in thousands):

<TABLE>
<CAPTION>
                                                                                            PREDECESSOR
                                                        SUCCESSOR COMPANY                     COMPANY
                                          ---------------------------------------------    -------------
                                          FISCAL YEAR     FISCAL YEAR     SEPTEMBER 28,    DECEMBER 29,
                                             ENDED           ENDED        1998 THROUGH     1997 THROUGH
                                          DECEMBER 31,    DECEMBER 26,    DECEMBER 27,     SEPTEMBER 27,
                                              2000            1999            1998             1998
                                          ------------    ------------    -------------    -------------
<S>                                       <C>             <C>             <C>              <C>
Current provision.......................     $  358           $775            $ --            $ 1,351
Deferred (benefit)......................      2,175             --             (15)            (1,351)
Increase in deferred tax asset valuation
  allowance.............................         --             --              15                 --
                                             ------           ----            ----            -------
                                             $2,533           $775            $ --            $    --
                                             ======           ====            ====            =======
</TABLE>

DEFERRED TAX ASSETS AND LIABILITIES

     The tax effect of significant temporary differences and carryforwards
representing deferred tax assets and liabilities (the difference between
financial statement carrying values and the tax basis of assets and liabilities)
for the Company is as follows at December 31, 2000 and December 26, 1999 (in
thousands):

<TABLE>
<CAPTION>
                                                              DECEMBER 31,    DECEMBER 26,
                                                                  2000            1999
                                                              ------------    ------------
<S>                                                           <C>             <C>
TEMPORARY DIFFERENCES
Current:
  Allowance for doubtful accounts...........................    $    124        $     76
  Gaming related............................................         397             261
  Accrued vacation and employee related.....................         977             858
  Outstanding chip and token liability......................         (17)            (68)
  Deferred income...........................................        (836)           (899)
  Other.....................................................        (341)             --
                                                                --------        --------
                                                                     304             228
                                                                --------        --------
Long-term:
  Pre-opening costs.........................................         915           2,500
  Debt issuance costs.......................................         (10)            (10)
  Excess of tax over book basis of assets due primarily to
     write down of assets...................................      72,953          77,088
                                                                --------        --------
                                                                  73,858          79,578
                                                                --------        --------
</TABLE>

                                        44
<PAGE>   45

<TABLE>
<CAPTION>
                                                              DECEMBER 31,    DECEMBER 26,
                                                                  2000            1999
                                                              ------------    ------------
<S>                                                           <C>             <C>
Total Temporary Differences.................................      74,162          79,806
                                                                --------        --------
Carryforwards:
  Section 382 limitation (NOL)..............................       7,092           3,986
  Alternative minimum tax credit............................         306             727
  Other credits.............................................         304              --
                                                                --------        --------
Total Carryforwards.........................................       7,702           4,713
                                                                --------        --------
Total temporary differences and carryforwards...............      81,864          84,519
Valuation allowance.........................................     (81,864)        (84,519)
                                                                --------        --------
Total deferred tax assets (liabilities).....................    $     --        $     --
                                                                ========        ========
</TABLE>

     The Company recorded a valuation allowance at December 31, 2000 and
December 26, 1999, relating to net recorded net tax benefits because of the
significant uncertainty as to whether such benefits will ever be realized.

     The provision (benefit) for income taxes differs from the amount computed
at the federal statutory rate as a result of the following:

<TABLE>
<CAPTION>
                                                    FISCAL YEAR     FISCAL YEAR       SEPTEMBER 28,
                                                       ENDED           ENDED           1998 THROUGH
                                                    DECEMBER 31,    DECEMBER 26,       DECEMBER 27,
                                                        2000            1999               1998
                                                    ------------    ------------    ------------------
<S>                                                 <C>             <C>             <C>
Federal statutory rate............................      35.0%           35.0%             (35.0)%
Permanent differences.............................        .8%            2.0%              27.0%
Decrease in federal income tax credits............      (2.2)%            --                 --
Increase (decrease) in deferred tax asset
  valuation allowance.............................        .8%          (11.0)%              8.0%
                                                       -----           -----              -----
                                                        34.4%           26.0%                --%
                                                       =====           =====              =====
</TABLE>

     SFAS 109 requires a "more likely than not" criterion be applied when
evaluating the realizability of a deferred tax asset. Given the Company's
history of losses for income tax purposes, the volatility of the industry within
which the Company operates, and certain other factors, the Company has
established a valuation allowance principally for the deductible temporary
differences, including the excess of the tax basis of the Company's assets over
the basis of such assets for financial purposes, which may not be realizable in
future periods. After application of the valuation allowance, the Company's net
deferred tax assets and liabilities are zero. In the event that the Company
recognizes, in subsequent years, the tax benefit of any deferred tax asset that
existed on the date the reorganization became effective, such tax benefit will
be reported as a direct addition to contributed capital.

     The total change in the valuation allowance was $2,655,000. This is
comprised of a $2,758,000 reduction credited directly to additional
paid-in-capital in accordance with SFAS 109 and the requirements for recording
tax benefits associated with emergence from bankruptcy, and an increase of
$103,000 credited to deferred tax expense relating to temporary differences
originating after emergence from bankruptcy.

DISCHARGE OF INDEBTEDNESS INCOME AND TAX ATTRIBUTE REDUCTION

     For financial reporting purposes, the Company reported an extraordinary
gain in the amount of $153,436,882 resulting from the cancellation of
indebtedness that occurred from the bankruptcy discharge on the Effective Date.
Pursuant to Section 108 of the Internal Revenue Code, this extraordinary gain is
excluded from income taxation and certain tax attributes of the Company are
eliminated or reduced, up to the amount of such income excluded from taxation.
As a result, the Company's net operating loss carryforwards in the

                                        45
<PAGE>   46

amount of $115,257,309 ($40,340,058 tax effected) were eliminated and the tax
basis in the Company's assets was reduced by $38,179,573 ($13,362,956 tax
effected). The net operating loss elimination and basis reduction significantly
contributed to the reduction of the deferred tax asset from the Predecessor
Company to the Successor Company.

DEBT ISSUANCE COSTS

     Prior to the Effective Date, the Company had recorded a deferred tax asset
for debt issuance costs that was being amortized for tax purposes over the term
of the 14 1/4% First Mortgage Notes. On the Effective Date, the deferred tax
asset for debt issuance costs in the amount of $2,628,007 (tax effected) was
eliminated when the 14 1/4% First Mortgage Notes were exchanged for the New
Common Stock.

SECTION 382 LIMITATION

     As of December 31, 2000 and December 26, 1999, the Company had a tax basis
in its assets in excess of its basis for financial reporting purposes that will
generate substantial tax deductions in future periods. As a result of a "change
in ownership" under Internal Revenue Code Section 382, the Company's ability to
utilize depreciation and other tax attributes will be limited to approximately
$6,400,000 per year for the five subsequent years. This limitation is applied to
all built-in losses which exist on the "change of ownership" date, including all
items giving rise to a deferred tax asset.

     For the years ended December 31, 2000 and December 26, 1999, a portion of
the Company's depreciation and other tax attributes in the amount of
approximately $4.0 million that existed on the "change of ownership" date were
limited under Section 382. Pursuant to Section 382, the limited depreciation and
other tax attributes are treated as a net operating loss, which the Company may
utilize in subsequent years.

     The application of Section 382 also resulted in a reduction in the basis of
the Company's assets for purposes of the Alternative Minimum Tax ("AMT"). As a
result, the Company was subject to AMT for the years ended December 31, 2000 and
December 26, 1999 of approximately $.4 million and $.7 million, respectively.
This AMT will be carried forward as a credit against any regular tax generated
in future periods.

(12)  OTHER RELATED PARTY TRANSACTIONS

     Carl C. Icahn related entities own approximately 89.6% of the Company's
Common Stock as of December 31, 2000. On October 4, 1999, AREH repurchased
985,286 shares from entities owned or controlled by Mr. Icahn. On March 24,
2000, AREH purchased 50,000 shares of the Company's common stock from NYBOR.
Upon completion of the purchase, AREH owned 51% of the Company's Common Stock.

     From January 1999, until their resignations in April 2000, Mr. Daniel A.
Cassella and Mr. Thomas A. Lettero, Chief Executive Officer and Chief Financial
Officer, respectively, provided management services to Arizona Charlie's Inc.
and Fresca, LLC d.b.a. Arizona Charlie's East (entities owned 100% by Mr.
Icahn). Subsequently, Mr. Richard Brown, Chief Operating Officer of Stratosphere
Gaming Corporation, Mr. Bobby Ray Harris, Senior Vice President of Operations of
Stratosphere Gaming Corporation and Mr. William Bischoff, Chief Financial
Officer, have provided similar management services. The Company has recorded a
$30,000 receivable that was paid on January 17, 2001, from Arizona Charlie's
Inc. and a $30,000 receivable that was paid on February 21, 2001, from Fresca,
LLC ("Arizona Charlie's East") for payroll and other expenses related to the
services performed from September 25, 2000 to December 31, 2000.

     Pursuant to a wholesale tour and travel agreement with Lowestfare.com (a
company owned by Mr. Icahn), the Company received hotel revenues of $.1 million
during the fourth quarter, 2000 and $.5 million for fiscal year 2000.

(13)  EMPLOYEE BENEFIT PLAN

     Employees of the Company who are members of various unions are covered by
union-sponsored, collectively bargained, multi-employer health and welfare and
defined benefit pension plans. The Company
                                        46
<PAGE>   47

recorded expenses for such plans of $4,622,104; $4,293,974; $1,158,570 and
$3,254,482 for the twelve months ended December 31, 2000, December 26, 1999,
three months ended December 27, 1998 and nine months ended September 27, 1998,
respectively. Sufficient information is not available from the plans' sponsors
to permit the Company to determine its share of unfunded vested benefits, if
any.

     The Company has a retirement savings plan under Section 401(k) of the
Internal Revenue Code covering its non-union employees. The plan allows
employees to defer, within prescribed limits, up to 15% of their income on a
pre-tax basis through contributions to the plan. The Company currently matches,
within prescribed limits, 50% of eligible employees' contributions up to 4% of
their individual earnings. The Company recorded charges for matching
contributions of $195,387; $191,114; $55,818 and $109,967 for the twelve months
ended December 31, 2000, December 26, 1999, three months ended December 27, 1998
and nine months ended September 27, 1998, respectively.

(14)  COMMITMENTS

     The Company and Mr. Richard Brown, Executive Vice President and Chief
Operating Officer of Stratosphere Gaming Corporation entered into a two-year
employment agreement effective March 20, 2000 (the "Brown Agreement"). The Brown
Agreement provides that Mr. Brown will serve as Executive Vice President of
Marketing for the Company and be paid a base annual compensation of $190,000.
The agreement also provides Mr. Brown receive an annual bonus of $20,000 for the
first year. Future annual bonuses can be 0% -- 100% of Mr. Brown's Base Salary
as determined by the Percentage Excess of EBITDA over EBITDA Base Rate, as
defined. The Brown Agreement further provides that if Mr. Brown is terminated
without "Cause" (as defined in the Brown Agreement) or there is a "Change of
Control" (as defined in the Brown Agreement), then Mr. Brown will receive an
immediate severance payment in the amount equal to the then current Base Salary.

(15)  CONTINGENCIES

     The Company's complaint for the avoidance of preferential transfers made to
McDonald's Corporation (the "Complaint") and the Company's objection to the
proof of claim filed by McDonald's Corporation came to trial June 24, 1999. On
September 20, 1999, the Bankruptcy Court entered its Notice of Entry of Findings
of Fact, Conclusions of Law and Judgment Re Debtors' Complaint for Avoidance of
Preferential Transfer Pursuant to 11 U.S.C. sec. 547 and Order Re Objection To
McDonald's Proof of Claim ("Judgment"). The Judgment ordered that payments made
in January 1997, by the Company to McDonald's in the amount of $.7 million
("Judgment Amount"), were preferential payments pursuant to Section 547(b) of
the Bankruptcy Code and were thereby recoverable by the Company. Regarding the
Company's objection to the proof of claim filed by McDonald's, the Bankruptcy
Court held that McDonald's was not entitled to an administrative claim and that
it was not entitled to any claim for damages. On September 29, 1999, McDonald's
Corporation filed its notice of appeal to the Bankruptcy Appellate Panel for the
Ninth Circuit Court of Appeals where it is currently pending.

     The Company has filed a complaint for the avoidance of preferential
transfers made to Grand Casinos, Inc. ("Grand"). Included in the complaint are
approximately $5.9 million of payments made to Grand prior to the Company
beginning bankruptcy proceedings. The parties have conducted discovery; no trail
date has been set. Management anticipates that trial will be set after August 1,
2001 and before December 31, 2001.

     Effective September 30, 2000, the Company and Strato-Retail executing a
Settlement Agreement, Purchase and Sale Agreement and Mutual General Release,
whereby the parties resolved all pending disputes, among other things.

     On January 31, 2001, the Company was named in an action styled Disabled
Rights Action Committee v. Stratosphere Gaming Corp., Case No A430070, in the
Eighth Judicial District Court of the State of Nevada. The Complaint alleges a
number of violations of the Americans with Disabilities Act ("ADA"), including
inadequate room selection, door widths and other similar items. Simultaneously
with the Complaint, plaintiffs filed a Motion for Preliminary Injunction,
seeking to have construction halted on the new tower until the property fully
complies with the ADA. The Company removed the action to the United States
District Court
                                        47
<PAGE>   48

in Nevada and it is now styled as Disabled Rights Action Committee v.
Stratosphere Gaming Corp., Case No. CV-S-01-0162-RAH (PAL). The Company has
moved to dismiss one of the counts of plaintiffs' Complaint. The Company also
opposed plaintiff's Motion for Preliminary Injunction. On March 7, 2001, the
Court held a hearing on the plaintiffs' Motion for Preliminary Injunction and
denied the motion, focusing upon what the Court believed to be the plaintiffs'
lack of irreparable injury. At present, the parties are awaiting the Court's
ruling on the Motion to Dismiss. If the case is not resolved by motion or by
some other method, discovery will then commence. While management intends to
vigorously contest this action, at this time it not possible to estimate the
eventual outcome of this matter.

     In addition, in the ordinary course of business, the Company is party to
various legal actions. In management's opinion, the ultimate outcome of such
legal actions will not have a material effect on the Company's financial
statements taken as a whole.

(16)  QUARTERLY FINANCIAL INFORMATION (UNAUDITED)

     Quarterly financial information for the fiscal years ended December 31,
2000 and December 26, 1999 is presented below. The sum of the individual
quarterly data may not equal the annual data due to rounding and fluctuations in
weighted average shares outstanding on a quarter-to-quarter basis.

<TABLE>
<CAPTION>
                                               MARCH 26,    JUNE 25,    SEPTEMBER 24,    DECEMBER 31,
                                                 2000         2000          2000             2000
                                               ---------    --------    -------------    ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                                            <C>          <C>         <C>              <C>
Net revenues.................................   $34,004     $32,088        $31,623         $35,047
Net income...................................     1,617       1,166            678           1,366
Basic and diluted income per common share....   $  0.80     $  0.57        $  0.33         $  0.67
</TABLE>

<TABLE>
<CAPTION>
                                               MARCH 28,    JUNE 27,    SEPTEMBER 26,    DECEMBER 26,
                                                 1999         1999          1999             1999
                                               ---------    --------    -------------    ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                                            <C>          <C>         <C>              <C>
Net revenues...............................     $33,915     $29,771        $30,712         $28,829
Net income (loss)..........................       2,119         122            101            (122)
Basic and diluted income (loss) per common
  share....................................     $  1.04     $  0.06        $  0.05         $ (0.06)
</TABLE>

ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
         FINANCIAL DISCLOSURE

     On March 1, 2000, the Company dismissed Arthur Andersen LLP as its
independent accountants effective May 31, 2000. The Company engaged KPMG LLP as
its new independent accountants as of March 1, 2000. The Form 8-K filed on March
1, 2000 by the Company regarding the change in accountants is incorporated by
reference in the December 26, 1999 Form 10-K.

                                        48
<PAGE>   49

                                    PART III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

     The following table sets forth the executive officers and directors of the
Company:

<TABLE>
<CAPTION>
                  NAME                       AGE                    POSITION
                  ----                       ---                    --------
<S>                                          <C>    <C>
Carl C. Icahn............................     65    Chairman of the Board
John P. Saldarelli.......................     59    Director
Robert J. Mitchell.......................     54    Director
Martin Hirsch............................     46    Director
Judge Jerome M. Becker...................     65    Director
William F. Bischoff......................     59    Senior Vice President, Chief Financial
                                                    Officer.
                                                    Treasurer and Secretary
</TABLE>

     CARL C. ICAHN, age 65, has served as Chairman of the Board and a Director
of Starfire Holding Corporation (formerly Icahn Holding Corporation), a
privately-held holding company, and Chairman of the Board and a Director of
various subsidiaries of Starfire, including ACF Industries, Incorporated, a
privately-held railcar leasing and manufacturing company, since 1984. He has
also been Chairman of the Board and President of Icahn & Co., Inc., a registered
broker-dealer and a member of the National Association of Securities Dealers,
since 1968. Since November 1990, Mr. Icahn has been Chairman of the Board of
American Property Investors, Inc., the general partner of American Real Estate
Partners, L.P., a public limited partnership that invests in real estate. Mr.
Icahn has been a Director of Cadus Pharmaceutical Corporation, a firm that holds
various biotechnology patents, since 1993. Since August 1998 he has also served
as Chairman of the Board of Lowestfare.com, LLC, an internet travel reservations
company. From October 1998, Mr. Icahn has been the President and a Director of
Stratosphere Corporation, which operates the Stratosphere Hotel and Casino.
Since September 29, 2000, Mr. Icahn has served as the Chairman of the Board of
GB Holdings, Inc., GB Property Funding, Inc. and Greate Bay Hotel & Casino, Inc.
which owns and operates the Sands Hotel in Atlantic City, NJ. Mr. Icahn received
his B. A. from Princeton University.

     JOHN P. SALDARELLI has served as Vice President, Secretary and Treasurer of
American Property Investors, Inc. (general partner of American Real Estate
Partners) since March 18, 1991. Mr. Saldarelli was also President of Bayswater
Realty Brokerage Corp. from June 1987 until November 19, 1993, and Vice
President of Bayswater Realty & Capital Corp. from September 1979 until April
15, 1993. Mr. Saldarelli has served as a Director of the Company since October
14, 1998.

     ROBERT J. MITCHELL, age 54, has been Senior Vice President-Finance of ACF
Industries, Incorporated, a privately-held railcar leasing and manufacturing
company, since March 1995 and was Treasurer of ACF from December 1994 to March
1995. Mr. Mitchell has also served as President and Treasurer of ACF Industries
Holding Corp., a privately-held holding company for ACF, since August 1993. Mr.
Mitchell is a director of National Energy Group, Inc., a public company involved
in the exploration of oil and gas reserves, since August 1996. Mr. Mitchell also
serves as a Director of Stratosphere Corporation, which operates the
Stratosphere Hotel and Casino, since October 14, 1998. Mr. Mitchell received his
BS Degree in Business Administration from St. Francis College.

     MARTIN HIRSCH has served as a Vice President of American Property
Investors, Inc. since March 18, 1991, where he is involved in investing,
managing and disposing of real estate properties and securities. From January
1986 to January 1991, he was at Integrated Resources, Inc. as a Vice President
where he was involved in the acquisition of commercial real estate properties
and asset management. From 1985-1986, he was a Vice President of Hall Financial
Group where he acquired and financed commercial and residential properties. Mr.
Hirsch received his MBA from The Emory University Graduate School of Business.
Mr. Hirsch has served as a Director of the Company since October 14, 1998.

     JUDGE JEROME M. BECKER serves as Chairman of the New York State Housing
Finance Agency, the New York State Affordable Housing Corporation, the New York
State Project Finance Agency and the

                                        49
<PAGE>   50

New York State Municipal Bond Bank. Judge Becker also serves as Vice-Chairman of
the State of New York Mortgage Agency. Judge Becker is a Director of the New
York State Mortgage Loan Enforcement and Administration Corporation, Director of
the New York State Housing Trust Fund Corporation and Member of the Homeless
Housing Assistance Corporation. He is also a Brigadier General in the New York
Guard. Judge Becker has formerly served as a Family Court Judge of the State of
New York and as an Acting Criminal Court Judge of the New York City Criminal
Court. He also served as Special District Attorney of Kings County (Brooklyn),
Chairman of the New York City Conditional Release Commission (Parole), Chairman
of the New York City Youth Board, Commissioner of the New York City Human Rights
Commission and Member of the New York City Board of Correction. Judge Becker is
a member of the New York State Bar having been admitted in 1962 and since has
become a member of the Washington DC, Colorado and Pennsylvania Bars. He is also
admitted to various federal courts including the United States Supreme Court.
Judge Becker has also practiced law privately having represented domestic and
international real estate interests.

     WILLIAM F. BISCHOFF has been Senior Vice President Administration and Chief
Financial Officer since April 2000. Mr. Bischoff also served as Vice President
and Chief Financial Officer of Arizona Charlie's, Inc., an entity owned by Mr.
Carl C. Icahn, from March 1999 to April 2000. From August 1995 until March 1999,
Mr. Bischoff was the Controller of Golden Gate Hotel and Casino in Las Vegas,
Nevada. From May 1993 until August 1995, Mr. Bischoff worked as an Independent
Gaming Consultant and Certified Public Accountant. From July 1990 until May
1993, he served as Executive Vice President and Chief Financial Officer of
Western Acceptance Corporation, an insurance premium finance company in Las
Vegas, Nevada. Mr. Bischoff was employed with Caesars Palace in Las Vegas,
Nevada from October 1987 until July 1990 as Assistant Vice President of Casino
Administration.

OTHER MATTERS

     On January 5, 2001, Reliance Group Holdings, Inc. ("Reliance") commenced an
action in the United States District Court for the Southern District of New York
against Carl C. Icahn, Icahn associates Corp. and High River Limited Partnership
("High River") alleging that High River's tender offer for Reliance 9% senior
notes violated Section 14(e) of the Exchange Act of 1934. Reliance sought a
temporary restraining order and preliminary and permanent injunctive relief to
prevent defendants from purchasing the notes. The Court initially imposed a
temporary restraining order. Defendants then supplemented the tender offer
disclosures. The Court conducted a hearing on the disclosures and other matters
raised by Reliance. The Court then denied Reliance's motion for a preliminary
injunction and ordered dissolution of the temporary restraining order following
dissemination of the supplement. Reliance took an immediate appeal to the United
States Court of Appeals for the Second Circuit and sought a stay to restrain
defendants from purchasing notes during the pendency of the appeal. On January
30, 2001, the Court of Appeals denied plaintiffs' stay application. On January
30, 2001, Reliance also sought a further temporary restraining order from the
District Court. The Court considered the matter and reimposed its original
restraint until noon the next day, at which time the restraint against Mr. Icahn
and his affiliates was dissolved. On March 22, 2001, the Court of Appeals ruled
in favor of Mr. Icahn by affirming the judgment of the District Court.

                                        50
<PAGE>   51

ITEM 11.  EXECUTIVE COMPENSATION

     The following table sets forth certain information concerning the
compensation for services rendered by the Chief Executive Officer of the Company
and for each executive officer of the Company.

                           SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
                                                                                   LONG-TERM
                                                                                  COMPENSATION
                                                                                     AWARDS
                                                                                  ------------
                                                       ANNUAL COMPENSATION         SECURITIES
                                                   ----------------------------    UNDERLYING
NAME AND PRINCIPAL POSITION                        YEAR     SALARY       BONUS    OPTIONS (#)
---------------------------                        ----     -------     -------   ------------
<S>                                                <C>      <C>         <C>       <C>
DANIEL A. CASSELLA(a)...........................   2000     196,520          --       --
Chief Executive Officer                            1999     500,000          --       --
                                                   1998     158,582          --       --
ANDREW BLUMEN(b)................................   2000          --          --(c)     --
General Counsel                                    1999      67,920          --       --
                                                   1998     265,769     225,000       --
THOMAS A. LETTERO(d)............................   2000     112,305          --(c)     --
Executive Vice President/Chief Financial           1999     302,553     200,000       --
Officer, Treasurer and Secretary                   1998     307,334                   --
THOMAS WILLER...................................   2000     116,058          --(c)     --
Vice President Marketing                           1999     180,000          --       --
                                                   1998     180,000      83,125       --
WILLIAM F. BISCHOFF.............................   2000     142,907      18,700       --
Senior Vice President/Chief Financial              1999          --          --       --
Officer, Treasurer and Secretary                   1988          --          --       --
</TABLE>

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

(a)  Effective January 18, 2000, Mr. Cassella resigned as an officer and
     director to the Company.

(b)  Effective July 2, 1999, Mr. Blumen resigned as general counsel to the
     Company.

(c)  Represents amounts paid pursuant to Senior Executive Retention Agreements.

(d)  Effective March 7, 2000, Mr. Lettero resigned as an officer of the Company
     and its subsidiaries.

                       OPTION GRANTS IN LAST FISCAL YEAR

     The Company has not implemented a stock option plan as of March 23, 2000.

EMPLOYMENT AGREEMENTS, SEPARATION AGREEMENT AND SEVERANCE AGREEMENTS

     The Company and Mr. Lettero entered into an employment agreement effective
as of May 15, 1998 (the "Lettero Agreement") continuing until June 9, 2000. The
Lettero Agreement provides that Mr. Lettero will serve as Chief Financial
Officer for the Company and be paid base annual compensation of $300,000. The
Lettero Agreement further provides that if Mr. Lettero is terminated without
"Cause" (as defined in the Lettero Agreement) or there is a "Change of Control"
(as defined in the Lettero Agreement), then Mr. Lettero will receive an
immediate severance payment of $200,000. The Lettero Agreement is terminable by
Mr. Lettero at any time by providing the Company 90 days prior written notice.
The Lettero Agreement also provides that if Mr. Lettero is not retained as Chief
Financial Officer of the Company at the end of the term, then Mr. Lettero will
receive an immediate severance payment of $75,000.

     On March 7, 2000, Mr. Lettero resigned as an officer of Stratosphere
Corporation and subsidiaries. Mr. Lettero has agreed to continue his duties and
responsibilities as Chief Financial Officer and assist in a succession plan for
a period not longer than ninety days.

                                        51
<PAGE>   52

     The Company and Mr. Richard Brown, Executive Vice President and Chief
Operating Officer of Stratosphere Gaming Corporation entered into a two-year
employment agreement effective March 20, 2000 (the "Brown Agreement"). The Brown
Agreement provides that Mr. Brown will serve as Executive Vice President of
Marketing for the Company and be paid a base annual compensation of $190,000.
The agreement also provides Mr. Brown receive an annual bonus of $20,000 for the
first year. Future annual bonuses can be 0% -- 100% of Mr. Browns Base Salary as
determined by the Percentage Excess of EBITDA over EBITDA Base Rate, as defined.
The Brown Agreement further provides that if Mr. Brown is terminated without
"Cause" (as defined in the Brown Agreement) or there is a "Change of Control"
(as defined in the Brown Agreement), then Mr. Brown will receive an immediate
severance payment in the amount equal to the then current Base Salary.

DIRECTOR COMPENSATION

     Each current director of the Company who is not an employee of the Company
or any of their affiliates receives $1,000 for any board meeting or committee
meeting attended. Employees of the Company or any of their affiliates will
receive no additional compensation for service as a director or committee
member. All directors will be reimbursed for expenses incurred in attending
board or committee meetings.

     On November 14, 1999, Jerome M. Becker was elected as the sole independent
member to the Stratosphere Corporation Board of Directors. Mr. Becker was
compensated $40,000 in advance for his services.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

     The Compensation Committee consisted of Mr. Icahn and Mr. Cassella until
January 18, 2000. Since that date, the Compensation Committee consisted of Mr.
Mitchell and Mr. Icahn.

     Mr. Icahn (including certain related entities) is actively involved in the
gaming industry and currently owns 89.6% of the Company's New Common Stock.
Casinos owned or managed by Mr. Icahn may directly or indirectly compete with
the Company. In addition, the potential for conflicts of interest exists among
the Company and Mr. Icahn for future business opportunities. Mr. Icahn may
intend to pursue other business opportunities and there is no agreement
requiring that such additional business opportunities be presented to the
Company.

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     The following table sets forth as of March 13, 2000, certain information
regarding the beneficial ownership of shares of New Common Stock by each
director of the Company, each of the executive officers listed in the Summary
Compensation Table, each person known to the Company to be the beneficial owner
of more than 5% of the outstanding shares and all directors and executive
officers as a group. Except as otherwise indicated, each stockholder has sole
voting and investment power with respect to the shares beneficially owned.

<TABLE>
<CAPTION>
                                                              NUMBER OF
NAME                                                           SHARES      PERCENT
----                                                          ---------    -------
<S>                                                           <C>          <C>
Carl C. Icahn...............................................  1,818,600(a)  89.6
John P. Saldarelli..........................................         --       --
Robert J. Mitchell..........................................         --       --
Martin Hirsch...............................................         --       --
Jerome M. Becker............................................         --       --
William F. Bischoff.........................................         --       --
All directors and executive officers (as a group four
  persons)..................................................  1,818,600     89.6
</TABLE>

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

(a)  Includes 1,035,286 shares held by American Real Estate Holdings Limited
     Partnership ("AREH") that were repurchased from entities owned or
     controlled by Carl C. Icahn. AREH is the subsidiary

                                        52
<PAGE>   53

     limited partnership of American Real Estate Partners, L.P. ("AREP") a
     master limited partnership whose units are traded on the New York Stock
     Exchange. Mr. Icahn currently owns approximately 85% of the outstanding
     depository units of AREP.

SECTION 16(A)  BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

     Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
officers and directors, and persons who own more than ten percent of a
registered class of the Company's equity securities, to file reports of
ownership and changes in ownership with the Securities and Exchange Commission
(the "SEC") and the Nasdaq National Market System. Officers, directors and
greater than ten percent shareholders are required by SEC regulation to furnish
the Company with copies of all Section 16(a) forms they file. Based solely on
review of the copies of such forms furnished by the Company, or written
representations that no Forms 5 were required, the Company believes that during
the fiscal years ended December 31, 2000 and December 26, 1999, all Section
16(a) filing requirements applicable to its officers, directors and greater than
ten-percent beneficial owners were satisfied.

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     Mr. Icahn (including certain related entities) is actively involved in the
gaming industry and currently owns 89.6% of the Company's New Common Stock.
Casinos owned or managed by Mr. Icahn may directly or indirectly compete with
the Company. In addition, the potential for conflicts of interest exists among
the Company and Mr. Icahn for future business opportunities. Mr. Icahn may
intend to pursue other business opportunities and there is no agreement
requiring that such additional business opportunities be presented to the
Company.

     The Company has entered into a wholesale tour and travel agreement with
Lowestfare.com (a company owned by Mr. Icahn). The Company received hotel
revenues of $.5 million during each of the fiscal years 2000 and 1999 from
Lowestfare.com.

     On January 1, 1999, the Company employed Albo Antenucci for construction
management services at a base annual salary of $75,000. Mr. Antenucci is the
Executive Vice President and Chief Operating Officer of American Property
Investors, Inc., the General Partner of both AREP and AREH. Mr. Antenucci
received approximately $72,000 of compensation for the fiscal year ended
December 26, 1999 and $47,885 of compensation in fiscal year 2000 through his
termination date of July 31, 2000.

     In 1999, Mr. Cassella and Mr. Lettero provided "over sight" management
services to Arizona Charlie's, an entity owned and controlled by Carl C. Icahn.
The Company was reimbursed $240,000 for the cost of all such services provided.
In 2000, Mr. Cassella, Mr. Lettero, Mr. Brown, Mr. Bischoff and Mr. Bobby Ray
Harris, Senior Vice President of Operations continued to provide such services
to both Arizona Charlie's, Inc and Fresca, LLC d.b.a. Arizona Charlie's East,
entities owned and controlled by Mr. Carl C. Icahn. The Company was reimbursed
$240,000 for the cost of all such services provided.

                                        53
<PAGE>   54

                                    PART IV

ITEM 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

     (a)(1)  Consolidated Financial Statements:

     Included in Part II:

<TABLE>
<S>              <C>                                                          <C>
                 Report of Independent Auditors -- December 31, 2000.........      25
                 Report of Independent Public Accountants -- December 26,          26
                 1999........................................................
                 Consolidated Balance Sheets at December 31, 2000 and              27
                 December 26, 1999...........................................
                 Consolidated Statements of Operations for fiscal year ended       28
                 December 31, 2000 (Successor Company), December 26, 1999
                 (Successor Company) for the period September 28, 1998
                 through December 27, 1998 (Successor Company) and for the
                 period December 29, 1997 through September 27, 1998
                 (Predecessor Company).......................................
                 Consolidated Statements of Shareholders' Equity (Deficit)         29
                 for the year ended December 31, 2000 (Successor Company),
                 December 26, 1999 (Successor Company), September 28, 1998
                 through December 27, 1998 (Successor Company) and for the
                 period, December 29, 1997 through September 27, 1998
                 (Predecessor Company).......................................
                 Consolidated Statements of Cash Flows for fiscal year ended       30
                 December 31, 2000 (Successor Company), December 26, 1999
                 (Successor Company), for the period September 28, 1998
                 through December 27, 1998 (Successor Company) and for the
                 period December 29, 1997 through September 27, 1998
                 (Predecessor Company).......................................
                 Notes to Consolidated Financial Statements..................      33
</TABLE>

     (a)(2)  Supplemental Financial Statement Schedules

     All financial statement schedules have been omitted because either they are
not required or the information required to be set forth therein is included in
the Consolidated Financial Statements or in the Notes thereto.

     (a)(3)  Exhibits

<TABLE>
<CAPTION>
EXHIBIT          DESCRIPTION OF DOCUMENT
-------          -----------------------
<S>              <C>                                                           <C>
2(1)             Disclosure Statement to accompany the Company's Second Amended Plan of
                 Reorganization.(d)
2(2)             The Company's Restated Second Amended Plan of Reorganization, dated
                 February 26, 1998.(e)
3(1)             Certificate of Incorporation of the Company, as amended.(f)
3(2)             Bylaws of the Company, as amended and restated.(f)
3(3)             Articles of Incorporation of the Operating Subsidiary.(f)
3(4)             Bylaws of the Operating Subsidiary.(f)
10(1)            Owner Participation Agreement between the City of Las Vegas Downtown
                 Redevelopment Agency and the Company.(b)
10(2)            Development and Lease Agreement, dated March 11, 1996 by and between
                 Strato-Retail, LLC and the Company.(a)
10(3)            Participation Agreement, dated as of April 29, 1996 by and among
                 Stratosphere Gaming Corp., First Security Trust Company of Nevada, The
                 Persons Listed on Schedule II, Bank of Scotland, First Interstate Bank
                 of Nevada, Societe Generale, Credit Lyonnais, Los Angeles Branch, BA
                 Leasing & Capital Corporation and the Company.(b)
10(4)            Lease Agreement, dated as of April 29, 1996 by and between First
                 Security Trust Company of Nevada and Stratosphere Gaming Corp.(b)
10(5)            Loan Agreement, dated as of April 29, 1996 by and among First Security
                 Trust Company of Nevada, BA Leasing & Capital Corporation, Bank of
                 Scotland, First Interstate Bank of Nevada, Societe Generale, Credit
                 Lyonnais, Los Angeles Branch, and the Persons Listed on Schedule I.(b)
</TABLE>

                                        54
<PAGE>   55

<TABLE>
<CAPTION>
EXHIBIT          DESCRIPTION OF DOCUMENT
-------          -----------------------
<S>              <C>                                                           <C>
10(6)            Promissory Notes from the Borrower to the Various Lenders.(b)
10(7)            Trust Agreement, dated as of April 29, 1996 between Stratosphere Gaming
                 Corp., as Grantor, and First Security Trust Company of Nevada, as
                 Trustee.(b)
10(8)            Security Agreement and Assignment of Lease, dated as of April 29, 1996
                 between First Security Trust Company of Nevada and BA Leasing & Capital
                 Corporation.(b)
10(9)            Guaranty, dated as of April 29, 1996 by the Company in favor of the
                 Beneficiaries named therein.(b)
10(10)           Subordination Agreement, entered into as of April 29, 1996 by and among
                 Stratosphere Gaming Corp., the Company, Grand Casinos, Inc., First
                 Security Trust Company of Nevada, and BA Leasing & Capital
                 Corporation.(b)
10(11)           Standstill and Amendment Agreement, dated as of October 30, 1996 by and
                 among Stratosphere Gaming Corp., First Security Trust Company of
                 Nevada, Bank of Scotland, Wells Fargo Bank, National Association,
                 Societe Generale, Credit Lyonnais, Los Angeles Branch, BA Leasing &
                 Capital Corporation and the Company.(c)
10(12)           Senior Executive Retention Agreement, dated as of January 23, 1998 by
                 and between Thomas Lettero and the Company.(e)
10(13)           Senior Executive Retention Agreement, dated as of January 23, 1998 by
                 and between Andrew S. Blumen and the Company.(e)
10(14)           Executive Employment Agreement dated effective as of May 15, 1998 by
                 and between Thomas A. Lettero and Stratosphere Corporation and
                 Stratosphere Gaming Corporation.(f)
10(15)           Participation Agreement, dated as of May 28, 1999, among Stratosphere
                 Gaming Corp., as Lessee, Stratosphere Corporation, as Guarantor, First
                 Security Trust Company of Nevada, as Lessor and Trustee, The Persons
                 Listed on Schedule II, as Lenders and Heller Financial Leasing, Inc.,
                 as Agent.(g)
10(16)           Exhibit A to Participation Agreement Form of Lease Agreement, dated as
                 of May 28, 1999, between First Security Trust Company of Nevada, not in
                 its individual capacity, except as expressly stated herein, but solely
                 as Trustee, as Lessor, and Stratosphere Gaming Corp., as Lessee.(g)
10(17)           Exhibit B to Participation Agreement Form of Loan Agreement, dated as
                 of May 28, 1999, among First Security Trust Company of Nevada, not in
                 its individual capacity, except as expressly stated herein, but solely
                 as Trustee, as Borrower, Heller Financial Leasing, Inc., as Agent, and
                 The Persons Listed on Schedule I, as Lenders.(g)
10(18)           Exhibit C to Participation Agreement Form of Trust Agreement, dated as
                 of May 28, 1999, between Stratosphere Gaming Corp., as Grantor, and
                 First Security Trust Company of Nevada, as Trustee.(g)
10(19)           Exhibit D to Participation Agreement Form of Security Agreement and
                 Assignment of Lease, dated as of May 28, 1999, between First Security
                 Trust Company of Nevada, not in its individual capacity but solely as
                 Trustee, and Heller Financial Leasing, Inc. as Agent.(g)
10(20)           Exhibit E to Participation Agreement Form of Guaranty, dated as of May
                 28, 1999, of Stratosphere Corporation in favor of The Beneficiaries
                 Named Herein.(g)
10(21)           Exhibit G to Participation Agreement Landlord Waiver and Consent.(g)
10(22)           Exhibit H to Participation Agreement Form of Advance Request.(g)
10(23)           Exhibit I to Participation Agreement Form of Bill of Sale.(g)
10(24)           Exhibit J to Participation Agreement Form of Certificate of Acceptance
                 of Lessee.(g)
10(25)           Exhibit K to Participation Agreement Form of Investor's Lett er.(g)
10(26)           Exhibit M to Participation Agreement Form of Opinion of Counsel to
                 Parent and Lessee.(g)
10(27)           Executive Employment Agreement dated effective as of March 20, 2000 by
                 and between Richard Brown and Stratosphere Corporation
21               Subsidiaries.(f)
</TABLE>

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

(a)  Incorporated herein by reference to the Company's Quarterly Report on Form
     10-Q for the quarterly period ended March 31, 1996.

(b)  Incorporated herein by reference to the Company's Quarterly Report on Form
     10-Q for the quarterly period ended June 30, 1996.

                                        55
<PAGE>   56

(c)  Incorporated herein by reference to the Company's Quarterly Report on Form
     10-Q for the quarterly period ended September 29, 1996.

(d)  Incorporated herein by reference to the Company's Quarterly Report on Form
     10-Q for the quarterly period ended September 30, 1997.

(e)  Incorporated herein by reference to the Company's Annual Report on Form
     10-K for the year ended December 28, 1997.

(f)  Incorporated herein by reference to the Company's Annual Report on Form
     10-K for the year ended December 27, 1998.

(g)  Incorporated herein by reference to the Company's Quarterly Report on Form
     10-Q for the quarterly period ended June 27, 1999.

(h)  Incorporated herein by reference to the Company's Form 8-K filed March 1,
     2000.

+     Relates to Executive Compensation.

(b)  Reports on Form 8-K.

     The Company filed no Reports on Form 8-K during the fiscal quarter ended
December 26, 1999.

                                        56
<PAGE>   57

                                   SIGNATURES

     In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.

                                          STRATOSPHERE CORPORATION
                                          Registrant

<TABLE>
<S>                                           <C>

Date: March 23, 2001                                          /s/ WILLIAM F. BISCHOFF
                                              By: ----------------------------------------------------
                                                             Name: William F. Bischoff
                                                          Title:  Chief Financial Officer
</TABLE>

     In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities
indicated on March 23, 2001.

<TABLE>
<CAPTION>
                    NAME                                             TITLE
                    ----                                             -----
<S>                                              <C>
              /s/ CARL C. ICAHN                  Chairman of the Board
---------------------------------------------
                Carl C. Icahn

           /s/ JOHN P. SALDARELLI                Director
---------------------------------------------
             John P. Saldarelli

           /s/ ROBERT J. MITCHELL                Director
---------------------------------------------
             Robert J. Mitchell

              /s/ MARTIN HIRSCH                  Director
---------------------------------------------
                Martin Hirsch

            /s/ JEROME M. BECKER                 Director
---------------------------------------------
              Jerome M. Becker

           /s/ WILLIAM F. BISCHOFF               Chief Financial Officer, Treasurer and
---------------------------------------------    Secretary
             William F. Bischoff
</TABLE>

                                        57