<PAGE>   1
 
================================================================================
                UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
 
     THE FOLLOWING ITEMS WERE THE SUBJECT OF A FORM 12B-25 AND ARE INCLUDED
HEREIN: Financial information regarding foreign and domestic operations and
export sales required under Item 1, information on quarterly stock prices
required under Item 5, Items 6, 7, 8, 10, 11, 12, 13 and financial information,
certain exhibits and other items required under Item 14.
 
                                FORM 10-K/A - 1
                ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
                      THE SECURITIES EXCHANGE ACT OF 1934
 
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996        COMMISSION FILE NUMBER 1-4115
 
                         ZENITH ELECTRONICS CORPORATION
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
 
<TABLE>
<S>                                                <C>
                  DELAWARE                                          36-1996520
      (STATE OR OTHER JURISDICTION OF                (I.R.S. EMPLOYER IDENTIFICATION NUMBER)
       INCORPORATION OR ORGANIZATION)
 1000 MILWAUKEE AVENUE, GLENVIEW, ILLINOIS                          60025-2493
  (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)                          (ZIP CODE)
</TABLE>
 
       REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (847) 391-7000
 
          SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
 
<TABLE>
<CAPTION>
                                                                  NAME OF EACH EXCHANGE
                    TITLE OF EACH CLASS                            ON WHICH REGISTERED
                    -------------------                           ---------------------
<S>                                                             <C>
COMMON STOCK, $1 PAR VALUE AND ASSOCIATED PURCHASE RIGHTS       NEW YORK STOCK EXCHANGE
                                                                CHICAGO STOCK EXCHANGE
                                                                BASEL, GENEVA AND ZURICH,
                                                                SWITZERLAND STOCK EXCHANGE
6 1/4% CONVERTIBLE SUBORDINATED DEBENTURES, DUE 2011            NEW YORK STOCK EXCHANGE
</TABLE>
 
          SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
 
                                      NONE
 
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 REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY STATEMENTS INCORPORATED BY
REFERENCE IN PART III OF THIS FORM 10-K OR ANY AMENDMENT TO THIS FORM 10-K.  [X]
 
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED
TO BE FILED 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 [ ]
 
THE AGGREGATE MARKET VALUE OF THE REGISTRANT'S COMMON STOCK HELD BY
NON-AFFILIATES BASED ON THE NEW YORK STOCK EXCHANGE CLOSING PRICE ON MARCH 26,
1997, WAS $321,205,625.
 
AS OF MARCH 26, 1997, THERE WERE 66,448,593 SHARES OF COMMON STOCK, PAR VALUE $1
PER SHARE OUTSTANDING.
 
                      DOCUMENTS INCORPORATED BY REFERENCE
 
PORTIONS OF THE REGISTRANT'S DEFINITIVE PROXY STATEMENT DATED APRIL 22, 1997,
ARE INCORPORATED BY REFERENCE INTO PART III OF THIS REPORT.
================================================================================
<PAGE>   2
 
                                     PART I
 
ITEM 1. BUSINESS
 
     The company was founded in 1918 and has been a leader in consumer
electronics, first in radio and later in monochrome and color television and
other video products. The company's operations involve a dominant industry
segment, the design, development, manufacture and marketing of video products
(including color TV sets and other consumer products) along with parts and
accessories for such products. These products, along with purchased VCRs, are
sold principally to retail dealers in the United States and to retail dealers
and wholesale distributors in other foreign countries. The company also sells
directly to buying groups, private label customers and customers in the lodging,
health care and rent-to-own industries. The company's video products also
include color picture tubes that are produced for and sold to other
manufacturers and Network Systems products which include digital and analog
set-top boxes and cable modems, interactive TV and data communication products
which are sold primarily to cable TV operators, telecommunications companies and
other commercial users of these products.
 
     The company has sold or downsized its non-core business activities. The
company sold its monochrome video monitor business in 1993 and its power supply
business in 1994. Its activities in color video monitors sold to computer
manufacturers ceased in 1995 and its activities in high-security electronic
equipment have been discontinued.
 
     The company has incurred losses in all but one of the years since 1985.
These results reflected the cumulative effect of frequent and significant color
TV price reductions during the 1980s and 1990s, and also reflected earlier
recessionary conditions in the United States. In addition, the company has
invested significant amounts in engineering and research in recent years, which
amounts have been expensed as incurred.
 
     In November 1995, a change in control of the company occurred, in which LG
Electronics, Inc. and LG Semicon Company, Ltd., corporations organized under
the laws of the Republic of Korea ("LGE"), purchased shares of the company
pursuant to a combined tender offer and purchase of newly issued shares of
common stock from the company. As of December 31, 1996, LGE owned 36,569,000
shares of common stock of the company, which represents 55 percent of the
outstanding common stock.
 
Raw Materials
 
     Many materials, such as copper, plastic, steel, wood, glass, aluminum and
zinc, are essential to the business. Adequate sources of supply exist for these
materials.
 
Patents
 
     The company holds many patents and is licensed under a number of patents
which are of importance to its business. The company has patents and patent
applications for numerous high-definition TV ("HDTV") related inventions. To the
extent these inventions are incorporated into the HDTV standard adopted by the
Federal Communications Commission, the company expects to receive royalties from
these patents. In addition, royalties have been and may be received from these
patents for non-HDTV applications as well. In addition, major manufacturers of
TV sets and VCRs agreed during 1992 to take licenses under some of the company's
U.S. tuning system patents. Based on 1996 U.S. industry unit sales levels and
technology, more than $25 million in annual royalty income is expected through
the life of these patents, the last of which expire in 2003. While in the
aggregate its patents and licenses are valuable, the business of the company is
not materially dependent on them.
 
Seasonal Variations in Business
 
     Sales of the company's consumer electronics products are generally at a
higher level during the second half of the year. Sales of consumer electronics
products typically increase in the fall, as the summer vacation season ends and
people spend more time indoors with the new fall programming on TV and during
the Christmas holiday season. During each of the last three years, approximately
60 percent of the company's net
 
                                        3
<PAGE>   3
 
sales were recorded in the second half of the year and approximately 30 percent
of the company's net sales were recorded in the fourth quarter of the year.
 
Major Customers
 
     Sales to a single customer, Circuit City Stores, Inc., amounted to $187.2
million (15 percent) in 1996, $172.1 million (14 percent) in 1995 and $180.8
million (12 percent) in 1994. Sales to a second customer, Sears, Roebuck and
Company, accounted for $140.9 million (11 percent) in 1996. No other customer
accounted for 10 percent or more of net sales.
 
Competitive Conditions
 
     Competitive factors in North America include price, performance, quality,
brand strength and reputation, variety of products and features offered,
marketing and sales capabilities, manufacturing costs, and service and support.
 
     The company's major product areas, including the color TV market, are
highly competitive. The company's major competitors are significantly larger,
100 percent foreign-owned companies, generally with greater worldwide TV volume
and overall resources. In efforts to increase market share or achieve higher
production volumes, the company's major competitors have aggressively lowered
their selling prices in the past several years.
 
Research and Development
 
     During 1996 expenditures for company-sponsored research and engineering
relating to new products and services and to improvements of existing products
and services were $46.7 million. Research and engineering expenditures were
$43.5 million in 1995 and $45.4 million in 1994.
 
Environmental Matters
 
     Compliance with federal, state and local environmental protection
provisions is not expected to have a material effect on capital expenditures,
earnings or the competitive position of the company. Further information
regarding environmental compliance is set forth under Item 3 of this report.
 
Number of Employees
 
     At year-end 1996, the company employed approximately 15,900 people, of whom
approximately 11,300 are hourly workers covered by collective bargaining
agreements. Approximately 4,400 of the company's employees are located in the
Chicago, Illinois, area, of whom approximately 2,800 are represented by unions.
Approximately 11,200 of the company's employees are located in Mexico, of whom
approximately 8,500 are represented by unions. Mexican labor contracts expire
every two years and wages are renegotiated annually or more frequently under
rapid devaluation or high inflation periods. The company pays competitive
salaries, wages and benefits and believes that it has good relations with its
employees.
 
Financial Information about Foreign and Domestic Operations and Export Sales
 
     Information regarding foreign operations is included in "Note Eight --
Geographic Segment Data" which is contained in this report. Export sales are
less than 10% of consolidated net sales.
 
     The company's product lines are dependent on the continuing operations of
the company's manufacturing and assembly facilities located in Mexico.
 
                                        4
<PAGE>   4
 
ITEM 2. PROPERTIES
 
     The company utilizes a total of approximately 5.3 million square feet for
manufacturing, warehousing, engineering and research, administration and
distribution, as described below.
 
<TABLE>
<CAPTION>
                                                                                               SQUARE FEET
                                                                                                   (IN
              LOCATION                                  NATURE OF OPERATION                     MILLIONS)
              --------                                  -------------------                    -----------
<S>                                      <C>                                                   <C>
DOMESTIC:
Chicago, Illinois (including.........    Six locations -- production of color picture
                                         tubes, parts
suburban locations)                      and service; engineering and research, marketing          2.2
                                         and administration activities; and assembly of
                                         electronic components (.6 million square feet is
                                         leased by the company)
Fort Worth, El Paso, McAllen,........    Six locations -- warehouses/offices (.6 million
                                         square
Brownsville and Dallas, Texas;           feet is leased by the company)                             .7
Douglas, Arizona
FOREIGN:
Mexico...............................    Twelve manufacturing and warehouse locations --           2.4
                                         production of plastic and wooden cabinets for
                                         color television, sub-assembly production of
                                         television chassis, tuners and other components
                                         and final assembly of color television and Network
                                         Systems products
Taiwan...............................    One location -- purchasing office                          --
                                                                                                   ---
       Total
                                                                                                   5.3
                                                                                                   ===
</TABLE>
 
     The company's facilities are suitable and adequate to meet current and
anticipated requirements. None of the real property owned by the company is
mortgaged.
 
ITEM 3. LEGAL PROCEEDINGS
 
     The company is involved in various legal actions, environmental matters,
and other proceedings relating to a wide range of matters that are incidental to
the conduct of its business. The company believes that, after reviewing such
matters with the company's counsel, any liability that may ultimately be
incurred with respect to these matters is not expected to have a material effect
on either the company's consolidated financial position or results of
operations.
 
Litigation
 
     Numerous lawsuits against major computer and peripheral equipment
manufacturers are pending in the U.S. District Court, Eastern District of New
York, the U.S. District Court of New Jersey and the New York State courts, as
well as other federal courts. These lawsuits seek several billion dollars in
damages from various defendants for repetitive stress injuries claimed to have
been caused by the use of word processor equipment. The company has been named
as a defendant in twenty-seven of these cases which relate to keyboards
allegedly manufactured or designed by the company for its former subsidiary,
Zenith Data Systems Corporation, which the company sold in 1989. Plaintiffs in
the company's cases seek to recover $31 million actual and $321 million punitive
damages from the company. The company believes it has meritorious defenses to
the cases. Thirteen of the foregoing cases have been dismissed, most without
prejudice or subject to the appeal of the 1996 Blanco v. AT&T ruling on the
applicable statute of limitations in the New York Supreme Court Appellate
Division.
 
     In 1994, the company notified its 15 independent distributors of its intent
to change to direct-to-retail distribution on a nationwide basis during 1995. In
February 1995, one of the independent distributors filed suit challenging the
company's right to discontinue the distributorship relationship and alleging
that it had been
 
                                        5
<PAGE>   5
 
damaged by certain of the company's practices. The lawsuit sought injunctive
relief, actual damages of $8 million and punitive damages of $20 million. In
October 1995, summary judgment dismissing the case on all counts was entered.
The plaintiff has appealed. Another suit arising in connection with this change
in distribution was filed in April 1995 by another independent distributor. The
lawsuit seeks approximately $13 million in damages under the Wisconsin Fair
Dealership Law. In January 1996, the court denied the company's motion for
summary judgment and granted the plaintiff's motion for summary judgment,
finding the company is liable. A jury trial on damages was held in May 1996, and
the jury awarded the plaintiff $2.37 million. The company has appealed the
judgment, contesting both the summary judgment finding of liability and the
damages award.
 
Environmental Litigation
 
     The company was sued in 1995 as one of several defendants who, the
plaintiffs allege, disposed of waste and, as such, may have contributed to the
contamination of an aquifer in Hidalgo County, Texas. The matter, entitled
Linn-Faysville Aquifer Preservations Association, et al. v. Republic Waste
Industries, Inc., seeks unspecified damages sought and injunctive relief. The
company has insufficient information at this time from which it can determine
the extent of its liability, if any.
 
     The company is a defendant in a suit for contribution in the matter of S C
Holdings, Inc. v. .A.A.A. Realty Co., et al (Civil Action No. 95-947 (GEB) which
was filed in the U.S. District Court, District of New Jersey on November 30,
1995. This litigation concerns the Cinnaminson Groundwater Contamination Site
(the "Site") in the Township of Cinnaminson, Burlington County, New Jersey. The
Site is a former landfill. The company is one of 100 parties involved in this
litigation; the company is an alleged generator of 40 drums of solvents that
were disposed of at the Site. The company is currently in settlement
negotiations and expects to resolve the matter for $140,000.
 
Environmental
 
     The company has been identified by the U.S. EPA as an alleged de minimis
generator of waste disposed at two sites, both of which are subject to U.S. EPA
action under the Comprehensive Environmental Response, Compensation, and
Liability Act of 1980, as amended. ("CERCLA") These are the Ramp Industries
Superfund Site in Denver, Colorado and the Galaxy/Spectron, Inc. Superfund Site
in Elkton, Maryland.
 
     The company has been identified as a potential responsible party ("PRP") at
three other Superfund sites: the North Penn Area 7 Superfund Site in Lansdale,
Pennsylvania, the Master Metals Superfund Site in Cleveland, Ohio and the
Midwest Solvent Recovery Superfund Site in Gary, Indiana. Neither the extent of
contamination nor the allocation of liability have been determined for the North
Penn site and, therefore, the company is unable to estimate the extent of its
liability, if any. On April 4, 1997, the company entered into an Administrative
Order on Consent ("AOC"), along with other PRPs, pursuant to which the PRPs will
undertake certain response activities at the Master Metals Superfund Site. The
company expects to be allocated a charge of 3.5% of an estimated $1.6 million to
implement the work outlined in the AOC. The extent of the company's liability
for future work at the Master Metals site, if any, is unknown. The company
expects to pay an additional $160,000 to cover costs incurred at the Midwest
Solvent Recovery Site through the end of 1997, as the site cleanup is completed.
 
     In October 1989, the U.S. Department of Justice brought a civil action
under CERCLA against certain owners, operators and generators, seeking
reimbursement of response costs incurred by U.S. EPA in connection with the
Moyer Landfill in Collegeville, Pennsylvania. One of the defendants sued Ford
Electronics and Refrigeration Corporation ("FERCO") and others as third party
defendants. FERCO in turn sued the company, as a subsequent owner of the Site,
for contribution as a third party defendant for the company's alleged hazardous
waste materials sent to the Moyer Landfill through FERCO as the company's
transporter. The company has agreed to settle the FERCO claim for $300,000, the
payment of which will occur upon the entry of a Consent Decree between the
Department of Justice and FERCO, which is expected to be consummated in the near
future. The Consent Decree takes into account the company-FERCO settlement.
 
                                        6
<PAGE>   6
 
                      EXECUTIVE OFFICERS OF THE REGISTRANT
 
<TABLE>
<CAPTION>
             NAME                                        OFFICE HELD                           AGE
             ----                                        -----------                           ---
<S>                              <C>                                                           <C>
Roger A. Cregg.................  Executive Vice President, Chief Financial Officer since May   41
                                 1996. Chief Financial Officer at Sweetheart Cup Company from
                                 1990 to 1996.
Richard F. Vitkus..............  Senior Vice President, General Counsel since 1994. Secretary  57
                                 since 1995. Previously Senior Vice President, General
                                 Counsel, and Director of Corporate Development at Vanstar
                                 Corporation (formerly ComputerLand Corporation) from 1991 to
                                 1994.
Peter S. Willmott..............  President and Chief Executive Officer since November 1996.    59
                                 Chairman, MacFrugal's Bargains Close-outs Inc., from 1990 to
                                 1997; Chairman and Chief Executive Officer, Willmott
                                 Services, Inc., from 1989 to 1997.
Dennis R. Winkleman............  Vice President - Human Resources since March 1996. Director,  46
                                 Human Resources, Case Corporation from 1990 to 1996.
</TABLE>
 
                                    PART II
 
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
 
     The New York Stock Exchange is the principal United States market in which
the company's common stock is traded. The number of stockholders of record was
12,026 as of March 26, 1997. No dividends were paid to stockholders during the
two years ended December 31, 1996.
 
     The high and low price range for the company's common stock by quarter for
the past two years is included in the Unaudited Quarterly Financial Information
which is contained in this report.
 
ITEM 6. SELECTED FINANCIAL DATA
 
     Five-Year Summary of Selected Financial Data
 
<TABLE>
<CAPTION>
                                                 1996      1995*      1994*      1993*      1992*
                                                 ----      -----      -----      -----      -----
                                                     (IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<S>                                            <C>        <C>        <C>        <C>        <C>
Results of operations:
  Net sales..................................  $1,287.9   $1,273.9   $1,469.0   $1,228.2   $1,243.5
  Pre-tax income (loss)......................    (177.8)     (98.5)     (14.8)     (93.2)    (123.8)
  Net income (loss)..........................    (178.0)     (90.8)     (14.5)     (93.2)    (107.9)
Financial position:
  Total assets...............................  $  765.3   $  700.7   $  662.4   $  568.5   $  583.9
  Long-term debt.............................     152.7      168.8      182.0      170.0      149.5
  Stockholders' equity.......................     162.0      317.5      237.1      161.5      215.4
Per share of common stock (primary and fully
  diluted):
  Net income (loss)..........................  $  (2.73)  $  (1.85)  $   (.35)  $  (2.89)  $  (3.66)
  Book value.................................      2.44       5.00       5.19       4.50       7.12
</TABLE>
 
-------------------------
* Restated for a change in the method of accounting for certain inventories. The
  effect of the change was to decrease the 1996 net loss by $2.7 million,
  decrease the 1995 net loss by $1.6 million, increase the 1994 net loss by $.3
  million, decrease the 1993 net loss by $3.8 million and increase the 1992 net
  loss by $2.0 million. See Note Three of Notes to Consolidated Financial
  Statements for additional information.
 
                                        7
<PAGE>   7
 
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
 
Results of Operations
 
     The statements of consolidated operations summarize operating results for
the last three years. This section of Management's Discussion and Analysis
highlights the main factors affecting the changes in operating results during
the three-year period.
 
     REVENUES. Sales in 1996 were $1,288 million, up one percent from 1995 sales
of $1,274 million. Sales in 1995 decreased 13 percent as compared to 1994 sales
of $1,469 million.
 
     The company's core business -- the development, manufacture and
distribution of a broad range of products for the delivery of video
entertainment -- is composed of two major product areas, Consumer Electronics
(which includes color picture tube operations) and Network Systems.
 
     In Consumer Electronics, the color TV market remains extremely competitive.
Price competition continued during 1996 and 1995 forcing the company to reduce
color TV prices in each year to maintain sales volumes and market share. This
price competition may continue to adversely affect the company's performance.
 
     Consumer Electronics sales increased 3 percent in 1996 from 1995, driven
largely by higher VCR sales. The company's domestic direct-view color television
unit sales in 1996 were flat compared with 1995, while industry color TV unit
sales to dealers declined. As a result, the company's market share increased
slightly during 1996. The industry color TV unit sales to dealers (including
projection television) decreased by 3 percent to 25.5 million units in 1996
(following a decrease of 4 percent to 26.2 million units in 1995 and an increase
of 10 percent to 27.4 million units in 1994). The Zenith brand remains one of
the top three U.S. color TV brands.
 
     Sales in 1996 were negatively impacted as the company suffered delays in
production of new high-margin Consumer Electronics products.
 
     Consumer Electronics sales decreased 14 percent in 1995 from 1994 primarily
due to lower selling prices, soft domestic demand for direct-view color TV sets,
reduced VCR revenues (partially due to a change in distribution method) and
significantly lower color TV unit sales in Mexico, due to the December 1994
devaluation of the Mexican peso.
 
     As a result of soft industry conditions during 1995, particularly during
the traditionally strong fourth quarter, domestic industry color TV unit sales
to dealers (including projection television) decreased by 4 percent to 26.2
million units (following increases of 10 percent to 27.4 million units in 1994
and 11 percent to 25.0 million units in 1993). The company's market share
declined slightly during 1995 due to slow shipments early in the first quarter
caused by start-up problems associated with a new finished-goods warehouse.
 
     In color picture tube operations, sales of picture tubes to other
manufacturers decreased 37 percent in 1996 from 1995 and the number of units
sold was down 48 percent. The 1996 decrease was a result of increased
competition in the market place along with a shift in the mix of items sold.
These sales had increased 33 percent in 1995 from 1994, and the number of units
sold was up 29 percent.
 
     In Network Systems, which includes the design and manufacture of set-top
boxes and data modems sold primarily to the cable TV industry, 1996 sales were
down significantly compared with 1995 due to slowing industry-wide demand for
analog set-top boxes as cable operators prepare to launch digital networks.
Industry and the company's shipments of cable modems, while still relatively
small, rose during 1996. During the third quarter of 1996, the company signed a
multi-year agreement with the Americast programming venture to provide up to 3
million digital set-top boxes to a consortium of telecommunications companies.
 
     In 1995, Network Systems sales increased 12 percent from 1994, reflecting
the strength of the industry and the popularity of the company's
high-performance analog set-top units. Sales also were aided by a multi-
million-dollar agreement with the Malaysian pay television operation Mega TV to
provide as many as 200,000 wireless cable decoders.
 
                                        8
<PAGE>   8
 
     Sales of non-core products, primarily power supplies and display monitors,
decreased by 77 percent in 1995 from 1994, to less than 1 percent of total
sales. These businesses were phased out or sold during 1994, although the
company continued to manufacture power supplies for the purchaser of the
magnetics business until April 1995.
 
     COSTS AND EXPENSES. In light of the company's net losses, the competitive
environment and inflationary cost pressures, the company has undertaken major
cost reduction programs in each of the last three years. These programs included
cost control and profit improvement initiatives; design, manufacturing,
logistics and distribution improvements; and business consolidations. The
company continues to seek ongoing additional cost reduction opportunities.
 
     The 1996 results include approximately $80 million of non-recurring
charges, reflecting actions taken by the company to stabilize its cost structure
and improve operating performance. The majority of these charges related to
selling, general and administrative expenses, but a significant amount of the
charges were included in costs of products sold and negatively impacted the
company's gross margin. The charges included in costs of products sold were
primarily associated with inventories (particularly write-offs of excess and
obsolete inventory), and also included charges for hourly employees severance.
 
     The Mexican peso devaluation, which began in December 1994, lowered
peso-denominated costs -- including wages and salaries, utilities, supplies and
materials in 1996 and 1995. These cost savings were offset by inflationary
increases for purchased material and labor costs (Mexican labor contracts expire
every two years and wages are renegotiated annually or more frequently under
rapid devaluation or high inflation periods).
 
     Selling, general and administrative expenses were $168 million in 1996,
$129 million in 1995 and $119 million in 1994. These expenses as a percent of
revenues were 13 percent in 1996, 10 percent in 1995 and 8 percent in 1994. The
increase in 1996, as compared to 1995, was the result of the unusual charges
mentioned above. These items included severance charges for salaried employees
(including executive severance), consulting fees and provisions for bad debts.
 
     The amount of these expenses in 1995, as compared to 1994, was relatively
constant but the decline in sales caused the ratio to increase.
 
     Amounts that the company spends each year on engineering and research
relating to new products and services and to improvements of existing products
and services are expensed as incurred. These amounts were $47 million in 1996,
$44 million in 1995 and $45 million in 1994. These expenses as a percentage of
revenues were approximately 4 percent in each year during the three years ended
December 31, 1996.
 
     OTHER OPERATING EXPENSE (INCOME). Other operating expense (income) is
primarily composed of royalty income received from manufacturers of TV sets and
VCRs who have taken licenses under some of the company's U.S. tuning system
patents. Royalty income from tuning system patents was $27 million in 1996, $26
million in 1995 and $28 million in 1994. Also included in Other operating
expense (income) are foreign exchange gains and losses. These amounts have
traditionally not been material, but in 1994 the company recorded $4 million of
foreign exchange gain, mainly as a result of the Mexican peso devaluation.
 
     RESTRUCTURING AND OTHER CHARGES. During the fourth quarter of 1996, the
company recorded $9 million of restructuring charges. The restructuring was
composed of $5 million of charges related to severance costs associated with
employment reductions (mostly in the company's U.S. salaried workforce) and $4
million of charges associated with the shutdown of the company's wholly-owned
Canadian distributor. Substantially all of the provisions are related to cash
expenditures that will be made during 1997.
 
     During 1995, the company recorded $22 million of restructuring and other
charges. The main component of this was a second-quarter charge of $18 million
primarily to restructure its core Consumer Electronics and Network Systems
business. The charge was mainly comprised of provisions made in anticipation of
cash expenditures that were paid in the second half of 1995 or in the first half
of 1996. The major elements of the restructuring related to severance expenses
($10 million) associated with employment reductions (mostly in the company's
U.S. salaried workforce) and costs associated with realigned distribution
activities ($3 million)
 
                                        9
<PAGE>   9
 
as the company changed to direct-to-retail distribution on a nationwide basis.
The remaining charges related to other non-recurring items, including certain
environmental, legal and other regulatory matters, and trade receivable
write-offs (primarily for accounts in Mexico as a result of the peso
devaluation).
 
     The remainder of the 1995 charges related to fourth-quarter charges
totaling $4 million that were incurred as a consequence of the LGE purchase of
common stock.
 
     GAIN (LOSS) ON ASSET SALES. In 1996 and 1995, the gain (loss) on asset
sales was not material. During 1994 the company realized a gain of $11 million
on asset sales, including more than 3 million square feet of excess plant and
office space, 98 acres of vacant land, and assets related to the magnetics
business.
 
     INTEREST EXPENSE. Interest expense in 1996 was consistent with the 1994
amount, but was approximately $5 million less than the 1995 amount. The
increased interest expense in 1995 resulted from higher funding requirements (at
higher interest rates) for company operations. To assist in funding these
requirements, the company entered into a $40 million Term Loan Agreement in May
1995.
 
     INCOME TAXES. Due to the company's continuing losses, provisions made for
income taxes during the last three years have not been material. In 1995, the
company recorded an income tax credit of $8 million (including interest) that
related to a tax refund due the company as a result of certain foreign tax
credit issues in audits of prior years.
 
     NET INCOME. As a result of the factors described above, net losses were
$178 million in 1996, $91 million in 1995 $15 million in 1994. Corresponding per
share losses were $2.73 in 1996, $1.85 in 1996 and $.35 in 1994.
 
     During 1996, the company announced a series of product initiatives based on
its set-top box and cable modem technologies. The company has not yet recognized
any revenues from these recently announced product initiatives. Whether the
company will achieve significant revenues or profits from these product
initiatives in the near term or ever will depend largely on market acceptance of
the products and the existence of competitive products. The company expects from
time to time in the future to announce other product initiatives. The ultimate
contribution of any such initiatives to the financial performance of the company
will similarly depend on such factors.
 
     In 1997, the company is focusing on higher-margin home theater TV systems,
and expects to launch a multimillion-dollar national advertising campaign, the
company's first in five years. In addition, the company is scheduled to begin
initial shipments of new digital set-top boxes to telecommunications companies
under the multi-year, $1 billion Americast contract signed in August 1996.
 
Cash Flows
 
     The statements of consolidated cash flows reflect the changes in cash for
the last three years by classifying transactions into three major categories:
Operating, Investing and Financing activities.
 
     OPERATING ACTIVITIES. A principal use of the company's liquidity is the
cash used by operating activities which consists of the company's net loss as
adjusted for non-cash operating items and the changes in current assets and
liabilities such as receivables, inventories and payables.
 
     In 1996, $24 million of cash was used by operating activities principally
to fund $143 million of net losses from operations as adjusted for depreciation.
The change in current accounts provided $116 million of cash and was principally
composed of a $180 million increase in accounts payable and accrued expenses
offset by a $53 million increase in inventories and a $8 million increase in
receivables. The increase in accounts payable and accrued expenses was mainly
due to increased amounts of accounts payable, composed of (i) contracts with LGE
which permit the company to elect interest-bearing extended-payment terms ($107
million at December 31, 1996, and $9 million at December 31, 1995) and (ii) all
other accounts payable ($110 million at December 31, 1996 and $63 million at
December 31, 1995). The increase in the LGE extended payables is due to a
lengthening of the terms, while the increase in the other accounts payable is
due mainly to the increased levels of inventory. In addition, the company
reduced cash used by operating activities by issuing
 
                                       10
<PAGE>   10
 
common stock to the profit-sharing retirement plans to fulfill the 1995
obligation to salaried employees and some hourly employees. This issuance
increased stockholders' equity by $5 million.
 
     In 1995, $33 million of cash was used by operating activities principally
to fund $57 million of net losses from operations as adjusted for depreciation
and a loss on asset sales. The change in current accounts provided $20 million
of cash and was principally composed of a $51 million decrease in inventories
offset by a $38 million decrease in accounts payable and accrued expenses. The
decreases in inventories and accounts payable were due in part to lower levels
of color TV production caused by lower sales levels. Inventories also were
reduced as a result of process improvements implemented during 1995.
 
     In 1994, $42 million of cash was used by operating activities primarily to
fund a $52 million change in current accounts, offset by $3 million in net
income from operations as adjusted for depreciation and gains on the sales of
assets. The change in current accounts was composed primarily of a $46 million
increase in receivables (due to higher sales) and a $43 million increase in
inventories (due mainly to increased levels of color television production in
support of higher sales), partially offset by a $40 million increase in accounts
payable and accrued expenses. In addition, the company reduced cash used by
operating activities by issuing common stock to the profit-sharing retirement
plans to fulfill the 1994 obligation to salaried employees and some hourly
employees. This issuance increased stockholders' equity by $6 million.
 
     INVESTING ACTIVITIES. The principal recurring investing activity is the
addition of property, plant and equipment. These expenditures are primarily for
equipment and tooling related to product improvements, more efficient production
methods and replacement for normal wear. In 1996, investing activities used $125
million of cash, which consisted of capital additions of $129 million offset by
$4 million of proceeds from asset sales. In 1995, investing activities used $49
million of cash, which consisted of capital additions of $52 million offset by
$3 million of proceeds from asset sales. In 1994, investing activities used $31
million of cash, which consisted of capital additions of $59 million, offset by
$28 million of proceeds from asset sales.
 
     The level of capital additions in 1996 was significantly higher than the
additions in 1995 primarily to support the expansion and modernization of the
company's Melrose Park, Ill., picture tube plant, and its Chihuahua, Mexico,
plant for digital set-top boxes. The company expects these capital projects,
scheduled for completion in the first half of 1997, to yield significant
productivity improvements. The level of capital additions in 1995 was consistent
with the additions in 1994. Capital additions in 1995 included a new production
line for projection TV picture tubes in the company's Juarez, Mexico, plant and
new industrial robotics to perform labor-intensive production processes in the
Melrose Park plant.
 
     The company is planning significant capital investment projects during
1997, primarily in the color picture tube area, which include the expansion of
production capacity for color TV picture tubes, new automated production
processes and the completion of new production lines for computer display tubes.
 
     FINANCING ACTIVITIES. Financing activities provided cash of $55 million in
1996, $167 million in 1995 and $62 million in 1994.
 
     In 1996, financing activities provided $55 million of cash, which included
$47 million provided as a result of borrowings under the company's credit
agreement and $15 million provided from sales of the company's common stock to
employees of the company via the exercise of previously issued stock options.
This was offset by $7 million of cash used to pay maturities of the Term Loan.
 
     The 1995 increase in cash provided was due to the company selling $171
million of common stock to investors, principally the sale at $10 per share of
16.5 million shares to LGE in November. In addition, the company sold 1.3
million shares to investors under a shelf registration statement. Cash also was
provided during 1995 as the company entered into a Term Loan Agreement for $40
million. Cash was used during 1995 as the company repurchased $43 million
principal amount of its 8.5% Convertible Senior Subordinated Debentures due 2000
and 2001, at par plus accrued interest. This repurchase resulted from the
exercise by certain holders of the debentures of the right to require repurchase
of all or a portion of the debentures following a change of control of the
company, which occurred upon the purchase of a controlling interest in the
company by LGE.
 
                                       11
<PAGE>   11
 
     In 1994, financing activities provided $62 million of cash, which included
$84 million provided from sales of the company's common stock and $12 million
from the sale of 8.5% Senior Subordinated Convertible Debentures due 2001. This
was offset by $35 million of cash used to redeem the company's outstanding
12 1/8% Notes due 1995 at a redemption price equal to par value (plus accrued
interest).
 
Financial Condition
 
     As of December 31, 1996, the company had $324 million of interest-bearing
obligations which consisted of: (i) $115 million of 6 1/4 percent Convertible
Subordinated Debentures due 2011 (the current portion of which is $6 million),
(ii) $24 million aggregate principal amount of 8.5 percent Senior Subordinated
Convertible Debentures due 2000 and 2001, (iii) a $31 million Term Loan with
General Electric Capital Corporation ("GE") (the current portion of which is $12
million), (iv) $47 million currently payable under a Credit Agreement with GE,
and (v) $107 million of extended-term payables with LGE.
 
     On April 2, 1997, the company obtained new financing commitments which
significantly enhance the company's liquidity and are consistent with its
strategy to improve its operating and financial performance.
 
     One of the commitments is a three year $110 million credit facility
composed of a $45 million term loan and a $65 million revolving credit line.
This facility replaces the company's previous credit agreement and term loan
with General Electric Capital Corporation. The term loan requires scheduled
quarterly principal payments of $2 million with a balloon payment of $20 million
at maturity. Under the revolving credit line, the maximum commitment of funds
available for borrowing is limited by a defined borrowing base formula related
to eligible inventory. The facility is secured by the company's inventory,
trademarks and tuner patent royalties, along with the related patents and
licenses. Interest on borrowings is based on market rates. The facility contains
certain covenants that must be met in order to remain in compliance with the
facility, including financial covenants that must be maintained as of the end of
each fiscal quarter.
 
     A second commitment is a three year trade receivables securitization which
is provided through a Citicorp commercial paper conduit. The availability of
funds under this receivable securitization is subject to receivables eligibility
based on such items as agings, concentrations, dilution and loss history,
subject to a maximum amount that is currently $130 million, but can be increased
to $200 million, assuming additional bank commentments. LGE provides support for
this facility through a performance undertaking and a letter of credit. This
trade receivable securitization was accounted for as a sale of receivables.
 
     Also, on April 2, 1997, the company entered into an $87 million
sale-leaseback transaction whereby the company sold and leased back new and
existing manufacturing equipment in its Melrose Park, Ill., plant and in its
Reynosa and Juarez, Mexico, facilities. The term of the lease is 12 1/2 years
and annual payments under the lease will average approximately $10 million. The
company's, payment obligations, along with certain other items under the lease
agreement are fully guaranteed by LGE. The lease of the manufacturing equipment
was accounted for as an operating lease.
 
     Additionally on April 2, 1997, the company and LGE entered into an
arrangement whereby certain of the company's accounts payables arising in the
ordinary course of business with LGE will be extended for certain periods of
time with interest being charged on the amounts extended.
 
     In return for LGE providing support for the securitizations and the
sale-leaseback transaction and the extended-term payables arrangement, the
company will grant options to LGE to purchase approximately 3.9 million common
shares of the company at an exercise price of $0.01 per share, exercisable over
time. The accounting for these stock options will be based upon their fair value
with that fair value being amortized straight-line over the term of the
associated commitments.
 
     Upon the closing of the new financing agreements described above, the
company received $142 million of cash of which $77 million was used to pay off
outstanding balances under the credit agreement and term loan agreement with
General Electric Capital Corporation. The remainder of the funds was used to pay
certain vendors, to pay fees related to the new financing agreements and for
general corporate purposes.
 
                                       12
<PAGE>   12
 
     As part of this refinancing, and to provide for contingencies, the company
has agreed to raise an additional $33 million by the end of the third quarter of
1997 through additional sale-leaseback transactions.  There can be no assurance
that the company will be able to enter into such sale-leaseback transactions, or
that the company will not experience liquidity problems in the future because of
adverse market conditions or other unfavorable events. However, the company
believes that its new financing commitments and the extended-term payables
available from LGE, together with its fulfillment of the additional
sale-leaseback obligations, will be adequate to meet its seasonal working
capital, capital expenditure and other requirements during 1997.
 
Recently Issued Accounting Standards 
 
     The Financial Accounting Standards Board issued Statement No. 125,
"Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities," in 1996. The new accounting standard (which is effective
beginning in 1997) provides accounting and reporting standards for transfers and
servicing of financial assets and extinguishments of liabilities. This statement
was adopted by the company during 1997 in connection with the new three year
trade receivables securitization that was entered into on April 2, 1997.
Pursuant to the new statement, the trade receivable securitization was accounted
for as a sale of receivables.
 
     The American Institute of Certified Public Accountants issued Statement of
Position ("SOP") 96-1 "Environmental Remediation Liabilities" in 1996. The new
SOP (which is effective beginning in 1997) provides a nonauthoritative
discussion of major federal legislation dealing with environmental laws and
authoritative guidance on specific accounting issues that are present in the
recognition, measurement and disclosure of environmental remediation
liabilities. The effects of adopting this SOP are to be considered a change in
an estimate and recorded solely on a prospective basis. The company has not yet
quantified the impact, if any, on the consolidated financial position or results
of operations of the company as a result of the new SOP.
 
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 
     The financial information required by Item 8 is contained in Item 14 of
Part IV of this report.
 
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
 
     None.
 
                                       13
<PAGE>   13
 
                                    PART III
 
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
 
     Information concerning directors is incorporated herein by reference from
the sections entitled "Election of Directors" and "Board and Committee Meetings
and Directors' Compensation" from the company's definitive Proxy Statement,
copies of which will be electronically transmitted to the Commission via EDGAR.
See also the list of the company's executive officers and related information
under "Executive Officers of the Registrant" at the end of Part I of this
Report.
 
ITEM 11. EXECUTIVE COMPENSATION
 
     Incorporated by reference from the sections entitled "Board and Committee
Meetings and Directors' Compensation", "Summary Compensation Table", "Employment
Agreements", "Option/SAR Grants in 1996", "Aggregated Option/SAR Exercises in
1996 and Year-End Option/SAR Values" and "Pension Plan" from the company's
definitive Proxy Statement, copies of which will be electronically transmitted
to the Commission via EDGAR.
 
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
 
     Incorporated by reference from the sections entitled "Security Ownership of
Certain Beneficial Owners" and "Security Ownership of Management" from the
company's definitive Proxy Statement, copies of which will be electronically
transmitted to the Commission via EDGAR.
 
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
 
     Incorporated by reference from the sections entitled "Nominees for Election
as Directors" and "Related Party Transactions" from the company's definitive
Proxy Statement, copies of which will be electronically transmitted to the
Commission via EDGAR.
 
                                       14
<PAGE>   14
 
                                    PART IV
 
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
 
     (a) 1. The following Consolidated Financial Statements of Zenith
Electronics Corporation, the Report of Independent Public Accountants, and the
Unaudited Quarterly Financial Data are included in this report:
 
        Statements of Consolidated Operations and Retained Earnings -- Years
        ended December 31, 1996, 1995 and 1994
 
        Consolidated Balance Sheets -- December 31, 1996 and 1995
 
        Statements of Consolidated Cash Flows -- Years ended December 31, 1996,
        1995 and 1994
 
        Notes to Consolidated Financial Statements
 
        Report of Independent Public Accountants
 
        Unaudited Quarterly Financial Information
 
     (a) 2. The following consolidated financial statement schedule for Zenith
Electronics Corporation is included in this report:
 
        Schedule II -- Valuation and Qualifying Accounts
 
     The Report of Independent Public Accountants on Financial Statement
Schedule is included in this report:
 
     All other schedules for which provision is made in Regulation S-X of the
Securities and Exchange Commission, are not required under the related
instructions or are inapplicable and, therefore, have been omitted.
 
     3. Exhibits:
 
<TABLE>
<C>       <S>
  (3a)    Restated Certificate of Incorporation of the company, as
          amended (incorporated by reference to Exhibit 3(a) to the
          company's Annual Report on Form 10-K for the year ended
          December 31, 1992)
  (3b)    Certificate of Amendment to Restated Certificate of
          Incorporation of the company dated May 4, 1993 (incorporated
          by reference to Exhibit 4(l) of the company's Quarterly
          Report on Form 10-Q for the quarter ended April 3, 1993)
  (3c)    By-Laws of the company, as amended (incorporated by
          reference to Exhibit 3 to the company's Quarterly Report on
          Form 10-Q for the quarter ended September 30, 1995)
  (4a)    Indenture dated as of April 1, 1986 between Zenith
          Electronics Corporation and The First National Bank of
          Boston as Trustee with respect to the 6 1/4% Convertible
          Subordinated Debentures due 2011 (incorporated by reference
          to Exhibit 1 of the company's Quarterly Report on Form 10-Q
          for the quarter ended March 30, 1991)
  (4b)    Debenture Purchase Agreement dated as of November 19, 1993
          with the institutional investors named therein (incorporated
          by reference to Exhibit 4(a) of the company's Current Report
          on Form 8-K dated November 19, 1993)
  (4c)    Amendment No. 1 dated November 24, 1993 to the Debenture
          Purchase Agreement dated as of November 19, 1993 with the
          institutional investor named therein (incorporated by
          reference to Exhibit 4(a) of the company's Current Report on
          Form 8-K dated November 24, 1993)
  (4d)    Amendment No. 2 dated as of January 11, 1994 to the
          Debenture Purchase Agreement dated as of November 19, 1993
          (incorporated by reference to Exhibit 4(c) of the company's
          Current Report on Form 8-K dated January 11, 1994)
</TABLE>
 
                                       15
<PAGE>   15
 
<TABLE>
<C>       <S>
  (4e)    Debenture Purchase Agreement dated as of January 11, 1994
          with the institutional investor named therein (incorporated
          by reference to Exhibit 4(a) of the company's Current Report
          on Form 8-K dated January 11, 1994)
*(10a)    1987 Zenith Stock Incentive Plan (as amended) (incorporated
          by reference to Exhibit A of the company's definitive Proxy
          Statement dated March 13, 1992)
*(10b)    Form of Amended and Restated Employment Agreement with
          Gerald M. McCarthy and Albin F. Moschner (incorporated by
          reference to Exhibit 2 of the company's Report on Form 10-K
          for the year ended December 31, 1990)
*(10c)    Form of Employee Stock Option Agreement (incorporated by
          reference to Exhibit 10e of the company's Quarterly Report
          on Form 10-Q for the quarter ended April 1, 1995)
*(10d)    Letter Agreement, dated October 21, 1991, with Albin F.
          Moschner (incorporated by reference to Exhibit 10u of the
          company's Report on Form 10-K for the year ended December
          31, 1991)
*(10e)    Form of Indemnification Agreement with Officers and
          Directors (incorporated by reference to Exhibit 8 of the
          company's Report on Form 10-K for the year ended December
          31, 1989)
*(10f)    Form of Directors 1989 Stock Units Compensation Agreement
          with T. Kimball Brooker (1000 units) (incorporated by
          reference to Exhibit 9 of the company's Report on Form 10-K
          for the year ended December 31, 1989)
*(10g)    Form of Directors 1990 Stock Units Compensation Agreement
          with T. Kimball Brooker, Andrew McNally IV and Peter S.
          Willmott (1000 units each) (incorporated by reference to
          Exhibit 6 of the company's Report on Form 10-K for the year
          ended December 31, 1990)
*(10h)    Form of Directors 1991 Stock Units Compensation Agreement
          with T. Kimball Brooker, Andrew McNally IV and Peter S.
          Willmott (1,000 units each) (incorporated by reference to
          Exhibit 10d of the company's Quarterly Report on Form 10-Q
          for the quarter ended June 29, 1991)
*(10i)    Form of Amendment, dated as of July 24, 1991, to Directors
          Stock Units Compensation Agreements for 1990 and 1991
          (incorporated by reference to Exhibit 10e of the company's
          Quarterly Report on Form 10-Q for the quarter ended June 29,
          1991)
*(10j)    Directors Retirement Plan and form of Agreement
          (incorporated by reference to Exhibit 10 of the company's
          Report on Form 10-K for the year ended December 31, 1989)
*(10k)    Form of Amendment, dated as of July 24, 1991, to Directors
          Retirement Plan and form of Agreement (incorporated by
          reference to Exhibit 10f of the company's Quarterly Report
          on Form 10-Q for the quarter ended June 29, 1991)
*(10l)    Supplemental Executive Retirement Income Plan effective as
          of January 1, 1994 (incorporated by reference to Exhibit
          10ab to the company's Annual Report on Form 10-K for the
          year ended December 31, 1994)
*(10m)    Supplemental Salaried Profit Sharing Retirement Plan
          effective as of January 1, 1994 (incorporated by reference
          to Exhibit 10ac to the company's Annual Report on Form 10-K
          for the year ended December 31, 1994)
 (10n)    Stock Purchase Agreement dated July 17, 1995, between Zenith
          Electronics Corporation and LG Electronics, Inc.
          (incorporated by reference to Exhibit 2 of the company's
          Report on Form 8-K dated July 17, 1995)
*(10o)    Resignation letter of Albin F. Moschner as president, chief
          executive officer and director of the company (incorporated
          by reference to Exhibit 10 of the company's Quarterly Report
          on Form 10-Q for the quarter ended June 29, 1996)
*(10p)    Employment Agreement, dated January 1, 1997, between Roger
          A. Cregg and Zenith Electronics Corporation
*(10q)    Employment Agreement, dated January 1, 1997, between Richard
          F. Vitkus and Zenith Electronics Corporation
</TABLE>
 
                                       16
<PAGE>   16
<TABLE>
<S>       <S>
*(10r)    Employment Agreement, dated January 1, 1997, between Peter
          S. Willmott and Zenith Electronics Corporation
*(10s)    Employment Agreement, dated January 1, 1997, between Dennis
          R. Winkleman and Zenith Electronics Corporation
  (18)    Letter re change in accounting principle
  (21)    Subsidiaries of the company
  (23)    Consent of Independent Public Accountants
  (27)    Financial Data Schedule for the Year ended December 31, 1996
</TABLE>
 
-------------------------
* Represents a management contract, compensation plan or arrangement.
 
     (b) Reports on Form 8-K
 
     A report on Form 8-K dated December 18, 1996, was filed by the company
stating under Item 5 that on December 18, 1996, the company announced that in a
major restructuring designed to help accelerate the company's return to
profitability and conserve cash, it is cutting its U.S. workforce by more than
25 percent. 
 
     (c) and (d) Exhibits and Financial Statement Schedules
 
     Certain exhibits and financial statement schedules required by this portion
of Item 14 are filed as a separate section of this report.
 
                                       17
<PAGE>   17
 
                                   SIGNATURES
 
     Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
 
                                          ZENITH ELECTRONICS CORPORATION
                                          (Registrant)
 
                                          By:      /s/ PETER S. WILLMOTT
 
                                            ------------------------------------
                                                     Peter S. Willmott
                                               President and Chief Executive
                                                           Officer
 
                                          Date: April 15, 1997
 
                                             -----------------------------------
 
     Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
 
<TABLE>
<CAPTION>
                   SIGNATURES                                      TITLE                         DATE
                   ----------                                      -----                         ----
<C>                                                 <S>                                     <C>
 
             /s/ T. KIMBALL BROOKER                 Director                                April 15, 1997
------------------------------------------------
               T. Kimball Brooker
 
                /s/ KI-SONG CHO                     Director                                April 15, 1997
------------------------------------------------
                  Ki-song Cho
 
             /s/ EUGENE B. CONNOLLY                 Director                                April 15, 1997
------------------------------------------------
               Eugene B. Connolly
 
              /s/ ROBERT A. HELMAN                  Director                                April 15, 1997
------------------------------------------------
                Robert A. Helman
 
            /s/ CHA HONG (JOHN) KOO                 Director                                April 15, 1997
------------------------------------------------
              Cha Hong (John) Koo
 
                 /s/ HUN JO LEE                     Director                                April 15, 1997
------------------------------------------------
                   Hun Jo Lee
 
             /s/ ANDREW MCNALLY IV                  Director                                April 15, 1997
------------------------------------------------
               Andrew McNally IV
 
                  /s/ YONG NAM                      Director                                April 15, 1997
------------------------------------------------
                    Yong Nam
 
             /s/ PETER S. WILLMOTT                  Director                                April 15, 1997
------------------------------------------------
               Peter S. Willmott
 
               /s/ ROGER A. CREGG                   Executive Vice President, and Chief     April 15, 1997
------------------------------------------------    Financial Officer (Principal
                 Roger A. Cregg                     Financial Officer)
</TABLE>
 
                                       18
<PAGE>   18
 
                   INDEX TO FINANCIAL STATEMENTS AND EXHIBITS
 
<TABLE>
<S>                                                           <C>
Consolidated Financial Statements
Notes to Consolidated Financial Statements
Report of Independent Public Accountants
Unaudited Quarterly Financial Data
Report of Independent Public Accountants on Financial
  Statement Schedule
Financial Statement Schedule:
     Schedule II -- Valuation and Qualifying Accounts
        Exhibits:
        (10p)  Employment Agreement, dated January 1, 1997, between Roger
               A. Cregg and Zenith Electronics Corporation
        (10q)  Employment Agreement, dated January 1, 1997, between Richard
               F. Vitkus and Zenith Electronics Corporation
        (10r)  Employment Agreement, dated January 1, 1997, between Peter
               S. Willmott and Zenith Electronics Corporation
        (10s)  Employment Agreement, dated January 1, 1997, between Dennis
               R. Winkleman and Zenith Electronics Corporation
        (18)   Letter re change in accounting principle
        (21)   Subsidiaries of the company
        (23)   Consent of Independent Public Accountants
        (27)   Financial Data Schedule for the Year ended December 31, 1996
</TABLE>
 
                                       19
<PAGE>   19
 
                       CONSOLIDATED FINANCIAL STATEMENTS
 
                         ZENITH ELECTRONICS CORPORATION
 
          STATEMENTS OF CONSOLIDATED OPERATIONS AND RETAINED EARNINGS
 
<TABLE>
<CAPTION>
                                                                        YEAR ENDED DECEMBER 31
                                                                ---------------------------------------
                                                                  1996           1995*          1994*
                                                                  ----           -----          -----
                                                                (IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<S>                                                             <C>            <C>            <C>
Revenues
  Net sales.................................................     $1,287.9       $1,273.9       $1,469.0
                                                                 --------       --------       --------
Costs, Expenses and Other
  Cost of products sold.....................................      1,257.0        1,188.8        1,348.8
  Selling, general and administrative.......................        167.8          128.8          118.8
  Engineering and research..................................         46.7           43.5           45.4
  Other operating expense (income), net (Notes One and
     Nine)..................................................        (26.3)         (30.1)         (33.6)
  Restructuring and other charges (Note Six)................          9.3           21.6             --
                                                                 --------       --------       --------
Income
  Operating income (loss)...................................       (166.6)         (78.7)         (10.4)
  Gain (loss) on asset sales, net (Note Eleven).............           .3           (1.7)          11.0
  Interest expense..........................................        (15.1)         (19.9)         (15.9)
  Interest income...........................................          3.6            1.8             .5
                                                                 --------       --------       --------
  Income (loss) before income taxes.........................       (177.8)         (98.5)         (14.8)
  Income taxes (credit) (Note Seven)........................           .2           (7.7)           (.3)
                                                                 --------       --------       --------
  Net income (loss).........................................     $ (178.0)      $  (90.8)      $  (14.5)
                                                                 ========       ========       ========
Per Share
  Income (loss) per common share (Note One).................     $  (2.73)      $  (1.85)      $   (.35)
                                                                 ========       ========       ========
Retained Earnings
  Balance at beginning of year..............................     $ (184.3)      $  (93.5)      $  (79.0)
  Net income (loss).........................................       (178.0)         (90.8)         (14.5)
                                                                 --------       --------       --------
  Retained earnings (deficit) at end of year................     $ (362.3)      $ (184.3)      $  (93.5)
                                                                 ========       ========       ========
</TABLE>
 
The accompanying Notes to Consolidated Financial Statements are an integral part
                              of these statements.
                          * Restated, see Note Three.
 
                                       20
<PAGE>   20
 
                         ZENITH ELECTRONICS CORPORATION
 
                          CONSOLIDATED BALANCE SHEETS
 
<TABLE>
<CAPTION>
                                                                   DECEMBER 31
                                                                ------------------
                                                                 1996       1995*
                                                                 ----       -----
                                                                  (IN MILLIONS)
<S>                                                             <C>        <C>
ASSETS
Current Assets
  Cash (Note One)...........................................    $    --    $  93.2
  Receivables, net of allowance for doubtful accounts of
     $6.2 and $3.6..........................................      208.3      201.3
  Inventories (Note Ten)....................................      255.7      202.6
  Other.....................................................       11.1        7.8
                                                                -------    -------
       Total current assets.................................      475.1      504.9
Noncurrent Assets
  Property, plant and equipment, net (Note Eleven)..........      278.3      184.7
  Other (Note One)..........................................       11.9       11.1
                                                                -------    -------
       Total assets.........................................    $ 765.3    $ 700.7
                                                                =======    =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
  Short-term debt (Note Twelve).............................    $  47.0    $    --
  Current portion of long-term debt (Note Thirteen).........       17.8        9.0
  Accounts payable..........................................      109.6       62.9
  Accounts payable to related party (Note Five).............      124.5        8.9
  Compensation and retirement benefits (Note Sixteen).......       43.2       30.8
  Product warranties........................................       32.1       28.4
  Co-op advertising and merchandising programs..............       20.5       29.9
  Income taxes payable......................................        1.3        1.2
  Other accrued expenses....................................       54.6       43.3
                                                                -------    -------
       Total current liabilities............................      450.6      214.4
Noncurrent Liabilities
  Long-term debt (Note Thirteen)............................      152.7      168.8
Stockholders' Equity
  Preferred stock, $1 par value; 8,000,000 shares
     authorized; none outstanding...........................         --         --
  Common stock, $1 par value; 150,000,000 shares authorized;
     66,564,119 and 63,542,922 shares issued................       66.6       63.5
  Additional paid-in capital................................      459.4      440.0
  Retained earnings (deficit)...............................     (362.3)    (184.3)
  Cost of 105,181 common shares in treasury.................       (1.7)      (1.7)
                                                                -------    -------
       Total stockholders' equity (Note Fourteen)...........      162.0      317.5
                                                                -------    -------
       Total liabilities and stockholders' equity...........    $ 765.3    $ 700.7
                                                                =======    =======
</TABLE>
 
The accompanying Notes to Consolidated Financial Statements are an integral part
                              of these statements.
                          * Restated, see Note Three.
 
                                       21
<PAGE>   21
 
                         ZENITH ELECTRONICS CORPORATION
 
                     STATEMENTS OF CONSOLIDATED CASH FLOWS
 
<TABLE>
<CAPTION>
                                                                INCREASE (DECREASE) IN CASH
                                                                  YEAR ENDED DECEMBER 31
                                                                ---------------------------
                                                                 1996      1995*     1994*
                                                                 ----      -----     -----
                                                                       (IN MILLIONS)
<S>                                                             <C>        <C>       <C>
Cash Flows from Operating Activities
  Net income (loss).........................................    $(178.0)   $(90.8)   $(14.5)
  Adjustments to reconcile net income (loss)
     to net cash used by operations:
  Depreciation..............................................       35.0      32.1      28.8
  Employee retirement plan contribution in stock............        5.3        --       6.0
  (Gain) loss on asset sales, net...........................        (.3)      1.7     (11.0)
  Other.....................................................        1.6        .5       (.2)
  Changes in assets and liabilities:
  Current accounts..........................................      116.4      19.9     (51.8)
  Other assets..............................................       (3.9)      3.4        .6
                                                                -------    ------    ------
Net cash used by operating activities.......................      (23.9)    (33.2)    (42.1)
                                                                -------    ------    ------
Cash Flows from Investing Activities
  Capital additions.........................................     (129.0)    (51.9)    (58.9)
  Proceeds from asset sales.................................        4.3       2.9      27.5
                                                                -------    ------    ------
  Net cash used by investing activities.....................     (124.7)    (49.0)    (31.4)
                                                                -------    ------    ------
Cash Flows from Financing Activities
  Short-term borrowings, net................................       47.0        --        --
  Proceeds from issuance of long-term debt..................         --      40.0      12.0
  Proceeds from issuance of common stock, net...............       15.7     170.7      84.1
  Principal payments on long-term debt......................       (7.3)    (44.2)    (34.5)
                                                                -------    ------    ------
  Net cash provided by financing activities.................       55.4     166.5      61.6
                                                                -------    ------    ------
Cash
  Increase (decrease) in cash...............................      (93.2)     84.3     (11.9)
  Cash at beginning of year.................................       93.2       8.9      20.8
                                                                -------    ------    ------
  Cash at end of year.......................................    $    --    $ 93.2    $  8.9
                                                                -------    ------    ------
Changes in Current Assets and Liabilities
  Increase (decrease) in cash attributable to changes in:
  Receivables, net..........................................    $  (7.5)   $ 10.2    $(45.5)
  Income taxes, net.........................................         .1      (6.0)      (.2)
  Inventories...............................................      (53.1)     51.4     (42.4)
  Other assets..............................................       (3.3)      2.2      (3.8)
  Accounts payable and accrued expenses.....................      180.2     (37.9)     40.1
                                                                -------    ------    ------
       Net change in current accounts.......................    $ 116.4    $ 19.9    $(51.8)
                                                                =======    ======    ======
Supplemental Disclosure
Supplemental disclosure of cash flow information --
  Cash paid (refunded) during the period for:
     Interest...............................................    $  14.1    $ 20.6    $ 17.6
     Income taxes...........................................         .9       (.1)      (.1)
</TABLE>
 
The accompanying Notes to Consolidated Financial Statements are an integral part
                              of these statements.
                          * Restated, see Note Three.
 
                                       22
<PAGE>   22
 
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
NOTE ONE -- SIGNIFICANT ACCOUNTING POLICIES:
 
     Principles of consolidation: The consolidated financial statements include
the accounts of Zenith Electronics Corporation and all domestic and foreign
subsidiaries (the company). All significant intercompany balances and
transactions have been eliminated.
 
     Use of estimates: The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
 
     Statements of consolidated cash flows: The company considers time deposits,
certificates of deposit and all highly liquid investments purchased with an
original maturity of three months or less to be cash.
 
     Inventories: Inventories are stated at the lower of cost or market. Costs
are determined for all inventories using the first-in, first-out (FIFO) method.
 
     Properties and depreciation: Property, plant and equipment is stated at
cost. Additions of machinery and equipment with lives of eight years or more are
depreciated by the straight-line method over their useful lives, which range
between 8 to 12 years. Accelerated methods are used for depreciation of all
other machinery and equipment items, including high technology equipment that
may be subject to rapid economic obsolescence. Useful lives for these items
range from 4 to 5 years. Additions of buildings are depreciated by the
straight-line method over their useful lives which range from 10 to 33 years.
 
     Property held for disposal is stated at the lower of cost or estimated net
realizable value. As of December 31, 1995, $3.4 million of property held for
disposal was included in Other noncurrent assets and included certain facilities
and land no longer used in the company's operations.
 
     Most tooling expenditures are charged to expense in the year acquired,
except for picture tube tooling, which is amortized over four years. Certain
production fixtures are capitalized as machinery and equipment.
 
     Rental expenses under operating leases were $12.8 million, $15.3 million
and $13.6 million in 1996, 1995 and 1994, respectively. These expenses will be
significantly higher in future years due to the sale-leaseback transaction that
was entered into subsequent to December 31, 1996. See Note Two for additional
information on the sale-leaseback transaction.
 
     The company capitalizes interest on major capital projects. The company
capitalized $2.3 million of interest in 1996. These amounts were not material in
1995 and 1994.
 
     Engineering, research, product warranty and other costs: Engineering and
research costs are expensed as incurred. Estimated costs for product warranties
are provided at the time of sale based on experience factors. The costs of co-op
advertising and merchandising programs are also provided at the time of sale.
 
     Foreign currency: The company uses the U.S. dollar as the functional
currency for all foreign subsidiaries. Foreign exchange gains and losses are
included in Other operating expense (income) and netted to a $3.6 million gain
in 1994. These amounts were not material in 1996 and 1995.
 
     Earnings per share: Primary earnings per share are based upon the weighted
average number of shares outstanding and common stock equivalents, if dilutive.
Fully diluted earnings per share, assuming conversion of the 6 1/4 percent
convertible subordinated debentures and the 8.5 percent convertible senior
subordinated debentures, are not presented because the effect of the assumed
conversion is antidilutive. The number of shares used in the computation were
65.2 million, 49.2 million and 42.0 million in 1996, 1995 and 1994,
respectively.
 
     Stock options: During 1996, the company adopted Statement of Financial
Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based
Compensation". The new accounting standard requires the company to value all
stock-based compensation based on the estimated fair value at the grant date and
spread the deemed cost over the vesting period. The standard permits a choice of
whether to charge operations or
 
                                       23
<PAGE>   23
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
disclose the calculated cost, as pro forma information. The company has chosen
to disclose the calculated cost, as pro forma information (see Note Fifteen).
 
     Impairment of Long-lived Assets: The company periodically assesses whether
events or circumstances have occurred that may indicate the carrying value of
its long-lived assets may not be recoverable. When such events or circumstances
indicate the carrying value of an asset may be impaired, the company uses an
estimate of the future undiscounted cash flows to be derived from the remaining
useful life of the asset to assess whether or not the asset is recoverable. If
the future undiscounted cash flows to be derived over the life of the asset do
not exceed the asset's net book value, the company recognizes an impairment loss
for the amount by which the net book value of the asset exceeds its estimated
fair market value. The company has not recognized any material impairment losses
for the three years ended December 31, 1996. Management does not believe any
material impairment of long-lived assets exists as of December 31, 1996.
 
NOTE TWO -- SUBSEQUENT EVENT:
 
     On April 2, 1997, the company obtained new financing commitments which
significantly enhance the company's liquidity and are consistent with its
strategy to improve its operating and financial performance.
 
     One of the commitments is a three year $110 million credit facility
composed of a $45 million term loan and a $65 million revolving credit line.
This facility replaces the company's previous credit agreement and term loan
with General Electric Capital Corporation. The term loan requires scheduled
quarterly principal payments of $2 million with a balloon payment of $20 million
at maturity. Under the revolving credit line, the maximum commitment of funds
available for borrowing is limited by a defined borrowing base formula related
to eligible inventory. The facility is secured by the company's inventory,
trademarks and tuner patent royalties, along with the related patents and
licenses. Interest on borrowings is based on market rates. The facility contains
certain covenants that must be met in order to remain in compliance with the
facility, including financial covenants that must be maintained as of the end of
each fiscal quarter.
 
     A second commitment is a three year trade receivables securitization which
is provided through a Citicorp commercial paper conduit. The availability of
funds under this receivable securitization is subject to receivables eligibility
based on such items as agings, concentrations, dilution and loss history,
subject to a maximum amount that is currently $130 million, but can be
increased to $200 million, assuming additional bank committments. LGE provides
support for this facility through a performance undertaking and a letter of
credit.
 
     Also, on April 2, 1997, the company entered into an $87 million
sale-leaseback transaction whereby the company sold and leased back new and
existing manufacturing equipment in its Melrose Park, Ill., plant and in its
Reynosa an Juarez, Mexico, facilities. The term of the lease is 12 1/2 years and
annual payments under the lease will average approximately $10 million. The
company's, payment obligations, along with certain other items under the lease
agreement are fully guaranteed by LGE.
 
     Additionally on April 2, 1997, the company and LGE entered into an
arrangement whereby certain of the company's accounts payables arising in the 
ordinary course of business with LGE will be extended for certain periods of
time with interest being charged on the amounts extended.
 
     In return for LGE providing support for the securitizations and the
sale-leaseback transaction and the extended-term payables arrangement, the
company will grant options to LGE to purchase approximately 3.9 million common
shares of the company at an exercise price of $0.01 per share, excercisable over
time. The accounting for these stock options will be based upon their fair value
with that fair value being amortized straight-line over the term of the
associated commitments.
 
     Upon the closing of the new financing agreements described above, the
company received $142 million of which $77 million was used to pay off
outstanding balances under the credit agreement and term loan agreement with
General Electric Capital Corporation. The remainder of the funds was used to pay
certain vendors, to pay fees related to the new financing agreements and for
general corporate purposes.
 
                                       24
<PAGE>   24
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
NOTE THREE -- ACCOUNTING CHANGE:
 
     Effective January 1, 1996, the company changed its inventory costing method
for its picture tube inventories from LIFO to FIFO. There has been a strategic
marketing shift in the company toward selling more larger-screen television sets
and less smaller-screen sets. The picture tubes for the smaller-screen
television sets are manufactured by the company and have been costed using LIFO.
It is expected that the LIFO picture tube inventory pool will decrease and this
decrease would create a LIFO liquidation resulting in a poor matching of current
costs with current revenues. As a result, the company believes that the FIFO
method is preferable as it will provide a more appropriate and consistent
matching of costs against revenues. This change in accounting had no material
impact on quarterly results and as a result, quarterly information is not
restated.
 
     The effect of the change in accounting principle was to reduce the net loss
reported for 1996 by $2.7 million, or $.04 per share, The change has been
applied to prior years by retroactively restating the financial statements. The
effect of this restatement was to increase retained earnings as of January 1,
1994 by $9.1 million. The restatement increased 1995 net income by $1.6 million,
or $.03 per share, and decreased 1994 net income by $.3 million, or $.01 per
share.
 
NOTE FOUR -- FINANCIAL RESULTS AND LIQUIDITY:
 
     The company has incurred net losses of $178.0 million, $90.8 million and
$14.5 million in 1996, 1995 and 1994, respectively. For many years the company's
major competitors, many with greater resources, have aggressively lowered their
selling prices in an attempt to increase market share. Although the company has
benefited from cost reduction programs, these lower color television prices
together with inflationary cost increases have more than offset such cost
reduction benefits.
 
     As discussed in Note Two, the company has recently obtained new financing
commitments that significantly enhance the company's liquidity and are
consistent with its strategy to improve its operating and financial performance.
As part of this refinancing, and to provide for contingencies, the company has
agreed to raise an additional $33 million by the end of the third quarter of
1997 through additional sale-leaseback transaction.  There can be no assurance
that the company will be able to enter into such sale leaseback transactions, or
that the company will not experience liquidity problems in the future because of
adverse market conditions or other unfavorable events. However, the company
believes that its new financing commitments and the extended-term payables
available from LGE, together with its fulfillment of the additional
sale-leaseback obligations, will be adequate to meet its seasonal working
capital, capital expenditure and other requirements during 1997.
 
NOTE FIVE -- RELATED PARTY:
 
     In November 1995, a change in control of the company occurred, in which LG
Electronics, Inc., and LG Semicon Company, Ltd., corporations organized under
the laws of the Republic of Korea ("LGE"), purchased shares of the company
pursuant to a combined tender offer and purchase of newly issued shares of
common stock from the company. As of December 31, 1996, LGE owned 36,569,000
shares of common stock of the company which represents 55 percent of the
outstanding common stock. As described in Note Two, the company will grant
options to LGE to purchase approximately 3.9 million common shares of the
company at an exercise price of $0.01 per share, excercisable over time.
 
     LGE is a leading international brand-name manufacturer of five main groups
of products: televisions; audio and video equipment; home appliances; computers
and office automation equipment; and other products, including video displays,
telecommunication products and components, and magnetic media.
 
     Because LGE owns a majority of the issued and outstanding common stock, it
effectively controls the outcome of any matter requiring action by a majority of
the company's stockholders, including the election of a majority of the
company's directors and any future change in control of the company.
 
                                       25
<PAGE>   25
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     The following represent the most significant transactions between the
company and LGE during 1996 and 1995, all of which, in the opinion of
management, were made at an arms-length basis:
 
     Product purchases: In the ordinary course of business, the company
purchases VCRs, TV-VCR combinations and components from LGE and its affiliates.
The company purchased $128.8 million and $87.2 million of these items in 1996
and 1995, respectively. Sales of products purchased from LGE and its affiliates
contributed $141.4 million and $92.5 million to sales in 1996 and 1995,
respectively, and $12.6 million and $5.3 million to gross margin in 1996 and
1995, respectively.
 
     Product and other sales: The company sells CRT tubes and yokes and other
manufactured subassemblies to LGE and its affiliates at prices that equate to
amounts charged by the company to its major customers. Sales in 1996 and 1995 by
the company to LGE and its affiliates were $29.4 million and $31.7 million,
respectively, with a contribution of $(1.3) million and $2.8 million to gross
margin, respectively.
 
     Technical agreements: The company and LGE are currently operating under
several technology agreements and licenses, including: LGE engineering support
for HDTV development and related technical and intellectual property; technology
and patent licenses to LGE to develop flat tension mask products; and agreements
granting LGE the right to use the company's patents on TV tuners. LGE's net
payment in 1996 and 1995 to the company under these agreements and licenses was
$1.0 million and $1.1 million, respectively.
 
     Service Assistance: In 1996, employees of LGE provided certain services to
the company for which LGE was not compensated. The value of these services was
not material in 1996.
 
     As of December 31, 1996 and 1995, receivables included $2.4 million and
$7.7 million, respectively, from LGE and its affiliates and accounts payable
included $124.5 million and $8.9 million, respectively, to LGE and its
affiliates. LGE has agreed to extended payment terms for certain of the accounts
payable to them. The amount of extended payables was $106.8 million and $8.8
million as of December 31, 1996 and 1995, respectively. The company is charged
interest on the extended period at negotiated rates.
 
     In December 1996, the company closed its wholly-owned Canadian distributor
and sold the remaining inventory to LGE at book value. The company entered into
a Distributor Agreement with LGE whereby LGE will be the Canadian distributor
for the company.
 
     LGE is providing support for certain financing activities of the company
that were entered into subsequent to December 31, 1996. See Note Two for further
discussion.
 
NOTE SIX -- RESTRUCTURING AND OTHER CHARGES:
 
     During the fourth quarter of 1996, the company recorded $9.3 million of
restructuring charges. The restructuring was composed of $5.2 million of charges
related to severance costs associated with employment reductions (mostly in the
company's U.S. salaried workforce) and $4.1 million of charges associated with
the shutdown of the company's wholly-owned Canadian distributor. Substantially
all of the provisions are related to cash expenditures that will be made during
1997.
 
     During the fourth quarter of 1995, the company recorded charges totaling
$3.6 million that were incurred as a consequence of the LGE purchase of common
stock as described in Note Five. During the second quarter of 1995, the company
recorded a charge of $18.0 million primarily to restructure its core Consumer
Electronics and Network Systems business. The major elements of the
restructuring related to severance expenses associated with employment
reductions, primarily in the company's U.S. salaried workforce and costs
associated with realigned distribution activities as the company changed to
direct-to-retail distribution on a nationwide basis. The remaining charges
related to other non-recurring items, including certain environmental, legal and
other regulatory matters, along with trade receivable write-offs (primarily for
accounts in Mexico as a result of the December 1994 peso devaluation).
 
                                       26
<PAGE>   26
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
NOTE SEVEN -- INCOME TAXES:
 
     The components of income taxes (credit) were:
 
<TABLE>
<CAPTION>
                                                            YEAR ENDED DECEMBER 31
                                                          --------------------------
                                                          1996      1995       1994
                                                          ----      ----       ----
                                                                (IN MILLIONS)
<S>                                                       <C>       <C>        <C>
Currently payable (refundable):
  Federal...............................................   $--      $(7.8)     $ (.5)
  State.................................................   .2          .1         .2
                                                           ---      -----      -----
     Total income taxes (credit)........................   $.2      $(7.7)     $ (.3)
                                                           ===      =====      =====
</TABLE>
 
     The $7.7 million income tax credit in 1995 included a $7.5 million tax
refund (including interest) due the company as a result of certain foreign tax
credit issues in audits of prior years. The company expects to receive this tax
refund during 1997.
 
     The statutory federal income tax rate and the effective tax rate are
compared below:
 
<TABLE>
<CAPTION>
                                                        YEAR ENDED DECEMBER 31
                                                        -----------------------
                                                        1996     1995     1994
                                                        ----     ----     ----
<S>                                                     <C>      <C>      <C>
Statutory federal income tax rate.....................  (35.0)%  (35.0)%  (35.0)%
State income taxes, net...............................     --       .1       .7
Foreign tax effects...................................    1.0      1.5     21.9
Tax benefits not recognized subject to future
  realization.........................................   34.0     33.5     13.4
Net operating loss carryback/refund...................     --     (8.4)    (3.2)
                                                        -----    -----    -----
Effective tax rate....................................    (--)%   (8.3)%   (2.2)%
                                                        =====    =====    =====
</TABLE>
 
     Deferred tax assets (liabilities) are comprised of the following:
 
<TABLE>
<CAPTION>
                                                                   YEAR ENDED
                                                                  DECEMBER 31
                                                               ------------------
                                                                1996       1995
                                                                ----       ----
                                                                 (IN MILLIONS)
<S>                                                            <C>        <C>
Loss carryforwards.........................................    $ 228.2    $ 163.8
Inventory valuation........................................       23.8       23.8
Product warranty...........................................       11.5       11.1
Co-op advertising..........................................        6.3        2.5
Merchandising..............................................        3.8        5.4
Other......................................................       38.0       14.6
                                                               -------    -------
     Deferred tax assets...................................      311.6      221.2
                                                               -------    -------
Depreciation...............................................       (6.6)     (17.5)
Employee benefits..........................................         --        (.7)
Other......................................................        5.5      (14.7)
                                                               -------    -------
     Deferred tax liabilities..............................       (1.1)     (32.9)
                                                               -------    -------
Valuation allowance........................................     (310.5)    (188.3)
                                                               -------    -------
     Net deferred tax assets...............................    $    --    $    --
                                                               =======    =======
</TABLE>
 
     The valuation allowance was established since the realization of these
assets cannot be reasonably assured, given the company's recurring losses.
 
                                       27
<PAGE>   27
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     As of December 31, 1996, the company had $555.4 million of total net
operating loss carryforwards (NOLs) available for federal income tax purposes
(which expire from 2004 through 2011) and unused tax credits of $3.6 million
(which expire from 2000 through 2002).
 
     The stock purchase by LGE described in Note Five created an "ownership
change" of the company for federal income tax purposes, with the effect that the
company's annual usage of its NOLs will be limited to approximately $27 million,
which represents the product of (i) a tax-exempt rate of return announced
monthly by the Internal Revenue Service (5.75 percent for ownership changes
occurring in the month of November 1995) and (ii) the value of the company
immediately before the ownership change, as determined under applicable tax
regulations. This limitation, appropriately modified, will also apply to the
company's utilization of most of its tax credit carryovers. The effect of this
annual limit will depend upon the generation of sufficient taxable income in the
future and certain other factors.
 
NOTE EIGHT -- GEOGRAPHIC SEGMENT DATA:
 
     The company's operations involve a dominant industry segment -- the design,
development, manufacture and distribution of video products, including color TV
sets, VCRs and other consumer electronics products, color picture tubes, cable
TV products and parts and accessories for these products.
 
     Financial information, summarized by geographic area, is as follows:
 
<TABLE>
<CAPTION>
                                                        YEAR ENDED DECEMBER 31
                                                 ------------------------------------
                                                   1996          1995          1994
                                                   ----          ----          ----
                                                            (IN MILLIONS)
<S>                                              <C>           <C>           <C>
Net sales to unaffiliated customers:
  Domestic companies...........................  $1,221.4      $1,212.7      $1,365.2
  Foreign companies............................      66.5          61.2         103.8
                                                 --------      --------      --------
          Total net sales......................  $1,287.9      $1,273.9      $1,469.0
                                                 ========      ========      ========
Income (loss) before income taxes:
  Domestic companies...........................  $ (171.5)     $  (94.5)     $   (8.7)
  Foreign companies............................      (6.3)         (4.0)         (6.1)
                                                 --------      --------      --------
          Total income (loss) before income
            taxes..............................  $ (177.8)     $  (98.5)     $  (14.8)
                                                 ========      ========      ========
Identifiable assets:
  Domestic companies...........................  $  615.5      $  548.5      $  512.0
  Foreign companies............................     149.8         152.2         150.4
                                                 --------      --------      --------
          Total identifiable assets............  $  765.3      $  700.7      $  662.4
                                                 ========      ========      ========
</TABLE>
 
     Foreign operations consist of manufacturing and sales subsidiaries in
Mexico, a distribution subsidiary in Canada (which was closed in December 1996)
and a purchasing office in Taiwan. Sales to affiliates are principally accounted
for at amounts based on local costs of production plus a reasonable return.
 
     Sales to a single customer, Circuit City Stores, Inc., amounted to $187.2
million (15 percent) in 1996, $172.1 million (14 percent) in 1995 and $180.8
million (12 percent) in 1994. Sales to a second customer, Sears, Roebuck and
Company, accounted for $140.9 million (11 percent) in 1996. No other customer
accounted for 10 percent or more of net sales.
 
NOTE NINE -- OTHER OPERATING EXPENSE (INCOME):
 
     Major manufacturers of TVs and VCRs agreed during 1992 to take licenses
under some of the company's U.S. tuning system patents (the licenses expire in
2003). Royalty income related to the tuning system patents was $26.6 million,
$25.9 million and $27.9 million in 1996, 1995 and 1994, respectively, and is
included in Other operating expense (income).
 
                                       28
<PAGE>   28
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
NOTE TEN -- INVENTORIES:
 
     Inventories consisted of the following:
 
<TABLE>
<CAPTION>
                                                                 DECEMBER 31
                                                            ---------------------
                                                             1996           1995
                                                             ----           ----
                                                                (IN MILLIONS)
<S>                                                         <C>            <C>
Raw materials and work-in-process.........................  $152.1         $128.7
Finished goods............................................   103.6           73.9
                                                            ------         ------
Total inventories.........................................  $255.7         $202.6
                                                            ======         ======
</TABLE>
 
NOTE ELEVEN -- PROPERTY, PLANT AND EQUIPMENT:
 
     Property, plant and equipment consisted of the following:
 
<TABLE>
<CAPTION>
                                                                  DECEMBER 31
                                                               ------------------
                                                                1996       1995
                                                                ----       ----
                                                                 (IN MILLIONS)
<S>                                                            <C>        <C>
Land.......................................................    $   9.9    $   3.9
Buildings..................................................      135.5      126.5
Machinery and equipment....................................      696.6      591.0
                                                               -------    -------
                                                                 842.0      721.4
Less accumulated depreciation..............................     (563.7)    (536.7)
                                                               -------    -------
Total property, plant and equipment, net...................    $ 278.3    $ 184.7
                                                               =======    =======
</TABLE>
 
     During 1994 the company recorded $11.0 million of net gain on asset sales.
Included in this amount is a $5.4 million gain on the sale of a warehouse in
Northlake, Illinois, and a $3.6 million gain on the sale of vacant land adjacent
to its Glenview, Illinois, headquarters. The company also sold its power supply
business and facilities in Chicago, Illinois, Springfield, Missouri and Lenexa,
Kansas.
 
NOTE TWELVE -- SHORT-TERM DEBT AND CREDIT ARRANGEMENTS:
 
     As described in Note Two, subsequent to December 31, 1996, the company
entered into revolving credit agreement and paid off the balance outstanding
under the credit agreement with General Electric Capital Corporation.
 
     In December 1996, the company entered into an amendment (the "Third
Amendment") to its $110 million Second Amended and Restated Credit Agreement
dated November 6, 1995 (the "Credit Agreement"), among the company, General
Electric Capital Corporation, as agent for itself and the other lenders named
therein. The Third Amendment (i) revised the minimum net worth levels, reducing
the amounts from $211.0 million to $150.0 million as of December 31, 1996, and
from $211.0 million to $100.0 million for every quarter thereafter and (ii)
revised the liabilities to net worth ratio, increasing the amounts from 4.00 to
1.0 to 4.50 to 1.0 as of December 31, 1996, and from 4.00 to 1.0 to 6.00 to 1.0
for every quarter thereafter. In May 1996, the company entered into an amendment
(the "First Amendment") to its Credit Agreement. The First Amendment (i) revised
the maximum capital expenditure levels, increasing the amount for 1996 from
$142.0 million to $180.0 million and (ii) revised the minimum net worth levels,
reducing the amounts from $245.0 million to $215.0 million as of June 29, 1996,
and from $245.0 million to $211.0 million for every quarter thereafter.
 
     Borrowings under the Credit Agreement, are secured by accounts receivable,
inventory, general intangibles and trademarks of the company. The Credit
Agreement is scheduled to expire on June 30, 1998. The maximum commitment of
funds available for borrowing under the Credit Agreement is $110 million, but is
limited by a defined borrowing base formula related to eligible receivables and
eligible inventory. Net
 
                                       29
<PAGE>   29
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
proceeds arising from material asset transactions will result in a partial
reduction in the maximum commitment of the lenders thereunder. Interest on
borrowings is based on market rates with a commitment fee of 3/8 percent per
annum payable monthly on the unused balance of the facility. As of December 31,
1996, $47.0 million of borrowings were outstanding under the Credit Agreement.
No borrowings were outstanding under the Credit Agreement as of December 31,
1995.
 
     As discussed above, the Credit Agreement contains restrictive financial
covenants that must be maintained as of the end of each fiscal quarter,
including a liabilities to net worth ratio and a minimum net worth amount. As of
December 31, 1996, the ratio of liabilities to net worth was required to be not
greater than 4.50 to 1.0 and was actually 3.98 to 1.0, and net worth was
required to be equal to or greater than $150.0 million and was actually $151.6
million (as defined in the Credit Agreement). The Credit Agreement restricts the
amount of capital expenditures by the company in each fiscal year. For the
fiscal years 1996, 1997 and each fiscal year thereafter the company is permitted
to make capital expenditures (as defined in the Credit Agreement) of up to
$180.0 million, $87.0 million and $60.0 million, respectively.
 
     In addition, there are restrictions regarding investments, acquisitions,
guaranties, transactions with affiliates, sales of assets, mergers and
additional borrowings, along with limitations on liens. The Credit Agreement
prohibits dividend payments on the company's common stock, restricts dividend
payments on any of its preferred stock, if issued, and prohibits the redemption
or repurchase of stock.
 
     Borrowings and interest rates on short-term debt were:
 
<TABLE>
<CAPTION>
                                                             YEAR ENDED DECEMBER 31
                                                             -----------------------
                                                             1996     1995     1994
                                                             ----     ----     ----
                                                                  (IN MILLIONS)
<S>                                                          <C>      <C>      <C>
Maximum month-end borrowings.............................    $72.6    $69.5    $60.4
Average daily borrowings.................................     18.3     37.2     26.3
Weighted average interest rate...........................      8.8%    10.5%     9.1%
</TABLE>
 
NOTE THIRTEEN -- LONG-TERM DEBT:
 
     The components of long-term debt were:
 
<TABLE>
<CAPTION>
                                                                  DECEMBER 31
                                                                ----------------
                                                                 1996      1995
                                                                 ----      ----
                                                                 (IN MILLIONS)
<S>                                                             <C>       <C>
6 1/4 percent convertible subordinated debentures due
  2011......................................................    $115.0    $115.0
8.5 percent senior subordinated convertible debentures due
  2000......................................................      23.8      23.8
8.5 percent senior subordinated convertible debentures due
  2001......................................................        .5        .5
Term Loan...................................................      31.2      38.5
                                                                ------    ------
                                                                 170.5     177.8
Less current portion........................................      17.8       9.0
                                                                ------    ------
     Total long-term debt...................................    $152.7    $168.8
                                                                ======    ======
</TABLE>
 
     As described in Note Two, subsequent to December 31, 1996, the company
entered into a new term loan agreement and paid off the balance outstanding
under the term loan with General Electric Capital Corporation.
 
     In December and May 1996, the company entered into amendments to its $40.0
million First Amended and Restated Term Loan Agreement dated November 6, 1995,
among the company, General Electric Capital Corporation, as agent for itself and
the other lenders named therein. These amendments revised the identical items
that are described in the Third Amendment and the First Amendment to the Credit
Agreement (see Note Twelve).
 
                                       30
<PAGE>   30
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     The Term Loan was in the initial principal amount of $40.0 million, and
requires scheduled quarterly principal payments over the life of the loan with a
balloon payment of $17.5 million due on the termination date of the loan, June
30, 1998, and additional mandatory prepayment in certain events. The borrowing
under the Term Loan Agreement is secured by the tuning system patent license
agreements of the company and a second security interest in the accounts
receivable, inventory, general intangibles and trademarks of the company. The
Term Loan Agreement contains the same financial covenants and other restrictions
that are contained in the Credit Agreement (see Note Twelve). Interest on the
borrowing is based on market rates.
 
     The 6 1/4 percent convertible subordinated debentures are unsecured general
obligations, subordinate in right of payment to certain other debt obligations,
and are convertible into common stock at $31.25 per share. Terms of the
debenture agreement include annual sinking-fund payments of $5.8 million
beginning in April 1997. The debentures are redeemable at the option of the
company, in whole or in part, at specified redemption prices at par or above.
 
     The 8.5 percent debentures due 2000 and 2001 are unsecured general
obligations, subordinate in right of payment to certain other debt obligations,
and are convertible into shares of common stock at an initial conversion price
of $9.76 per share and $10.00 per share, respectively. The debentures due 2000
and 2001 are redeemable at the option of the company, in whole or in part, at
any time on or after November 19, 1997 and January 18, 1998, respectively, at
specified redemption prices at par or above.
 
     On December 21, 1995, the company repurchased $42.7 million principal
amount of the 8.5 percent debentures, at par plus accrued interest. This
repurchase resulted from the exercise by certain holders of the debentures of
the right to require repurchase of all or a portion of the debentures following
a change of control of the company, which occurred upon the purchase of a
controlling interest in the company by LGE.
 
     The fair value of long-term debt is $130.4 million as of December 31, 1996,
as compared to the carrying amount of $152.7 million. The fair value of the
6 1/4 percent convertible subordinated debentures is based on the quoted market
price from the New York Stock Exchange. The fair value of the 8.5 percent
convertible senior subordinated debentures is based on the quoted price obtained
from third party financial institutions. The fair value of the Term Loan
approximates the carrying value as interest on the loan is based on market
rates. As of December 31, 1996, the company's Credit Agreement and Term Loan
Agreement would not allow the company to extinguish the long-term debt through
purchase and thereby realize the gain.
 
                                       31
<PAGE>   31
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
NOTE FOURTEEN -- STOCKHOLDERS' EQUITY:
 
     Changes in stockholders' equity accounts are shown below:
 
<TABLE>
<CAPTION>
                                                              ADDITIONAL
                                                     COMMON    PAID-IN     TREASURY
                                                     STOCK     CAPITAL      SHARES
                                                     ------   ----------   --------
                                                             (IN MILLIONS)
<S>                                                  <C>      <C>          <C>
Balance, December 31, 1993.........................  $35.9      $205.1      $ (.5)
  Sales of common stock............................    8.6        71.2         --
  Stock issued for benefit plans...................     .6         5.4         --
  Stock issued for stock options...................     .5         3.6         --
  Other............................................     .1          .1         --
                                                     -----      ------      -----
Balance, December 31, 1994.........................   45.7       285.4        (.5)
  Sales of common stock............................   17.8       152.6         --
  Stock issued for stock options...................     --          .3         --
  Other............................................     --         1.7       (1.2)
                                                     -----      ------      -----
Balance, December 31, 1995.........................   63.5       440.0       (1.7)
  Stock issued for benefit plans...................     .8         4.5         --
  Stock issued for stock options...................    1.9        13.9         --
  Other............................................     .4         1.0         --
                                                     -----      ------      -----
Balance, December 31, 1996.........................  $66.6      $459.4      $(1.7)
                                                     =====      ======      =====
</TABLE>
 
     During 1996, the company sold 1.9 million shares of authorized but unissued
common stock to employees of the company via the exercise of previously issued
stock options. During 1995, the company sold 16.5 million shares of authorized
but unissued common stock to LGE for a price of $10 per share (see Note Five for
further discussion). Also during 1995 and 1994 the company sold 1.3 million and
8.6 million shares, respectively, of authorized but unissued shares of common
stock to investors under registration statements that had been filed with the
Securities and Exchange Commission.
 
     The company has authorized 8 million shares of preferred stock of which
none are issued or outstanding as of December 31, 1996. The Board of Directors
of the company is authorized to issue the preferred stock from time to time in
one or more series and to determine all relevant terms of each such series,
including but not limited to the following (i) whether and upon what terms, the
shares of such series would be redeemable; (ii) whether a sinking fund would be
provided for the redemption of the shares of such series and, if so, the terms
thereof; and (iii) the preference, if any, to which shares of such series would
be entitled in the event of voluntary or involuntary liquidation of the company.
 
NOTE FIFTEEN -- STOCK OPTIONS AND AWARDS:
 
     Stock Options: The 1987 Stock Incentive Plan authorizes the granting of
incentive and non-qualified stock options, restricted stock awards and stock
appreciation rights to key management personnel. The purchase price of shares
under option is the market price of the shares on the date of grant. Options
expire 10 years from the date granted. The company accounts for employee stock
options under APB Opinion No. 25, under which no compensation cost has been
recognized. Had compensation cost been determined based on the
 
                                       32
<PAGE>   32
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
fair value of options at their grant dates consistent with the method of SFAS
123, the company's net income and earnings per share would have been reduced to
the following pro forma amounts:
 
<TABLE>
<CAPTION>
                                                                 1996       1995
                                                                 ----       ----
                                                                  (IN MILLIONS)
<S>                                                             <C>        <C>
Net income:
  As reported...............................................    $(178.0)   $(90.8)
  Pro forma.................................................     (179.1)    (92.5)
Earnings per share:
  As reported...............................................    $ (2.73)   $(1.85)
  Pro forma.................................................      (2.75)    (1.88)
</TABLE>
 
     Because the SFAS 123 method of accounting has not been applied to options
granted prior to January 1, 1995, the pro forma compensation cost may not be
representative of the pro forma cost to be expected in future years.
 
     A summary of the status of the company's stock option plans at December 31,
1996 and 1995 and changes during the years then ended is presented in the table
and narrative below:
 
<TABLE>
<CAPTION>
                                                                     1996                   1995
                                                              -------------------    -------------------
                                                                         WEIGHTED               WEIGHTED
                                                                         AVERAGE                AVERAGE
                                                              SHARES     EXERCISE    SHARES     EXERCISE
                                                              (000'S)     PRICE      (000'S)     PRICE
                                                              -------    --------    -------    --------
<S>                                                           <C>        <C>         <C>        <C>
Options outstanding at January 1..........................      2,588      8.25        2,027      8.66
Options granted...........................................        456     12.54          738      7.16
Options exercised.........................................     (1,889)     8.33          (38)     7.69
Options canceled or expired...............................       (187)     9.30         (139)     8.66
                                                               ------     -----       ------      ----
Options outstanding at December 31........................        968      9.91        2,588      8.25
                                                               ------     -----       ------      ----
Options exercisable at December 31........................        427      8.27        2,081      8.34
Shares available for grant at December 31.................      1,329                  1,269
</TABLE>
 
     Of the options outstanding at December 31, 1996, 589,000 had exercise
prices between $6.25 and $9.63, with a weighted average exercise price of $7.80
and a weighted average remaining contractual life of 6.99 years. The remaining
380,000 had exercise prices between $9.75 and $14.75, with a weighted average
exercise price of $13.25 and a weighted average remaining contractual life of
9.29 years.
 
     The fair value of each option grant was estimated on the date of grant
using the Black-Scholes option pricing model, using the following assumptions
for grants in 1996 and 1995, respectively; weighted average risk-free interest
rates of 6.25 percent and 6.83 percent, zero expected dividend yields, and
expected volatility of 62.35 percent for both years. A 3.5 year estimated life
was used for all grants.
 
     Restricted stock awards: The company had 270,090 and 9,339 restricted stock
awards issued and outstanding as of December 31, 1996 and 1995, respectively.
The market value of the restricted shares is deferred in the additional paid-in
capital account and is generally amortized over the years the restrictions
lapse. The 1996 increase in restricted stock was caused by issuances to new
members of the company's management. Total compensation expense in 1996 and
1995, related to these awards, was not material.
 
NOTE SIXTEEN -- RETIREMENT PLANS AND EMPLOYEE BENEFITS:
 
     Virtually all employees in the United States and Canada are eligible to
participate in noncontributory profit-sharing retirement plans after completing
one full year of service. The plans provide for a minimum annual contribution of
6 percent of employees' eligible compensation. Contributions above the minimum
could be required based upon profits in excess of a specified return on net
worth. Profit-sharing expenses were
 
                                       33
<PAGE>   33
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
$8.6 million, $8.8 million and $9.7 million in 1996, 1995 and 1994,
respectively. The 1995 and 1994 contributions were partially funded through the
issuance of approximately 782,000 and 547,000 shares, respectively, of the
company's common stock.
 
     Employees in Mexico are covered by government-mandated plans, the costs of
which are accrued by the company. Benefits payable to employees when they leave
the company other than by reason of retirement did not have a material effect on
the financial statements of the company, nor are they expected to have a
material effect on future results of operations.
 
NOTE SEVENTEEN -- CONTINGENCIES:
 
     The company is involved in various legal actions, environmental matters,
patent claims, and other proceedings relating to a wide range of matters that
are incidental to the conduct of its business. In addition, the company remains
liable for certain retained obligations of a discontinued business, principally
income and other taxes prior to the closing of the sale. Furthermore, the
company has been named as a defendant in certain cases which relate to keyboards
allegedly manufactured or designed by the company for the discontinued business.
 
     In 1994, the company notified its 15 independent distributors of its intent
to change to direct-to-retail distribution on a nationwide basis during 1995. In
February 1995, one of the independent distributors filed suit challenging the
company's right to discontinue the distributorship relationship and alleging
that it had been damaged by certain of the company's practices. The lawsuit
sought injunctive relief, actual damages of $8 million and punitive damages of
$20 million. In October 1995 summary judgment dismissing the case on all counts
was entered. The plaintiff has appealed. Another suit arising in connection with
this change in distribution was filed in April 1995 by another independent
distributor. The lawsuit seeks approximately $13 million in damages under the
Wisconsin Fair Dealership Law ("WFDL"). In January 1996 the court denied the
company's motion for summary judgment and granted the plaintiff's motion for
summary judgment, finding the company is liable. A jury trial on damages was
held in May 1996, and the jury awarded the plaintiff $2.37 million. The company
has appealed the judgment, contesting both the summary judgment finding of
liability and the damages awarded.
 
     The company believes that, after reviewing such matters with the company's
counsel, any liability that may ultimately be incurred with respect to these
matters is not expected to have a material effect on either the company's
consolidated financial position or results of operations.
 
NOTE EIGHTEEN -- RECLASSIFICATIONS
 
     Certain prior-year amounts have been reclassified to conform with the
presentation currently used.
 
                                       34
<PAGE>   34
                   REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS


To the Stockholders of Zenith Electronics Corporation:

We have audited the accompanying consolidated balance sheets of Zenith
Electronics Corporation (a Delaware corporation) and subsidiaries as of
December 31, 1996 and 1995, and the related statements of consolidated
operations and retained earnings and cash flows for each of the three years in
the period ended December 31, 1996.  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 generally accepted auditing
standards.  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.                    

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Zenith
Electronics Corporation and subsidiaries as of December 31, 1996 and 1995, and
the results of their operations and their cash flows for each of the three
years in the period ended December 31, 1996, in conformity with generally
accepted accounting principles.

As explained in Note Three to the financial statements, the Company has
given retroactive effect to the change in accounting for its picture tube
inventories from the LIFO method to the FIFO method.




/s/ Arthur Andersen LLP
--------------------------
    Arthur Andersen LLP


Chicago, Illinois 
February 26, 1997 
(except with respect to the matter
discussed in Note Two, as to which
the date is April 2, 1997)






                                      35
















<PAGE>   35
                  UNAUDITED QUARTERLY FINANCIAL INFORMATION



<TABLE>
<CAPTION>
In millions, except per share amounts

                                     1996 Quarters Ended                                1995 Quarters Ended
                           ---------------------------------------------------------------------------------------------------

                           Dec.31(1),  Sept. 28,  June 29,  March 30,     Dec. 31,*(2)  Sept. 30,(3)  July 1(4),  April 1
                           ---------------------------------------------------------------------------------------------------
<S>                        <C>         <C>        <C>       <C>           <C>           <C>           <C>         <C>   
Net sales                   $427.6      $340.8     $282.1    $237.4        $394.7        $332.5        $284.6      $262.1

Gross margin                 (10.0)       20.4       12.4       8.1          26.4          32.8          10.0        15.9

Net income (loss)            (69.3)      (40.2)     (33.2)    (35.3)        (23.0)          1.8         (45.3)      (24.3)

Per share of common stock (primary and fully diluted):

Net income (loss)           $ (1.05)    $  (.61)   $  (.51)  $  (.56)      $  (.42)      $   .04       $  (.97)    $  (.53)

New York Stock Exchange market price per share:

High                          16 5/8      17 1/2     25 3/4     7 1/2         8 7/8         9 1/4         8 1/2      12 1/8
Low                           10 1/4       8 1/8      6 1/8     5 7/8         6 5/8         7 1/4         6 7/8       7 1/2
End of quarter                10 7/8      15 5/8     12 1/8     6 5/8         6 7/8         8 5/8         7 3/8       7 3/4

(1) Includes $ 9.3 million of Restructuring and other charges.
(2) Includes $ 3.6 million of Restructuring and other charges.
(3) Includes $ 7.5 million of Income tax credits.
(4) Includes $18.0 million of Restructuring and other charges.

* Restated for a change in the method of accounting for certain inventories.  See Note Three of Notes to Consolidated 
Financial Statements.

</TABLE>

























                                      36

<PAGE>   36
 
                  REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON
                          FINANCIAL STATEMENT SCHEDULE
 
To the Stockholders of Zenith Electronics Corporation:
 
     We have audited, in accordance with generally accepted auditing standards,
the consolidated financial statements included in Zenith Electronics
Corporation's annual report to stockholders included in this Form 10-K, and have
issued our report thereon dated February 26, 1997 (except with respect to the
matters discussed in Note Two, as to which the date is April 2, 1997). Our
audits were made for the purpose of forming an opinion on those statements taken
as a whole. The financial statement schedule listed in Item 14 (a) 2 is the
responsibility of the Company's management and is presented for purposes of
complying with the Securities and Exchange Commission's rules and is not part of
the basic consolidated financial statements. This schedule has been subjected to
the auditing procedures applied in the audits of the basic consolidated
financial statements and, in our opinion, fairly states in all material respects
the financial data required to be set forth therein in relation to the basic
consolidated financial statements taken as a whole.
 
/s/ ARTHUR ANDERSEN LLP
---------------------------------------------
Arthur Andersen LLP
 
Chicago, Illinois
February 26, 1997
 
                                       37
<PAGE>   37
 
                          FINANCIAL STATEMENT SCHEDULE
 
                 SCHEDULE II-VALUATION AND QUALIFYING ACCOUNTS
 
<TABLE>
<CAPTION>
               COLUMN A                   COLUMN B               COLUMN C                COLUMN D     COLUMN E
---------------------------------------  ----------   -------------------------------   ----------   ----------
                                                                 ADDITIONS
                                         BALANCE AT   -------------------------------                BALANCE AT
        RESERVES AND ALLOWANCES          BEGINNING       CHARGED TO       CHARGED TO                   END OF
     DEDUCTED FROM ASSET ACCOUNTS        OF PERIOD    COSTS & EXPENSES   OTHER ACCTS.   DEDUCTIONS     PERIOD
     ----------------------------        ----------   ----------------   ------------   ----------   ----------
                                                                 (AMOUNTS IN MILLIONS)
<S>                                      <C>          <C>                <C>            <C>          <C>
Allowance for doubtful accounts:
  Year Ended December 31, 1996.........    $  3.6          $  5.2            $ --          $2.6(1)     $  6.2
                                           ======         =======            ====          ====        ======
  Year Ended December 31, 1995.........    $  3.1          $   .8            $ --          $ .3(1)     $  3.6
                                           ======         =======            ====          ====        ======
  Year Ended December 31, 1994.........    $  2.5          $  1.4            $ --          $ .8(1)     $  3.1
                                           ======         =======            ====          ====        ======
Valuation allowance for deferred tax
  assets:
  Year Ended December 31, 1996.........    $188.3          $122.2            $ --          $ --        $310.5
                                           ======         =======            ====          ====        ======
  Year Ended December 31, 1995.........    $183.9          $  4.4            $ --          $ --        $188.3
                                           ======         =======            ====          ====        ======
  Year Ended December 31, 1994.........    $179.2          $  4.7            $ --          $ --        $183.9
                                           ======         =======            ====          ====        ======
</TABLE>
 
-------------------------
(1) Uncollectible accounts written off, net of recoveries.
 
                                       38