<PAGE>   1

================================================================================
                UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                   FORM 10-K
                ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
                      THE SECURITIES EXCHANGE ACT OF 1934

FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997        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 18,
1998, WAS $220,564,685.

AS OF MARCH 18, 1998, THERE WERE 67,525,447 SHARES OF COMMON STOCK, PAR VALUE $1
PER SHARE OUTSTANDING.

                      DOCUMENTS INCORPORATED BY REFERENCE

PORTIONS OF THE REGISTRANT'S DEFINITIVE PROXY STATEMENT DATED APRIL 1998 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 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.

     The company has been developing a broad operational and financial
restructuring plan. See the Outlook section of Management's Discussion and
Analysis of Financial Condition and Results of Operations for further
information.

     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, 1997, 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 television and digital TV ("DTV")
related inventions. To the extent these inventions are incorporated into the DTV
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-DTV applications as well. 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 1997 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
55 percent of the company's net 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.

                                        2
<PAGE>   3

Major Customers

     Sales to a single customer, Circuit City Stores, Inc., amounted to $138.6
million (12 percent) in 1997, $187.2 million (15 percent) in 1996, and $172.1
million (14 percent) in 1995. Sales to a second customer, Sears, Roebuck and
Company, accounted for $132.4 million (11 percent) in 1997 and $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 believes it competes well with respect to each of these factors.

     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 1997 expenditures for company-sponsored research and engineering
relating to new products and services and to improvements of existing products
and services were $42.9 million. Research and engineering expenditures were
$46.7 million in 1996 and $43.5 million in 1995.

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 December 31, 1997, the company employed approximately 11,400 people, of
whom approximately 7,800 are hourly workers covered by collective bargaining
agreements. At December 31, 1996, the company employed approximately 15,900
people, of whom approximately 11,300 were hourly workers covered by collective
bargaining agreements.

     At December 31, 1997, approximately 3,600 of the company's employees are
located in the Chicago, Illinois, area, of whom approximately 2,400 are
represented by unions. Approximately 7,500 of the company's employees are
located in Mexico, of whom approximately 5,400 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 Nine to the
company's Consolidated Financial Statements. 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.

                                        3
<PAGE>   4

ITEM 2. PROPERTIES

     The company utilizes a total of approximately 5.2 million square feet for
manufacturing, warehousing, engineering and research, administration and
distribution, as described below.

<TABLE>
<CAPTION>
                                                                                            SQUARE FEET
              LOCATION                                NATURE OF OPERATION                  (IN MILLIONS)
              --------                                -------------------                  -------------
<S>                                    <C>                                                 <C>
DOMESTIC:
Chicago, Illinois....................  Five locations -- production of color picture            1.9
(including suburban locations)         tubes, parts and service; engineering and
                                       research, marketing and administration activities;
                                       and assembly of electronic components (.4 million
                                       square feet is leased by the company)
Fort Worth, El Paso, McAllen,........  Nine locations -- warehouses/offices (.8 million          .9
Brownsville and Dallas, Texas;         square feet is leased by the company)
Douglas, Arizona; Huntsville,
Alabama; Ontario and San Jose,
California
FOREIGN:
Mexico...............................  Four locations (twelve manufacturing and warehouse       2.4
                                       buildings) -- 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                                                                                      5.2
                                                                                                ===
</TABLE>

     The company's facilities are suitable and adequate to meet current and
anticipated requirements. Mortgages exist on domestic real property as
collateral for certain of the company's financing agreements. See the Outlook
section of Management's Discussion and Analysis of Financial Condition and
Results of Operations for further information.

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, after reviewing such matters
with the company's counsel, that any liability which 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

     In May 1997, the company's directors and LGE were named as defendants and
the company was named as a nominal defendant in a stockholder derivative suit
entitled Fisher v. Zenith Electronics Corporation. The suit alleges breach of
fiduciary duties by the directors resulting from the issuance of stock options
to LGE to purchase company stock for its support of certain of the company's
financing transactions. The suit seeks to void the stock option grants and to
recover unspecified damages and attorneys' fees from the directors and LGE. A
second derivative suit entitled Lazar v. Zenith Electronics Corporation was also
filed in May 1997 alleging identical claims of breach of fiduciary duties by the
company's directors and requesting the identical relief as sought in the Fisher
case. Both cases were filed in the Court of Chancery, New Castle County,
Delaware. Both cases are currently inactive.

     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

                                        4
<PAGE>   5

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
had 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. Of
the twenty-seven cases originally filed, only four remain pending against the
company. The company believes it has meritorious defenses to these cases. All
the other cases have been dismissed without payment of any damages by the
company.

     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. A
suit arising in connection with this change in distribution was filed in April
1995 by an independent distributor. The lawsuit sought 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 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 and is awaiting the appellate court's
decision.

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 and injunctive relief. The company
is currently in settlement negotiations.

     The company has been named as one of several dozen defendants in a tort
suit filed on behalf of several hundred plaintiffs. The suit alleges exposure to
various chemicals linked to a former television manufacturing plant in Texas.
The case entitled Aaron v. Akzo et al., No. D-0157586, 136(th) Judicial District
Court, Jefferson City, Texas, was filed on November 30, 1997.

Environmental

     The company and/or one of its subsidiaries are currently named as
Potentially Responsible Parties ("PRP"s) under the Comprehensive Environmental
Response, Compensation and Liability Act of 1980, as amended ("CERCLA"), as a
generator of allegedly hazardous waste disposed of at seven contaminated sites
in the United States. These are: the Rocky Flats Industrial Park Superfund Site
in Jefferson County, Colorado, the Liquid Dynamics Superfund Site in Chicago,
Illinois, the Midwest Solvent Recovery Superfund Sites in Gary, Indiana, the
Galaxy/Spectron, Inc. Superfund Site in Elkton, Maryland, the Master Metals
Superfund Site in Cleveland, Ohio, the North Penn Area 7 Superfund Site in
Lansdale, Pennsylvania and the Boarhead Farms Superfund Site in Bridgeton
Township, Pennsylvania.

     Based on information available to the company at this time, the company
believes its share of liability at each of these Sites (other than North Penn &
Boarhead) will not be material. At the North Penn and Boarhead sites, no cost
estimates are available nor has liability been imposed. In addition to these 7
sites, the company is awaiting the finalization of a Consent Decree that it will
enter into with the United States of America regarding the Moyer Landfill matter
in Collegeville, Pennsylvania. Under the Consent Decree, the company will
resolve its alleged liability for hazardous wastes disposed of at Moyer Landfill
for $300,000.

Events in 1997 include the following:

     In a letter dated August 13, 1997, the United States Environmental
Protection Agency ("US EPA") gave notice to the Zenco de Chihuahua and,
subsequently, Zenith Electronics Corporation of Texas, wholly-owned subsidiaries
of the company (the "company") of their alleged liability as PRPs at the Rocky
Flats Industrial Park Superfund Site under CERCLA. The US EPA issued an order to
perform a "Non-Time Critical Removal" and established the framework for an
investigation. The total cost to perform the investigation is currently
estimated not to exceed $850,000 of which the company paid $42,500 in 1997 and
is obligated to pay an additional $42,500 in 1998. In the event the
investigation costs exceed $850,000, the

                                        5
<PAGE>   6

company may be required to contribute an additional sum equal to 10% of the such
excess costs. No allocation has been established for future response costs. In
addition, the liability for US EPA past costs and any remedial work that may be
required has not been determined.

     On September 17, 1997 the US EPA served the company with a General Notice
of Potential Liability pursuant to Section 107(a) of CERCLA with regard to the
Liquid Dynamics, Inc., Superfund Site in Chicago, Illinois. The US EPA advised
PRPs that it would perform a preliminary investigation. No costs have been
incurred to date. US EPA advised the PRPs that it believes the entire Liquid
Dynamics portion of the investigation will not exceed $200,000. Future US EPA
response costs incurred performing the investigation and the cost of any
remedial work have not yet been determined but will be allocated among the
members of the PRP group. However, based on information currently available, the
company believes it will be allocated a significant share of the cost of
investigation and future response costs, if any.

     The Master Metals, Inc. Superfund site (the "Site") is located in
Cleveland, Ohio. The company received notice from US EPA in 1996 that it was
identified as a PRP under CERCLA and would be held responsible for a portion of
the clean up costs associated with the Site. A PRP group was formed to conduct
Phase I remedial activities which the company joined and contributed $24,936 out
of the total amount of $1,700,000 assessed to finance the estimated cost of
conducting the Phase I remedial activities. This was an interim allocation based
on the estimated cost of conducting the Phase I remedial activities. At this
early stage, the estimated cost of Phase II remedial activities is not expected
to exceed a total amount of $500,000 which will be allocated among the PRP group
in accordance with the previously established allocation.

                                        6
<PAGE>   7

                      EXECUTIVE OFFICERS OF THE REGISTRANT

<TABLE>
<CAPTION>
             NAME                                        OFFICE HELD                           AGE
             ----                                        -----------                           ---
<S>                              <C>                                                           <C>
Michael Ahn....................  Former acting President of Consumer Electronics Division      49
                                 from November 1997 to February 1998. Senior Vice President
                                 of Operations from July 1996 to October 1997. President OEM
                                 Sales Division from 1991 to 1995, LG Electronics U.S.A.,
                                 Inc.
Ramesh G. Amin.................  Former President, Consumer Electronics Division, from         54
                                 December 1996 to October 1997. Previously Senior Vice
                                 President, Display Products Group at Sony for seven years.
Roger A. Cregg.................  Former Executive Vice President, Chief Financial Officer,     41
                                 from May 1996 to December 1997. Chief Financial Officer at
                                 Sweetheart Cup Company from 1990 to 1996.
Robert N. Dangremond...........  Acting Chief Financial Officer since December 1997.           55
                                 Principal with Jay Alix & Associates, a consulting and
                                 accounting firm specializing in corporate restructurings and
                                 turnaround activities, since August 1989. Previously,
                                 beginning in August 1995, Mr. Dangremond has held the
                                 position of interim Chief Executive Officer and President of
                                 Forstmann & Company, Inc. and was Chairman of the Board,
                                 President and Chief Executive Officer of AM International,
                                 Inc. from February 1993 to September 1994.
Jeffrey P. Gannon..............  President and Chief Executive Officer, since January 1998.    47
                                 Previously held a variety of senior positions at General
                                 Electric during a 24-year career, including Corporate Vice
                                 President, International Business Development from October
                                 1997 to January 1998 and President & Chief Executive Officer
                                 of General Electric Lighting's Asia Pacific Operations from
                                 1994 to 1997.
John M. Renfro.................  Senior Vice President, Human Resources, since March 1998.     38
                                 Previously, Vice President Human Resources and
                                 Administration, Ameritech Corporation, Small Business
                                 Service from 1996 to 1998. Vice President, Human Resources,
                                 Asia-Pacific, Latin America and Africa, Dun and Bradstreet
                                 Corporation, 1993 to 1996.
Richard F. Vitkus..............  Senior Vice President, General Counsel since 1994. Secretary  58
                                 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..............  Former President and Chief Executive Officer from November    60
                                 1996 to January 1998. 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............  Former Vice President, Human Resources, from March 1996 to    47
                                 October 1997. Director, Human Resources, Case Corporation
                                 from 1990 to 1996.
Nam K. Woo.....................  Former Executive Vice President and acted as Chief Operating  48
                                 Officer from October 1997 to January 1998. Senior Managing
                                 Director LG Electronics, Inc. since 1997. President of North
                                 American Operations and LG Electronics U.S.A., Inc. 1994 to
                                 1997.
</TABLE>

                                        7
<PAGE>   8

                                    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
11,488 as of March 18, 1998. No dividends were paid to stockholders during the
two years ended December 31, 1997.

     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.

ITEM 6. SELECTED FINANCIAL DATA

FIVE-YEAR SUMMARY OF SELECTED FINANCIAL DATA

<TABLE>
<CAPTION>
                                          1997          1996          1995          1994          1993
                                          ----          ----          ----          ----          ----
                                                    (IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<S>                                     <C>           <C>           <C>           <C>           <C>
Results of operations:
  Net sales...........................  $1,173.1      $1,287.9      $1,273.9      $1,469.0      $1,228.2
  Pre-tax income (loss)...............    (300.2)       (177.8)        (98.5)        (14.8)        (93.2)
  Net income (loss)...................    (299.4)       (178.0)        (90.8)        (14.5)        (93.2)
Financial position:
  Total assets........................  $  527.7      $  765.3      $  700.7      $  662.4      $  568.5
  Long-term debt......................     132.8         152.7         168.8         182.0         170.0
  Stockholders' equity (deficit)......     (85.3)        162.0         317.5         237.1         161.5
Per share of common stock:
  Net income (loss)...................  $  (4.49)     $  (2.73)     $  (1.85)     $   (.35)     $  (2.89)
  Book value (deficit)................     (1.27)         2.44          5.00          5.19          4.50
</TABLE>

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 1997 were $1,173 million down nine percent from 1996
sales of $1,288 million. Sales in 1996 increased one percent as compared to 1995
sales of $1,274 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 1997 and 1996 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 decreased seven percent in 1997 from 1996
primarily due to soft demand for direct-view color TV sets (particularly during
the traditionally strong fourth quarter) and lower VCR sales. In addition, sales
continued to be negatively impacted as the company suffered delays in production
of new high-margin Consumer Electronics products. Because of picture tube
availability problems, the company's domestic direct-view color television unit
sales declined compared with 1996, but the company gained market share in key
large-screen categories. The industry color TV unit sales to dealers (including
projection television) decreased by four percent in 1997 to 24.5 million units
(following a decrease of three percent to

                                        8
<PAGE>   9

25.5 million units in 1996 and a decrease of four percent to 26.2 million units
in 1995). The Zenith brand remains one of the top three U.S. color TV brands.

     Sales in 1997 were negatively impacted as a result of a dispute the company
had with a Brazilian customer. The company shipped dramatically less to this
customer during 1997, and as a result the company's international sales have
been lower than expected.

     Consumer Electronics sales increased three 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 televisions) decreased by three percent to 25.5 million
units in 1996 (following a decrease of four percent to 26.2 million units in
1995 and an increase of ten percent to 27.4 million units in 1994).

     Sales in 1996 were negatively impacted as the company suffered delays in
production of new high-margin Consumer Electronics products.

     In Network Systems, which includes the design and manufacture of digital
and analog set-top boxes, along with data modems sold primarily to cable
television operators, 1997 sales were down significantly compared with 1996 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 1997. During 1996, the
company signed a multi-year agreement with the Americast programming venture to
provide digital set-top boxes to a consortium of telecommunications companies.
Initial shipments under this contract began in 1997. Network Systems 1996 sales
were down significantly compared with 1995 for the reasons discussed above.

     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 1997 results included large losses in color picture tube operations
along with significant charges related to inventory valuation (approximately $44
million) and bad debts (approximately $25 million) which are significantly
higher that last year. The large losses in the company's color picture tube
plant resulted from high operating costs and performance difficulties associated
with new product start-up and new automated production processes. These product
and process problems created a large amount of rework inventory that
necessitated significant charges for excess and obsolete inventory. These items
combined to negatively impact the company's gross margin. The charges for bad
debts affected selling, general and administrative expenses and are discussed
below.

     The 1996 results also included significant charges. 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.

     Selling, general and administrative expenses were $178 million in 1997,
$168 million in 1996 and $129 million in 1995. These expenses as a percent of
revenues were 15 percent in 1997, 13 percent in 1996 and 10 percent in 1995. The
increase in 1997, as compared to 1996, was primarily the result of a $21 million
bad debt charge related to a dispute the company had with a Brazilian customer.
See Note Four to the company's Consolidated Financial Statements for further
information. The increase in 1996, as compared to 1995, was the result of the
unusual charges which included severance charges for salaried employees
(including executive severance), consulting fees and provisions for bad debts.

     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

                                        9
<PAGE>   10

$43 million in 1997, $47 million in 1996 and $44 million in 1995. These expenses
as a percentage of revenues were approximately 4 percent in each year during the
three years ended December 31, 1997.

     OTHER OPERATING EXPENSE (INCOME). Other Operating Expense (Income) contains
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 $26 million in 1997, $27 million in 1996 and $26
million in 1995. Also included in Other operating expense (income) are foreign
exchange gains and losses. These amounts have traditionally not been material.

     In 1997, Other Operating Expense (Income) was significantly impacted as the
company recorded $64 million in charges for asset impairments. As required by
Statement of Financial Accounting Standards (FAS) No. 121, long-lived assets to
be held and used are reviewed for impairment whenever events or changes in
circumstances indicate that the related carrying amount may not be recoverable.
During the fourth quarter of 1997, an impairment was recognized for the Consumer
Electronics business since the future undiscounted cash flows of assets were
estimated to be insufficient to recover their related carrying values. As such,
the company recognized an expense of $54 million and established a valuation
reserve for the write-down of the excess carrying value over fair market value.
The fair market value used in determining the impairment loss was based upon
management and third party valuations.

     Also in accordance with FAS 121, certain long-lived assets to be disposed
of are reported at the lower of carrying amount or fair value less cost to sell.
During the third quarter of 1997, the company recorded a charge of $10 million
related to the impairment of certain long-lived assets to be disposed of. The
charge relates primarily to (i) assets that will be sold or scrapped as a result
of the company's decision to phase out of its printed circuit board operation
(ii) assets that will be sold or scrapped as a result of the company's decision
not to develop the proposed large-screen picture tube plant in Woodridge,
Illinois and (iii) a building in Canada that was sold in December 1997.

     The impairment charges discussed above are based upon management's best
estimates of the recoverability of long-lived assets and the fair value of the
related assets. It is reasonably possible that the company's estimates of the
recoverability of long-lived assets and the fair value will change. See the
Outlook section of Management's Discussion and Analysis of Financial Condition
and Results of Operations for further information.

     RESTRUCTURING AND OTHER CHARGES. There were no Restructuring and Other
Charges during 1997, however, if the company executes its business plan for
1998, significant restructuring charges are expected to be incurred during 1998.
See the Outlook section of Management's Discussion and Analysis of Financial
Condition and Results of Operations for further information.

     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 were 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) 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.

                                       10
<PAGE>   11

     INTEREST EXPENSE. Interest expense was $26 million in 1997, $15 million in
1996 and $20 million in 1995. The increased amounts in 1997 and 1995, when
compared to 1996, resulted from higher funding requirements for company
operations. To assist in funding these requirements, the company entered into
various financing transactions.

     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
$299 million in 1997, $178 million in 1996 and $91 million in 1995.
Corresponding per share losses were $4.49 in 1997, $2.73 in 1996 and $1.85 in
1995.

     In recent years, the company has announced product initiatives based on its
digital set-top box and cable modem technologies. The company has not yet
recognized any significant revenues from these 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.

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 1997, $25 million of cash was used by operating activities principally
to fund $193 million of net losses from operations as adjusted for depreciation,
charges for asset impairments and losses on asset sales. The change in current
accounts provided $149 million of cash and was principally composed of a $187
million decrease in receivables and a $90 million decrease in inventories,
offset by a $111 million increase in transferor certificates. The decrease in
receivables and the increase in transferor certificates were mainly due to the
receivable securitization agreement with Citicorp being put in place during 1997
which accounts for transactions under this agreement as the sale of receivables.
The net effect of the decrease in receivables and the increase in transferor
certificates was a decrease of $76 million which was primarily related to the
lower sales levels, particularly in the fourth quarter of 1997, the $21 million
bad debt charge related to a dispute the company had with a Brazilian customer,
and the sale of receivable to outside investors under the receivable
securitization agreement. The decrease in inventories was related to reduced
amounts of purchases in anticipation of the lower fourth quarter sales. In
addition, the company reduced cash used by operating activities by issuing
common stock to the retirement savings plans to fulfill the 1996 obligation to
salaried employees. This issuance increased stockholders' equity by $5 million.

     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

                                       11
<PAGE>   12

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.

     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. Beginning in 1997, another major
investing activity became the distribution of investor certificates that were
generated under the receivable securitization with Citicorp.

     In 1997, investing activities provided $21 million of cash, which consisted
of $188 million of proceeds from asset sales offset by capital additions of $83
million and the distribution of $84 million of investor certificates. The
proceeds from asset sales were primarily composed of $95 million of cash
received from the sale of receivables (sold via the receivable securitization
with Citicorp) and $87 million of cash received in connection with a
sale-leaseback transaction whereby the company sold and leased back new and
existing manufacturing equipment in its Melrose Park, Illinois, picture tube
plant and in its Reynosa and Juarez, Mexico, facilities. Capital additions in
1997 included expenditures related to projects primarily in the color picture
tube area, which include new automated production processes and the addition of
new production lines for computer display tubes.

     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. The level of capital additions in 1996 was significantly higher other
years primarily to support the expansion and modernization of the company's
Melrose Park, Illinois, picture tube plant, and its Chihuahua, Mexico, plant for
digital set-top boxes.

     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. 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,
Illinois, picture tube plant.

     The company is planning a significant reduction in capital investment
projects during 1998.

     FINANCING ACTIVITIES. In 1997, financing activities provided $4 million of
cash, which included $45 million provided as a result of borrowings under the
company's new term loan, $25 million of increased borrowings under the company's
short-term debt agreements and $1 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 $31 million of cash used to pay off the old
term loan, $24 million of cash used to redeem the 8.5 percent Senior
Subordinated Convertible Debentures due November 2000, $7 million of cash used
to pay maturities of the new term loan and $6 million of cash used to pay
maturities of the 6 1/4 percent Convertible Subordinated Debentures due 2011.

     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

                                       12
<PAGE>   13

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.

Financial Condition

     As of December 31, 1997, the company had $364 million of interest-bearing
obligations which consisted of: (i) $144 million of extended-term payables with
LGE, (ii) $109 million of 6 1/4 percent Convertible Subordinated Debentures due
2011 (the current portion of which is $6 million), (iii) $72 million currently
payable under various unsecured and uncommitted credit facilities, (iv) a $38
million Term Loan with Citicorp (the current portion of which is $9 million),
(v) $1 million aggregate principal amount of 8.5 percent Senior Subordinated
Convertible Debentures due 2001 which are classified as current as they were
redeemed subsequent to December 31, 1997.

     In April 1997, the company obtained several financing commitments. 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. The term loan
requires scheduled quarterly principal payments of $2 million with a balloon
payment of $20 million at maturity in the year 2000. 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, domestic fixed assets, stock of the
company's subsidiaries and tuner patent royalties, along with the related
patents, licenses and other general intangibles. 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. During 1997, the company
amended its credit facility to relax certain financial covenants. As amended,
the financial covenants include a minimum EBITDA amount, a current ratio test, a
funded debt/total capitalization ratio test, a tuning patent royalties test and
an LGE payable test. As a result of waivers obtained from Citicorp, N.A., in
December 1997 and March 1998, only the tuning patent royalties test and the LGE
payable test were in effect as of December 31, 1997 and March 31, 1998, and the
company was in compliance with both of these covenants.

     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 was $165 million as of December 31, 1997, but
can be increased to $200 million, assuming additional bank commitments. 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, in April 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, Illinois, picture tube 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.

     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.

                                       13
<PAGE>   14

     Additionally in April 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 at negotiated rates.

     In return for LGE providing support for the securitizations and the
sale-leaseback transaction and the extended-term payables arrangement, the
company has granted 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 is based upon their fair value with
that fair value being amortized straight-line over the term of the associated
commitments.

     In August 1997 the company received $30 million from LGE representing
payments in advance for 1997 sales from the company to LGE. The amount was
recorded as a liability and as sales were made to LGE, the liability balance was
reduced. As of December 31, 1997, $1 million of the liability to LGE remained
and is included in accrued expenses.

     Between November 1997 and February 1998 the company entered into a series
of new financing transactions designed to enhance the company's liquidity and
financial flexibility. The company obtained a total of $110 million in unsecured
and uncommitted credit facilities through four lines of credit with Bank of
America ($30 million), First Chicago NBD ($30 million), Societe Generale ($20
million) and Credit Agricole ($30 million). The credit lines are guaranteed by
LGE for which LGE will receive a fee in an amount up to 2 percent of the face
amount of the loan, in the form of cash or the company's equity and subject to
the approval of the Finance Committee of the company's Board of Directors and in
the case of equity, the approval of the company's shareholders. The company
granted liens in favor of LGE on the capital stock of the company's domestic
subsidiaries and on the company's intellectual property (other than tuning
patents, tuning patent royalties and related license agreements) to secure the
guaranties of LGE for borrowings under these credit lines. As a result of this
financing, the company redeemed, in December 1997, its 8.5 percent Senior
Subordinated Convertible Debentures due November 2000. There was $24 million
principal amount of such debentures outstanding and the redemption price of such
debentures was 104 percent of such principal amount plus accrued interest
through the redemption date. The company also called for redemption, in January,
1998 its 8.5 percent Senior Subordinated Convertible Debentures due January
2001. There was $1 million principal amount of such debentures outstanding.

     In March 1998, the company entered into a secured credit facility with LGE
which provides for borrowings of up to $45 million. The term of the facility is
one year from the date of the first borrowing, subject to LGE's right to demand
repayment at anytime after June 30, 1998. Repayment is due in full at the end of
the term. The facility is secured by liens on certain of the company's assets
and is subject to certain terms and conditions.

Outlook

     Since joining the company in January 1998, the new Chief Executive Officer,
along with the rest of the company's management team has been developing a broad
operational and financial restructuring plan. A broad outline of that plan has
been presented to the company's Board of Directors in March 1998. The plan,
which is designed to leverage the company's brand, distribution and technology
strengths, includes reducing costs, outsourcing of certain components and
products, disposition of certain assets and capitalizing on the company's
patented digital television technologies. Restructuring costs must be incurred
to implement the plan.

     Despite its negative cash flow, the company has been able to secure
financing to support its operations to date, based on credit support from LGE.
Between November 1997 and February 1998, the company (with the guarantee of LGE)
entered into a series of new lending agreements with commercial lenders for
unsecured lines of credit totaling more than $100 million, all of which has been
drawn as of March 31, 1998.

     Going forward, significant amounts of additional cash will be needed to pay
the restructuring costs to implement the proposed business plan and to fund
losses until the company has returned to profitability. Based on management's
proposed plan, the company estimates that at least $225 million would be
required to fund

                                       14
<PAGE>   15

the company's restructuring costs and operations through the end of 1998 and
that additional amounts could be required thereafter.

     While there is no assurance that funding will be available to execute the
plan, the company is continuing to seek financing to support its turnaround
efforts and is exploring a number of alternatives in this regard. LGE has agreed
to provide up to $45 million in additional funding for one year from the date of
the first borrowing, subject to LGE's right to demand repayment at anytime after
June 30, 1998, and is secured by certain assets of the company. The company
believes that this additional short-term financing, along with its current
credit facilities, will be sufficient to support the company's liquidity
requirements through June 30, 1998, depending on operating results and the level
of continued trade support. In addition, the company is engaged in ongoing
discussions with LGE concerning the company's business plan, and LGE is
considering whether to provide additional long-term financial support. However,
LGE has no obligation to do so. Any such support by LGE would be subject to a
number of conditions, including the operating results of the company,
third-party consents, Republic of Korea regulatory approvals and other
conditions. No decision has been made at this time by LGE or the company
regarding additional financial support, and there can be no assurance that any
additional financial support will be forthcoming from LGE.

     In the absence of long-term financial support from LGE, there can be no
assurance that additional financing can be obtained from conventional sources.
Management is exploring alternatives that include seeking strategic investors,
lenders and/or technology partners, selling substantial company assets or
pursuing other transactions that could result in diluting LGE to a less than
majority position. There can be no assurance that management's efforts in this
regard will be successful.

     To implement the proposed business plan and to fund associated
restructuring costs and operating losses, the company will be required to
restructure certain of its outstanding debt and other financing arrangements
(See Notes Six, Fourteen, Fifteen and Sixteen to the company's Consolidated
Financial Statements for a description of certain debt and financing
arrangements.) A number of alternatives, including out-of-court and in-court
financial restructurings, are being considered. Management believes that, under
any restructuring scenario, the company's common stock would likely be subject
to massive dilution as a result of the conversion of debt to equity or
otherwise. There can be no assurances as to what value, if any, would be
ascribed to the common stock in a restructuring. In addition, the company's
subordinated debentures could suffer substantial impairment in a restructuring.
Due to a number of uncertainties, many of which are outside the control of the
company, there can be no assurance that the company will be able to consummate
any operational or financial restructuring.

     The company's independent public accountants have included a "going
concern" emphasis paragraph in their audit report accompanying the 1997
financial statements. The paragraph states that the company's recurring losses
and negative working capital raise substantial doubt about the company's ability
to continue as a going concern and cautions that the financial statements do not
include adjustments that might result from the outcome of this uncertainty.

     Existing credit facilities are not expected to be sufficient to cover
liquidity requirements after June 30, 1998, and the company is currently facing
the prospect of not having adequate funds to operate its business. There can be
no assurance that additional credit facilities can be arranged or that any
long-term restructuring alternative can be successfully initiated or implemented
by June 30, 1998, in which case the company may be compelled to pursue a
bankruptcy filing in the absence of a proposed or pre-approved financial
restructuring. The company will be required to obtain waivers under its
financing arrangements for periods subsequent to June 30, 1998 and the lenders
thereunder are under no obligation to provide such waivers.

     Management believes that, despite the financial hurdles and funding
uncertainties going forward, it has under development a business plan that, if
successfully funded and executed as part of a financial restructuring, can
significantly improve operating results. The support of the company's vendors,
customers, lenders, stockholders and employees will continue to be key to the
company's future success.

                                       15
<PAGE>   16

CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995

     Certain Statements in this Annual Report on Form 10-K, such as statements
regarding the company's strategies, plans, objectives and expectations are
forward-looking statements that involve known and unknown risks, uncertainties
and other factors which may cause the actual results of the company or of its
efforts to execute a business and financial restructuring to be materially
different from any future results expressed or implied by such forward-looking
statements. Such factors include, among others, the following: general economic
and business conditions, both in the United States and other countries in which
the company sells its products and from which the company obtains supplies; the
effect of competition in the markets served by the company; required approvals
of the Republic of Korea for additional financing, if any, that LGE may desire
to extend to the company; the availability and terms of financing from LGE or
other financing sources to fund the company's operating losses, restructuring
charges and the other costs and expenses of its new business plan; the
willingness of existing creditors to continue to forbear from enforcing
available rights and remedies and to grant additional waivers of potential
defaults and to agree to the terms of any proposed financial restructuring.
Given these uncertainties, stockholders and debtholders are cautioned not to
place undue reliance on any forward-looking statement contained herein. The
company disclaims any obligation to update such factors or forward-looking
statements or to publicly announce the result of any revisions to any of the
forward-looking statements contained herein or to reflect future events or
developments.

Readiness for the Year 2000

     The company is currently evaluating its computer-based systems, facilities
and products to determine whether they are "Year 2000 Ready." The company is
employing a combination of internal resources and outside consultants to
coordinate and implement it's Year 2000 Readiness initiatives. The company has
established a company-wide Year 2000 Task Force, led by the company's technology
group, with representation from its major business segments, to evaluate and
address Year 2000 issues. The Year 2000 Task Force's responsibilities include,
without limitation, (i) conducting an evaluation of the company's computer-based
systems, facilities and products (and those of the dealers, vendors and other
third-parties with which the company does business) to determine their Year 2000
Readiness, (ii) coordinating the replacement and/or upgrade of non-compliant
systems as necessary, (iii) promoting the company-wide awareness of Year 2000
issues through education and training, and (iv) developing, and overseeing the
implementation of all of the company's other Year 2000 Readiness initiatives.
While the company is working to achieve Year 2000 Readiness, it makes no
assurance that it will successfully achieve all of its goals.

     In 1997, the company spent approximately $2 million on software and
hardware upgrades and replacements in connection with its Year 2000 transition
and has budgeted an additional $2 million for 1998. Most of the costs incurred
in addressing Year 2000 issues are expected to be expensed as incurred, in
compliance with generally accepted accounting principles. The company continues
to evaluate the estimated costs associated with its Year 2000 Readiness efforts.
While the Year 2000 transition efforts will involve additional costs, at this
time, the company has not yet determined the full cost of the necessary
modifications necessary to address all Year 2000 issues.

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.

                                       16
<PAGE>   17

                                    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 1997" and "Aggregated Option/SAR Exercises in
1997 and year-end Option/SAR Values" 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.

                                    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, 1997, 1996 and 1995

        Consolidated Balance Sheets -- December 31, 1997 and 1996

        Statements of Consolidated Cash Flows -- Years ended December 31, 1997,
        1996 and 1995

        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.

                                       17
<PAGE>   18

     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>
<S>       <C>
  (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
  (4a)    Credit Agreement dated as of March 31, 1997, among Zenith
          Electronics Corporation, Citibank N.A., Citicorp North
          America, Inc. and the other lenders named (incorporated by
          reference to Exhibit 4f to the company's Quarterly Report on
          Form 10-Q for the quarter ended March 29, 1997)
  (4b)    First Amendment, effective as of October 29, 1997, to Credit
          Agreement dated as of March 31, 1997, among Zenith
          Electronics Corporation, Citibank N.A., Citicorp North
          America, Inc. and the other lenders named therein
          (incorporated by reference to Exhibit 4 to the company's
          Quarterly Report on Form 10-Q or the quarter ended September
          27, 1997)
  (4c)    Second Amendment, effective as of December 31, 1997, to
          Credit Agreement dated as of March 31, 1997, among Zenith
          Electronics Corporation, Citibank N.A., Citicorp North
          America, Inc. and the other lenders named therein
  (4d)    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)
*(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 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)
*(10c)    Form of Directors 1989 Stock Units Compensation Agreement
          with T. Kimball Brooker (1,000 units) (incorporated by
          reference to Exhibit 9 of the company's Report on Form 10-K
          for the year ended December 31, 1989)
*(10d)    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)
*(10e)    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)
*(10f)    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)
*(10g)    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)
*(10h)    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)
</TABLE>

                                       18
<PAGE>   19
<TABLE>
<S>       <C>
*(10i)    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)
*(10j)    Restated and Amended Zenith Salaried Retirement Savings Plan
*(10k)    Long-Term Equity Compensation Plan (incorporated by
          reference on Form S-8 filed June 6, 1997)
*(10l)    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)
*(10m)    Form of Employee Stock Option Agreement, Long-Term Equity
          Compensation Plan
 (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)    Employment Agreement, dated January 1, 1997, between Roger
          A. Cregg and Zenith Electronics Corporation (incorporated by
          reference to Exhibit 10p to the company's Annual Report on
          Form 10-K for the year ended December 31, 1996)
*(10p)    Employment Agreement, dated January 1, 1997, between Richard
          F. Vitkus and Zenith Electronics Corporation (incorporated
          by reference to Exhibit 10q to the company's Annual Report
          on Form 10-K for the year ended December 31, 1996)
*(10q)    Employment Agreement, dated January 1, 1997, between Peter
          S. Willmott and Zenith Electronics Corporation (incorporated
          by reference to Exhibit 10r to the company's Annual Report
          on Form 10-K for the year ended December 31, 1996)
*(10r)    Employment Agreement, dated January 1, 1997, between Dennis
          R. Winkleman and Zenith Electronics Corporation
          (incorporated by reference to Exhibit 10s to the company's
          Annual Report on Form 10-K for the year ended December 31,
          1996)
 (10s)    Agreement between Jay Alix & Associates and Zenith
          Electronics Corporation, as amended
 (10t)    Receivables Purchase Agreement dated as of March 31, 1997,
          among Zenith Electronics Corporation and Zenith Finance
          Corporation (incorporated by reference to Exhibit 10a to the
          company's Quarterly Report on Form 10-Q for the quarter
          ended March 29, 1997)
 (10u)    Letter amendment, dated October 15, 1997, to Receivables
          Purchase Agreement dated as of March 31, 1997, among Zenith
          Electronics Corporation and Zenith Finance Corporation and
          to Zenith Trade Receivable Master Trust Pooling and
          Servicing Agreement dated as of March 31, 1997, among Zenith
          Finance Corporation, Zenith Electronics Corporation and
          Bankers Trust Company
 (10v)    Receivables Purchase Agreement dated as of March 31, 1997,
          among Zenith Microcircuits Corporation and Zenith Finance
          Corporation (incorporated by reference to Exhibit 10b to the
          company's Quarterly Report on Form 10-Q for the quarter
          ended March 29, 1997)
 (10w)    Zenith Trade Receivable Master Trust Pooling and Servicing
          Agreement dated as of March 31, 1997, among Zenith Finance
          Corporation, Zenith Electronics Corporation and Bankers
          Trust Company (incorporated by reference to Exhibit 10c to
          the company's Quarterly Report on Form 10-Q for the quarter
          ended March 29, 1997)
 (10x)    Lease Agreement dated as of March 26, 1997, by and among
          Fleet National Bank and Zenith Electronics Corporation
          (incorporated by reference to Exhibit 10d to the company's
          Quarterly Report on Form 10-Q for the quarter ended March
          29, 1997)
 (10y)    Lease Agreement dated as of March 26, 1997, by and among
          Fleet National Bank and Zenith Electronics Corporation of
          Texas (incorporated by reference to Exhibit 10e to the
          company's Quarterly Report on Form 10-Q for the quarter
          ended March 29, 1997)
</TABLE>

                                       19
<PAGE>   20
<TABLE>
<S>       <C>
 (10z)    Participation Agreement dated as of March 26, 1997, by and
          among Zenith Electronics Corporation, General Foods Credit
          Corporation, Fleet National Bank and other lenders named,
          and First Security Bank, National Association (incorporated
          by reference to Exhibit 10f to the company's Quarterly
          Report on Form 10-Q for the quarter ended March 29, 1997)
 (10aa)   Participation Agreement dated as of March 26, 1997, by and
          among Zenith Electronics Corporation of Texas, General Foods
          Credit Corporation, Fleet National Bank and other lenders
          named, and First Security Bank, National Association
          (incorporated by reference to Exhibit 10g to the company's
          Quarterly Report on Form 10-Q for the quarter ended March
          29, 1997)
 (10ab)   Financial Support Agreement as of March 31, 1997, between LG
          Electronics Inc. and Zenith Electronics Corporation
          (incorporated by reference to Exhibit 10h to the company's
          Quarterly Report on Form 10-Q for the quarter ended March
          29, 1997)
 (10ac)   Subordination Agreement, dated as of November 3, 1997, among
          Zenith Electronics Corporation, Citicorp North America, Inc.
          and LG Electronics Inc., (incorporated by reference to
          Exhibit 10 to the company's Quarterly Report on Form 10-Q
          for the quarter ended September 27, 1997)
*(10ad)   Performance Optimization Plan Agreement, dated April 7,
          1997, between Richard F. Vitkus and Zenith Electronics
          Corporation
 (18)     Letter re change in accounting principle (incorporated by
          reference to Exhibit 18 to the company's Quarterly Report on
          Form 10-Q for the quarter ended June 28, 1997)
 (21)     Subsidiaries of the company
 (23)     Consent of Independent Public Accountants
 (27)     Financial Data Schedule for the Year ended December 31, 1997
</TABLE>

-------------------------
* Represents a management contract, compensation plan or arrangement.

     (b) Reports on Form 8-K

     No reports on Form 8-K were filed during the quarter ended December 31,
1997.

     (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.

                                       20
<PAGE>   21

                                   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/ JEFFREY P. GANNON

                                            ------------------------------------
                                                     Jeffrey P. Gannon
                                               President and Chief Executive
                                                           Officer

                                          Date: March 31, 1998

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

     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                               March 31, 1998
------------------------------------------------
               T. Kimball Brooker

                /s/ KI-SONG CHO                     Director                               March 31, 1998
------------------------------------------------
                  Ki-song Cho

             /s/ EUGENE B. CONNOLLY                 Director                               March 31, 1998
------------------------------------------------
               Eugene B. Connolly

              /s/ ROBERT A. HELMAN                  Director                               March 31, 1998
------------------------------------------------
                Robert A. Helman

            /s/ CHA HONG (JOHN) KOO                 Director                               March 31, 1998
------------------------------------------------
              Cha Hong (John) Koo

              /s/ SEUNG PYEONG KOO                  Director                               March 31, 1998
------------------------------------------------
                Seung Pyeong Koo

                 /s/ HUN JO LEE                     Director                               March 31, 1998
------------------------------------------------
                   Hun Jo Lee

             /s/ ANDREW MCNALLY IV                  Director                               March 31, 1998
------------------------------------------------
               Andrew McNally IV

                  /s/ YONG NAM                      Director                               March 31, 1998
------------------------------------------------
                    Yong Nam

             /s/ PETER S. WILLMOTT                  Director                               March 31, 1998
------------------------------------------------
               Peter S. Willmott

                  /s/ NAM WOO                       Director                               March 31, 1998
------------------------------------------------
                    Nam Woo

            /s/ ROBERT N. DANGREMOND                Acting Chief Financial Officer         March 31, 1998
------------------------------------------------    (Principal Financial Officer)
              Robert N. Dangremond

            /s/ LAWRENCE D. PANOZZO                 Director of Corporate Accounting       March 31, 1998
------------------------------------------------    and Planning
              Lawrence D. Panozzo                   (Principal Accounting Officer)
</TABLE>

                                       21
<PAGE>   22

                   INDEX TO FINANCIAL STATEMENTS AND EXHIBITS

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:

<TABLE>
<S>       <C>
 (3c)     By-Laws of the company, as amended
 (4c)     Second Amendment, effective as of December 31, 1997, to
          Credit Agreement dated as of March 31, 1997, among Zenith
          Electronics Corporation, Citibank N.A., Citicorp North
          America, Inc. and the other lenders named therein
(10j)     Restated and Amended Zenith Salaried Retirement Savings Plan
(10m)     Form of Employee Stock Option Agreement, Long-Term Equity
          Compensation Plan
(10s)     Agreement between Jay Alix & Associates and Zenith
          Electronics Corporation, as amended
(10u)     Letter amendment, dated October 15, 1997, to Receivables
          Purchase Agreement dated as of March 31, 1997, among Zenith
          Electronics Corporation and Zenith Finance Corporation and
          to Zenith Trade Receivable Master Trust Pooling and
          Servicing Agreement dated as of March 31, 1997, among Zenith
          Finance Corporation, Zenith Electronics Corporation and
          Bankers Trust Company
(10ad)    Performance Optimization Plan Agreement, dated April 7,
          1997, with Richard F. Vitkus
(21)      Subsidiaries of the company
(23)      Consent of Independent Public Accountants
(27)      Financial Data Schedule for the Year ended December 31, 1997
</TABLE>

                                       22
<PAGE>   23

                       CONSOLIDATED FINANCIAL STATEMENTS

                         ZENITH ELECTRONICS CORPORATION

     STATEMENTS OF CONSOLIDATED OPERATIONS AND RETAINED EARNINGS (DEFICIT)

<TABLE>
<CAPTION>
                                                                        YEAR ENDED DECEMBER 31
                                                                ---------------------------------------
                                                                  1997           1996           1995
                                                                  ----           ----           ----
                                                                (IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<S>                                                             <C>            <C>            <C>
Revenues
  Net sales.................................................    $1,173.1       $1,287.9       $1,273.9
                                                                --------       --------       --------
Costs, Expenses and Other
  Cost of products sold.....................................     1,180.5        1,257.0        1,188.8
  Selling, general and administrative (Note Four)...........       178.3          167.8          128.8
  Engineering and research..................................        42.9           46.7           43.5
  Other operating expense (income), net
     (Notes One, Three and Ten).............................        42.4          (26.3)         (30.1)
  Restructuring and other charges (Note Seven)..............          --            9.3           21.6
                                                                --------       --------       --------
Income
  Operating income (loss)...................................      (271.0)        (166.6)         (78.7)
  Gain (loss) on asset sales, net...........................        (4.6)           0.3           (1.7)
  Interest expense..........................................       (25.5)         (15.1)         (19.9)
  Interest income...........................................         0.9            3.6            1.8
                                                                --------       --------       --------
  Income (loss) before income taxes.........................      (300.2)        (177.8)         (98.5)
  Income taxes (credit) (Note Eight)........................        (0.8)           0.2           (7.7)
                                                                --------       --------       --------
     Net income (loss)......................................    $ (299.4)      $ (178.0)      $  (90.8)
                                                                ========       ========       ========
Per Share
  Income (loss) per common share (Note Eighteen)............    $  (4.49)      $  (2.73)      $  (1.85)
                                                                ========       ========       ========
Retained Earnings (Deficit)
  Balance at beginning of year..............................    $ (362.3)      $ (184.3)      $  (93.5)
  Net income (loss).........................................      (299.4)        (178.0)         (90.8)
                                                                --------       --------       --------
     Retained earnings (deficit) at end of year.............    $ (661.7)      $ (362.3)      $ (184.3)
                                                                ========       ========       ========
</TABLE>

The accompanying Notes to Consolidated Financial Statements are an integral part
                              of these statements.

                                       23
<PAGE>   24

                         ZENITH ELECTRONICS CORPORATION

                          CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                    DECEMBER 31
                                                                --------------------
                                                                  1997        1996
                                                                  ----        ----
                                                                (IN MILLIONS, EXCEPT
                                                                SHARE AND PER SHARE
                                                                       DATA)
<S>                                                             <C>         <C>
ASSETS
Current Assets
  Cash (Note One)...........................................    $    --     $    --
  Receivables, net of allowance for doubtful accounts of $--
     and $6.2...............................................       21.7       208.3
  Inventories (Note Eleven).................................      165.5       255.7
  Transferor Certificates (Note Twelve).....................       99.7          --
  Other.....................................................       26.3        11.1
                                                                -------     -------
     Total current assets...................................      313.2       475.1
Noncurrent Assets
  Property, plant and equipment, net (Note Thirteen)........      171.1       278.3
  Other (Note Six)..........................................       43.4        11.9
                                                                -------     -------
          Total assets......................................    $ 527.7     $ 765.3
                                                                =======     =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
  Short-term debt (Note Fifteen)............................    $  72.0     $  47.0
  Current portion of long-term debt (Note Sixteen)..........       15.3        17.8
  Accounts payable..........................................       91.3       109.6
  Accounts payable to related party (Note Six)..............      145.9       124.5
  Compensation and retirement benefits (Note Nineteen)......       41.2        43.2
  Product warranties........................................       18.3        32.1
  Co-op advertising and merchandising programs..............       30.6        20.5
  Income taxes payable......................................        0.7         1.3
  Other accrued expenses....................................       51.6        54.6
                                                                -------     -------
     Total current liabilities..............................      466.9       450.6
Noncurrent Liabilities
  Long-term liabilities (Note Six)..........................       17.0          --
  Long-term debt (Note Sixteen).............................      132.8       152.7
Stockholders' Equity
  Preferred stock, $1 par value; 8,000,000 shares
     authorized; none outstanding...........................         --          --
  Common stock, $1 par value; 150,000,000 shares authorized;
     67,130,628 and 66,564,119 shares issued................       67.1        66.6
  Additional paid-in capital................................      507.3       459.4
  Retained earnings (deficit)...............................     (661.7)     (362.3)
  Cost of 105,181 common shares in treasury.................       (1.7)       (1.7)
                                                                -------     -------
     Total stockholders' equity (Note Seventeen)............      (89.0)      162.0
                                                                -------     -------
          Total liabilities and stockholders' equity........    $ 527.7     $ 765.3
                                                                =======     =======
</TABLE>

The accompanying Notes to Consolidated Financial Statements are an integral part
                              of these statements.

                                       24
<PAGE>   25

                         ZENITH ELECTRONICS CORPORATION

                     STATEMENTS OF CONSOLIDATED CASH FLOWS

<TABLE>
<CAPTION>
                                                               INCREASE (DECREASE) IN CASH
                                                                 YEAR ENDED DECEMBER 31
                                                              -----------------------------
                                                                1997       1996      1995
                                                                ----       ----      ----
                                                                      (IN MILLIONS)
<S>                                                           <C>        <C>        <C>
Cash Flows from Operating Activities
  Net income (loss).........................................  $(299.4)   $(178.0)   $(90.8)
  Adjustments to reconcile net income (loss)
    to net cash used by operations:
       Depreciation.........................................     38.0       35.0      32.1
       Charge for asset impairment..........................     63.7         --        --
       Employee retirement plan contribution in stock.......      4.9        5.3        --
       (Gain) loss on asset sales, net......................      4.6        (.3)      1.7
       Charge for donated services..........................      2.2         --        --
       Other................................................       .5        1.6        .5
       Changes in assets and liabilities:
         Current accounts...................................    149.4      116.4      19.9
         Other assets.......................................      3.6       (3.9)      3.4
         Other liabilities..................................      7.6         --        --
                                                              -------    -------    ------
  Net cash used by operating activities.....................    (24.9)     (23.9)    (33.2)
                                                              -------    -------    ------
Cash Flows from Investing Activities
  Capital additions.........................................    (82.5)    (129.0)    (51.9)
  Proceeds from asset sales.................................    187.7        4.3       2.9
  Distribution of Investor Certificates.....................    (84.0)        --        --
                                                              -------    -------    ------
  Net cash provided (used) by investing activities..........     21.2     (124.7)    (49.0)
                                                              -------    -------    ------
Cash Flows from Financing Activities
  Short-term borrowings, net................................     25.0       47.0        --
  Proceeds from issuance of long-term debt..................     45.0         --      40.0
  Proceeds from issuance of common stock, net...............      1.1       15.7     170.7
  Principal payments on long-term debt......................    (67.4)      (7.3)    (44.2)
                                                              -------    -------    ------
  Net cash provided by financing activities.................      3.7       55.4     166.5
                                                              -------    -------    ------
Cash
  Increase (decrease) in cash...............................       --      (93.2)     84.3
  Cash at beginning of year.................................       --       93.2       8.9
                                                              -------    -------    ------
  Cash at end of year.......................................  $    --    $    --    $ 93.2
                                                              =======    =======    ======
Changes in Current Assets and Liabilities
  Increase (decrease) in cash attributable to changes in:
       Receivables, net.....................................    186.6    $  (7.5)   $ 10.2
       Transferor Certificates..............................   (110.7)        --        --
       Income taxes, net....................................     (0.6)        .1      (6.0)
       Inventories..........................................     90.2      (53.1)     51.4
       Other assets.........................................     (9.7)      (3.3)      2.2
       Accounts payable and accrued expenses................     (6.4)     180.2     (37.9)
                                                              -------    -------    ------
         Net change in current accounts.....................  $ 149.4    $ 116.4    $ 19.9
                                                              =======    =======    ======
Supplemental Disclosure
Supplemental disclosure of cash flow information --
  Cash paid (refunded) during the period for:
    Interest................................................  $  24.8    $  14.1    $ 20.6
    Income taxes............................................     (9.3)        .9       (.1)
  Non-cash activity:
    Asset and additional paid-in capital recorded related to
      guarantee fee.........................................  $  39.7    $    --    $   --
    Liability recorded related to deferred gain on sale
      leaseback.............................................     10.2         --        --
</TABLE>

The accompanying Notes to Consolidated Financial Statements are an integral part
                              of these statements.

                                       25
<PAGE>   26

                   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 reported at the lower of carrying amount or
fair value, less cost to sell, and is included in Other noncurrent assets. This
property includes certain facilities and land no longer used in the company's
operations.

     Rental expenses under operating leases were $20.7 million, $12.8 million,
and $15.3 million in 1997, 1996 and 1995, respectively. The 1997 increase in
rental expense was due to the sale-leaseback transaction that was entered into
in April 1997. See Note Fourteen for additional information on the
sale-leaseback transaction.

     The company capitalizes interest on major capital projects. The company
capitalized $4.1 million and $2.3 million of interest in 1997 and 1996,
respectively. The amount was not material in 1995.

     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 were not material in 1997, 1996
and 1995.

     Stock options: During 1996, the company adopted Statement of Financial
Accounting Standards ("FAS") No. 123, "Accounting for Stock-Based Compensation".
The 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 disclose the calculated cost, as pro forma information. The
company has chosen to disclose the calculated cost, as pro forma information
(see Note Seventeen).

     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

                                       26
<PAGE>   27
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

which the net book value of the asset exceeds its estimated fair market value.
See Note Three for additional information.

NOTE TWO -- FINANCIAL RESULTS AND LIQUIDITY:

     The company has incurred net losses of $299.4 million, $178.0 million, and
$90.8 million in 1997, 1996 and 1995, 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.

     Since joining the company in January 1998, the new Chief Executive Officer,
along with the rest of the company's management team has been developing a broad
operational and financial restructuring plan. A broad outline of that plan has
been presented to the company's Board of Directors in March 1998. The plan,
which is designed to leverage the company's brand, distribution and technology
strengths, includes reducing costs, outsourcing of certain components and
products, disposition of certain assets and capitalizing on the company's
patented digital television technologies. Restructuring costs must be incurred
to implement the plan.

     Despite its negative cash flow, the company has been able to secure
financing to support its operations to date, based on credit support from LGE.
Between November 1997 and February 1998, the company (with the guarantee of LGE)
entered into a series of new lending agreements with commercial lenders for
unsecured lines of credit totaling more than $100 million, all of which has been
drawn as of March 31, 1998.

     Going forward, significant amounts of additional cash will be needed to pay
the restructuring costs to implement the proposed business plan and to fund
losses until the company has returned to profitability. Based on management's
proposed plan, the company estimates that at least $225 million would be
required to fund the company's restructuring costs and operations through the
end of 1998 and that additional amounts could be required thereafter.

     While there is no assurance that funding will be available to execute the
plan, the company is continuing to seek financing to support its turnaround
efforts and is exploring a number of alternatives in this regard. LGE has agreed
to provide up to $45 million in additional funding for one year from the date of
the first borrowing, subject to LGE's right to demand repayment at anytime after
June 30, 1998, and is secured by certain assets of the company. The company
believes that this additional short-term financing, along with its current
credit facilities, will be sufficient to support the company's liquidity
requirements through June 30, 1998, depending on operating results and the level
of continued trade support. In addition, the company is engaged in ongoing
discussions with LGE concerning the company's business plan, and LGE is
considering whether to provide additional long-term financial support. However,
LGE has no obligation to do so. Any such support by LGE would be subject to a
number of conditions, including the operating results of the company,
third-party consents, Republic of Korea regulatory approvals and other
conditions. No decision has been made at this time by LGE or the company
regarding additional financial support, and there can be no assurance that any
additional financial support will be forthcoming from LGE.

     In the absence of long-term financial support from LGE, there can be no
assurance that additional financing can be obtained from conventional sources.
Management is exploring alternatives that include seeking strategic investors,
lenders and/or technology partners, selling substantial company assets or
pursuing other transactions that could result in diluting LGE to a less than
majority position. There can be no assurance that management's efforts in this
regard will be successful.

     To implement the proposed business plan and to fund associated
restructuring costs and operating losses, the company will be required to
restructure certain of its outstanding debt and other financing arrangements
(See Notes Six, Fourteen, Fifteen and Sixteen for a description of certain debt
and financing arrangements.) A number of alternatives, including out-of-court
and in-court financial restructurings, are being considered.

                                       27
<PAGE>   28
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Management believes that, under any restructuring scenario, the company's common
stock would likely be subject to massive dilution as a result of the conversion
of debt to equity or otherwise. There can be no assurances as to what value, if
any, would be ascribed to the common stock in a restructuring. In addition, the
company's subordinated debentures could suffer substantial impairment in a
restructuring. Due to a number of uncertainties, many of which are outside the
control of the company, there can be no assurance that the company will be able
to consummate any operational or financial restructuring.

     The company's independent public accountants have included a "going
concern" emphasis paragraph in their audit report accompanying the 1997
financial statements. The paragraph states that the company's recurring losses
and negative working capital raise substantial doubt about the company's ability
to continue as a going concern and cautions that the financial statements do not
include adjustments that might result from the outcome of this uncertainty.

     Existing credit facilities are not expected to be sufficient to cover
liquidity requirements after June 30, 1998, and the company is currently facing
the prospect of not having adequate funds to operate its business. There can be
no assurance that additional credit facilities can be arranged or that any
long-term restructuring alternative can be successfully initiated or implemented
by June 30, 1998, in which case the company may be compelled to pursue a
bankruptcy filing in the absence of a proposed or pre-approved financial
restructuring. The company will be required to obtain waivers under its
financing arrangements for periods subsequent to June 30, 1998 and the lenders
thereunder are under no obligation to provide such waivers.

     Management believes that, despite the financial hurdles and funding
uncertainties going forward, it has under development a business plan that, if
successfully funded and executed as part of a financial restructuring, can
significantly improve operating results. The support of the company's vendors,
customers, lenders, stockholders and employees will continue to be key to the
company's future success.

NOTE THREE -- IMPAIRMENT OF LONG-LIVED ASSETS:

     During the fourth quarter of 1997, an impairment was recognized for the
Consumer Electronics business since the future undiscounted cash flows of assets
were estimated to be insufficient to recover their related carrying values. As
such, the company recognized an expense of $53.7 million and established a
valuation reserve for the write-down of the excess carrying value over fair
market value. The fair market value used in determining the impairment loss was
based upon management and third party valuations, including estimates of
potential environmental liabilities. This FAS 121 charge is included in Other
operating expense (income).

     During the third quarter of 1997, the company recorded a charge of $10.0
million related to the impairment of certain long-lived assets to be disposed
of. The charge relates primarily to (i) assets that will be sold or scrapped as
a result of the company's decision to phase out of its printed circuit board
operation (ii) assets that will be sold or scrapped as a result of the company's
decision not to develop the proposed large-screen picture tube plant in
Woodridge, Illinois and (iii) a building in Canada that was sold in December
1997. The amount of the charge is included in Other operating expense (income).

     The impairment charges discussed above are based upon management's best
estimates of the recoverability of long-lived assets and the fair value of the
related assets. It is reasonably possible that the company's estimates of the
recoverability of long-lived assets and the fair value will change. See Note Two
for additional information.

NOTE FOUR -- CHARGE FOR BAD DEBTS:

     In November 1995 the company entered into a contract with a customer in
Brazil to purchase TVs and TV kits and to assemble and distribute Zenith brand
TVs in that country. In early 1997, this customer discontinued timely payments
of its obligations, and sought to renegotiate both the timing and the amount of
the obligations to the company. While the company and this customer continued to
negotiate in an attempt to reach a business solution, litigation was commenced
by both parties in Brazil. The company had also initiated

                                       28
<PAGE>   29
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

litigation against this customer in the United States. In late 1997, this matter
was settled. The agreement provides that the company will make certain parts and
components available to this customer, and will receive an $11.0 million
settlement payable in installments over eleven months. As a result of the above
problems, the company recorded a $21.3 million bad debt charge during 1997
related to this customer, which reflects the company's estimated loss as of
December 31, 1997. The bad debt charge affected the transferor certificate
valuation allowance.

NOTE FIVE -- ACCOUNTING CHANGES:

     During 1997 the company changed its accounting policy for most tooling
expenditures. The old policy was to charge most tooling expenditures to expense
in the period acquired. The new policy is to defer the tooling charges incurred
subsequent to March 29, 1997, over a 20-month period in order to more
appropriately match the costs with their period of benefit. The accounting
policy for picture tube tooling remains the same, which is to amortize that
tooling over a four-year period. This change was accounted for as a change in
accounting estimate effected by a change in accounting principle and will be
accounted for on a prospective basis. The change decreased tooling expense by
$8.9 million, and decreased the loss per share by $.13 in 1997.

     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 this 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 change for 1995 was to reduce the net loss reported by $1.6
million, or $.03 per share.

NOTE SIX -- RELATED PARTY:

     In November 1995, a change in control of the company occurred, in which 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,
1997, LGE owned 36,569,000 shares of common stock of the company which
represents 55 percent of the outstanding common stock. 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.

     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. The following
represent the most significant transactions between the company and LGE during
1997 and 1996.

     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 $93.3 million and $128.8 million of these items in 1997
and 1996, respectively. Sales of products purchased from LGE and its affiliates
contributed $112.3 million and $141.4 million to sales in 1997 and 1996,
respectively, and $19.0 million and $12.6 million to gross margin in 1997 and
1996, respectively.

     Equipment purchases: The company purchased approximately $40 million of
production machinery and equipment from LGE during 1997 and 1996. The machinery
and equipment related primarily to new production lines in the company's picture
tube plant for the manufacture of computer display tubes.

                                       29
<PAGE>   30
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     Product and other sales: The company sells TVs, picture tubes, 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 1997 and 1996
by the company to LGE and its affiliates were $55.1 million and $29.4 million,
respectively.

     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 an LGE subsidiary whereby LGE will be the Canadian
distributor for the company. During 1997, the company entered into a similar
agreement with an LGE subsidiary in Mexico to sell the company's product in
Mexico.

     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 payment
in 1997 and 1996 to the company under these agreements and licenses was $.6
million and $1.0 million, respectively.

     Service Assistance: In 1997, employees of LGE provided certain services to
the company for which LGE was not compensated. These donated services were
valued at $2.2 million and the accounting treatment was to recognize the value
of these expenses in the company's income statement and in additional paid-in
capital. 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.

     In 1997, employees of LGE provided certain services to the company that
were covered under service agreements. The company's payments and payable to LGE
for such services totaled $4.8 million.

     Other Items: In March 1998, the company entered into a secured credit
facility with LGE which provides for borrowings of up to $45 million. The term
of the facility is one year from the date of the first borrowing, subject to
LGE's right to demand repayment at anytime after June 30, 1998. Repayment is due
in full at the end of the term. The facility is secured by liens on certain of
the company's assets and is subject to certain terms and conditions.

     In September 1997, the company and LGE entered into an High Definition TV
Receiver Project Agreement. As called for in the agreement, the company received
$4.5 million from LGE toward funding for the project. In return, LGE will
receive a percentage of applicable royalties the company anticipates receiving
until such time as LGE has received $4.5 million. The $4.5 million is included
in Long-term liabilities.

     In August 1997, the company received $30.0 million from LGE representing
payments in advance for 1997 sales from the company to LGE. The amount was
recorded as a liability and as sales were made to LGE, the liability balance was
reduced. As of December 31, 1997, $.6 million of the liability to LGE remained
and is included in Other accrued expenses.

     In April 1997, the company and LGE entered into an arrangement whereby the
company's accounts payables arising in the ordinary course of business to LGE
would be extended for certain periods of time. Prior to April 1997, the
company's accounts payables arising in the ordinary course of business to LGE
were extended for certain periods of time, but no formal arrangement was in
place. The amount of extended payables was $144.3 million and $106.8 million as
of December 31, 1997 and 1996, respectively. The company is charged interest on
the extended period at negotiated rates.

     In return for LGE providing support for certain financing activities of the
company entered into in April 1997, the company granted 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 was based upon their fair value with that fair value being amortized
straight-line over the term of the associated commitments. The related deferred
financing charge, net of amortization, is recorded as follows: $30.1 million in
Noncurrent other assets and $5.1 million in Current other assets.

                                       30
<PAGE>   31
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     As of December 31, 1997 and 1996, accounts payable included $145.9 million
and $124.5 million, respectively, to LGE and its affiliates. The amount of
receivables from LGE and its affiliates was not material as of December 31, 1997
and 1996.

     The company currently leases space from an LGE subsidiary in (i)
Huntsville, Alabama, for its Parts & Service group, (ii) Ontario, California,
for a warehouse and (iii) San Jose, California, for its Network Systems group.

NOTE SEVEN -- 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 were related to cash expenditures 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 Six. 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).

NOTE EIGHT -- INCOME TAXES:

     The components of income taxes (credit) were:

<TABLE>
<CAPTION>
                                                            YEAR ENDED DECEMBER 31
                                                           -------------------------
                                                           1997      1996      1995
                                                           ----      ----      ----
                                                                 (IN MILLIONS)
<S>                                                        <C>       <C>       <C>
Currently payable (refundable):
  Federal................................................  $ .1       $--      $(7.8)
  State..................................................   (.9)       .2         .1
                                                           ----       ---      -----
  Total income taxes (credit)............................  $(.8)      $.2      $(7.7)
                                                           ====       ===      =====
</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 received 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
                                                        -----------------------
                                                        1997     1996     1995
                                                        ----     ----     ----
<S>                                                     <C>      <C>      <C>
Statutory federal income tax rate.....................  (35.0)%  (35.0)%  (35.0)%
State income taxes, net...............................     --       --       .1
Foreign tax effects...................................    2.2      1.0      1.5
Tax benefits not recognized subject to future
  realization.........................................   32.8     34.0     33.5
Net operating loss carryback/refund...................     --       --     (8.4)
                                                        -----    -----    -----
Effective tax rate....................................    (--)%    (--)%   (8.3)%
                                                        =====    =====    =====
</TABLE>

                                       31
<PAGE>   32
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     Deferred tax assets (liabilities) are comprised of the following:

<TABLE>
<CAPTION>
                                                                   YEAR ENDED
                                                                  DECEMBER 31
                                                               ------------------
                                                                1997       1996
                                                                ----       ----
                                                                 (IN MILLIONS)
<S>                                                            <C>        <C>
Loss carryforwards.........................................    $ 353.5    $ 228.2
Inventory valuation........................................       22.6       23.8
Transferor certificate valuation reserve...................       14.6         --
PP&E valuation reserve.....................................       22.9         --
Product warranty...........................................        9.4       11.5
Co-op advertising..........................................        3.7        6.3
Merchandising..............................................        2.6        3.8
Other......................................................       35.6       38.0
                                                               -------    -------
     Deferred tax assets...................................      464.9      311.6
                                                               -------    -------
Depreciation...............................................        3.4       (6.6)
Other......................................................       (1.3)       5.5
                                                               -------    -------
     Deferred tax liabilities..............................        2.1       (1.1)
                                                               -------    -------
Valuation allowance........................................     (467.0)    (310.5)
                                                               -------    -------
     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.

     As of December 31, 1997, the company had $835.6 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 $3.9 million
(which expire from 2000 through 2002).

     The stock purchase by LGE described in Note Six 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 applies to approximately $481 million of the
company's available NOL carryovers, which represents the losses generated prior
to the "ownership change". The company's remaining loss carryovers are not
subject to this limitation. In addition, 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 NINE -- 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.

                                       32
<PAGE>   33
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     Financial information, summarized by geographic area, is as follows:

<TABLE>
<CAPTION>
                                                        YEAR ENDED DECEMBER 31
                                                 ------------------------------------
                                                   1997          1996          1995
                                                   ----          ----          ----
                                                            (IN MILLIONS)
<S>                                              <C>           <C>           <C>
Net sales:
  Domestic companies...........................  $1,144.9      $1,221.4      $1,212.7
  Foreign companies............................      28.2          66.5          61.2
                                                 --------      --------      --------
  Total net sales..............................  $1,173.1      $1,287.9      $1,273.9
                                                 ========      ========      ========
Income (loss) before income taxes:
  Domestic companies...........................  $ (195.3)     $ (171.5)     $  (94.5)
  Foreign companies............................      (4.9)         (6.3)         (4.0)
                                                 --------      --------      --------
  Total income (loss) before income taxes......  $ (300.2)     $ (177.8)     $  (98.5)
                                                 ========      ========      ========
Identifiable assets:
  Domestic companies...........................  $  405.1      $  615.5      $  548.5
  Foreign companies............................     122.6         149.8         152.2
                                                 --------      --------      --------
  Total identifiable assets....................  $  527.7      $  765.3      $  700.7
                                                 ========      ========      ========
</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 $138.6
million (12 percent) in 1997, $187.2 million (15 percent) in 1996, and $172.1
million (14 percent) in 1995. Sales to a second customer, Sears, Roebuck and
Company, accounted for $132.4 million (11 percent) in 1997 and $140.9 million
(11 percent) in 1996. No other customer accounted for 10 percent or more of net
sales.

NOTE TEN -- 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 $26.0 million,
$26.6 million, and $25.9 million in 1997, 1996 and 1995, respectively, and is
included in Other operating expense (income). See Note Three for further
discussion on Other operating expense (income).

NOTE ELEVEN -- INVENTORIES:

     Inventories consisted of the following:

<TABLE>
<CAPTION>
                                                                 DECEMBER 31
                                                            ---------------------
                                                             1997           1996
                                                             ----           ----
                                                                (IN MILLIONS)
<S>                                                         <C>            <C>
Raw materials and work-in-process.........................  $ 96.9         $152.1
Finished goods............................................    68.6          103.6
                                                            ------         ------
Total inventories.........................................  $165.5         $255.7
                                                            ======         ======
</TABLE>

NOTE TWELVE -- TRANSFEROR CERTIFICATES:

     The Financial Accounting Standards Board issued FAS 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,"
in 1996. The accounting standard provides accounting and reporting standards for
transfers and servicing of financial assets and extinguishments of liabilities.
This statement was adopted by the company during the second quarter of 1997 in
connection with the three-year

                                       33
<PAGE>   34
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

trade receivables securitization that was entered into in April 1997. Pursuant
to the new statement, the trade receivable securitization was accounted for as a
sale of receivables.

     Transferor certificates represent the company's retained interest in the
pool of saleable receivables that have been sold by the company to a
special-purpose trust, but can not or have not yet been sold to outside
investors in the commercial paper market via a multi-seller conduit pursuant to
the trade receivables securitization agreement. Outside investors hold investor
certificates which evidence their ownership of a portion of the assets contained
in the special multi-purpose trust. Transferor certificates are valued at
historical cost not to exceed their net realizable value. This cost approximates
the value of the previous carrying amount (prior to transfer), allocated between
the assets sold and the retained interest, based on their relative fair values
at the date of the transfer, as required by FAS 125.

NOTE THIRTEEN -- PROPERTY, PLANT AND EQUIPMENT:

     Property, plant and equipment consisted of the following:

<TABLE>
<CAPTION>
                                                                  DECEMBER 31
                                                               ------------------
                                                                1997       1996
                                                                ----       ----
                                                                 (IN MILLIONS)
<S>                                                            <C>        <C>
Land.......................................................    $   2.7    $   9.9
Buildings..................................................      147.9      135.5
Machinery and equipment....................................      640.9      696.6
                                                               -------    -------
                                                                 791.5      842.0
Less accumulated depreciation..............................     (562.0)    (563.7)
Less valuation reserve.....................................      (58.4)        --
                                                               -------    -------
Total property, plant and equipment, net...................    $ 171.1    $ 278.3
                                                               =======    =======
</TABLE>

     At December 31, 1997, the company reclassed $8.7 million of property
pending disposal out of Property, Plant and Equipment into Other Noncurrent
Assets. Included in this amount is $6.0 million of land, which is the primary
reason for the 1997 decrease in land, when compared to 1996.

NOTE FOURTEEN -- SALE LEASEBACK TRANSACTION:

     In April 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 result of the sale was a $10.2 million gain for
the company, which was deferred and is being amortized over the 12 1/2 year
lease term

     The related lease is being accounted for as an operating lease. The rental
expense under this lease in 1997 was $8.1 million. The minimum lease payments
required by the lease over the next five years are as follows (in million):

<TABLE>
<S>                                                           <C>
Year ending December 31:
       1998.................................................  $ 12.3
       1999.................................................    10.6
       2000.................................................     9.6
       2001.................................................     9.7
       2002.................................................     9.7
       Thereafter...........................................    78.6
                                                              ------
       Total minimum lease payments.........................  $130.5
                                                              ======
</TABLE>

                                       34
<PAGE>   35
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     The company's payment obligations, along with certain other items under the
lease agreement are fully guaranteed by LGE (see discussion in Note Six). The
sale-leaseback agreement contains financial penalties which would be triggered
if the company was to terminate the lease early.

NOTE FIFTEEN -- SHORT-TERM DEBT AND CREDIT ARRANGEMENTS:

     In April 1997, the company obtained a $65 million revolving credit line
with Citicorp. This facility replaces the company's previous credit agreement
with General Electric Capital Corporation. 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, domestic fixed assets, stock of the company's
subsidiaries and tuner patent royalties, along with the related patents,
licenses and other general intangibles. Interest on borrowings is based on
market rates.

     The credit line 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. During 1997, the company
amended the credit facility to relax certain financial covenants. As amended,
the financial covenants include a minimum EBITDA amount, a current ratio test, a
funded debt / total capitalization ratio test, a tuning patent royalties test
and an LGE payable test. As a result of waivers obtained from Citicorp, N.A., in
December 1997 and March 1998, only the tuning patent royalties test and the LGE
payable test were in effect as of December 31, 1997 and March 31, 1998, and the
company was in compliance with both of these covenants. 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.

     Between November 1997 and February 1998 the company entered into a series
of new financing transactions designed to enhance the company's liquidity and
financial flexibility. The company obtained a total of $110 million in unsecured
and uncommitted credit facilities through four lines of credit with Bank of
America ($30 million), the First Chicago NBD ($30 million), Societe Generale
($20 million) and Credit Agricole ($30 million). As of December 31, 1997, a
total of $72.0 million was outstanding under these credit lines.

     The credit lines are guaranteed by LGE for which LGE will receive a fee in
an amount up to 2 percent of the face amount of the loan, in the form of cash or
the company's equity and subject to the approval of the Finance Committee of the
company's Board of Directors and in the case of equity, the approval of the
company's shareholders. The company granted liens in favor of LGE on the capital
stock of the company's domestic subsidiaries and on the company's intellectual
property (other than tuning patents, tuning patent royalties and related license
agreements) to secure the guaranties of LGE for borrowings under these credit
lines.

     In March 1998, the company entered into a secured credit facility with LGE
which provides for borrowings of up to $45 million. See Note Six for further
discussion.

     Borrowings and interest rates on short-term debt were:

<TABLE>
<CAPTION>
                                                         YEAR ENDED DECEMBER 31,
                                                         ------------------------
                                                          1997     1996     1995
                                                          ----     ----     ----
                                                              (IN MILLIONS)
<S>                                                      <C>      <C>      <C>
Maximum month-end borrowings...........................  $72.0    $72.6    $69.5
Average daily borrowings...............................   26.4     18.3     37.2
Weighted average interest rate.........................    9.1%     8.8%    10.5%
</TABLE>

                                       35
<PAGE>   36
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE SIXTEEN -- LONG-TERM DEBT:

     The components of long-term debt were:

<TABLE>
<CAPTION>
                                                                DECEMBER 31
                                                              ---------------
                                                               1997     1996
                                                               ----     ----
                                                               (IN MILLIONS)
<S>                                                           <C>      <C>
6 1/4 percent convertible subordinated debentures due
  2011......................................................  $109.3   $115.0
8.5 percent senior subordinated convertible debentures due
  2000......................................................      --     23.8
8.5 percent senior subordinated convertible debentures due
  2001......................................................      .5       .5
Term Loan...................................................    38.3     31.5
                                                              ------   ------
                                                               148.1    170.5
Less current portion........................................    15.3     17.8
                                                              ------   ------
     Total long-term debt...................................  $132.8   $152.7
                                                              ======   ======
</TABLE>

     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 and provisions which could result in the acceleration of
their payment in the event the company is in default on provisions of other debt
agreements. The debentures are redeemable at the option of the company, in whole
or in part, at specified redemption prices at par or above.

     In December 1997 the company redeemed the 8.5 percent Senior Subordinated
Convertible Debentures due November 2000. There was $23.8 million principal
amount of such debentures outstanding and the redemption price of such
debentures was 104 percent of such principal amount plus accrued interest
through the redemption date. The loss on extinguishment of this debt was not
material.

     The 8.5 percent debentures due 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 $10.00
per share. Subsequent to December 31, 1997, the company redeemed the 8.5 percent
Senior Subordinated Convertible Debentures due January 2001. There was $.5
million principal amount of such debentures outstanding and the redemption price
of such debentures was 104 percent of such principal amount plus accrued
interest through the redemption date. The loss on extinguishment of this debt
was not material.

     In April 1997 the company entered into a $45 million term loan with
Citicorp. This facility replaces the company's previous credit term loan with
General Electric Capital Corporation. The term loan requires scheduled quarterly
principal payments of $2.3 million with a balloon payment of $20.3 million at
maturity. The facility is secured by the company's inventory, domestic fixed
assets, stock of the company's subsidiaries and tuner patent royalties, along
with the related patents, licenses and other general intangibles. Interest on
borrowings is based on market rates.

     The term loan 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. During 1997, the company
amended the credit facility to relax certain financial covenants. As amended,
the financial covenants include a minimum EBITDA amount, a current ratio test, a
funded debt/total capitalization ratio test, a tuning patent royalties test and
an LGE payable test. As a result of waivers obtained from Citicorp, N.A., in
December 1997 and March 1998, only the tuning patent royalties test and the LGE
payable test were in effect as of December 31, 1997 and March 31, 1998, and the
company was in compliance with both of these covenants. The long-term portion of
the term loan has been classified in the accompanying balance sheet based on the
company's intention to seek additional waivers or amendments for any future
noncompliance prior to the expiration of the March 1998 waiver in June 1998 that
extent to a period subsequent to January 1, 1999. There are no assurances that
such waivers or amendments will be granted.

                                       36
<PAGE>   37
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     In addition, the term loan contains restrictions regarding investments,
acquisitions, guaranties, transactions with affiliates, sales of assets, mergers
and additional borrowings, along with limitations on liens. The term loan
prohibits dividend payments on the company's common stock and restricts dividend
payments on any of its preferred stock.

     The fair value of long-term debt is $90.8 million as of December 31, 1997,
as compared to the carrying amount of $132.8 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, 1997, the company's credit agreement and term loan
would not allow the company to extinguish the long-term debt through purchase
and thereby realize the gain.

NOTE SEVENTEEN -- 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, 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)
Stock issued for benefit plans................     .5             4.4             --
Stock issued for stock options................     .1             1.0             --
Paid in capital -- LGE guarantee..............     --            39.7             --
Paid in capital -- LGE services...............     --             2.2             --
Other.........................................    (.1)             .6             --
                                                -----          ------          -----
Balance, December 31, 1997....................  $67.1          $507.3          $(1.7)
                                                =====          ======          =====
</TABLE>

     During 1997, the company entered into certain transactions with LGE that
effected paid in capital. These transaction dealt with the granting of stock
options and donated services. See Note Six for further discussion on these
items.

     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 Six for
further discussion). Also during 1995 the company sold 1.3 million shares 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, 1997. 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

                                       37
<PAGE>   38
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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 EIGHTEEN -- STOCK OPTIONS AND AWARDS:

     Stock Options: The 1987 Stock Incentive Plan, which expired in April 1997,
and the Long Term Equity Compensation Plan, approved by the company's
shareholders in May 1997, authorize the granting of incentive and non-qualified
stock options and restricted stock awards 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 fair value of options at their grant dates consistent with the
method of FAS 123, the company's net income (loss) and earnings (loss) per share
would have been increased to the following pro forma amounts:

<TABLE>
<CAPTION>
                                                  1997          1996          1995
                                                  ----          ----          ----
                                                           (IN MILLIONS)
<S>                                              <C>           <C>           <C>
Net income (loss):
  As reported..................................  $(299.4)      $(178.0)      $(90.8)
  Pro forma....................................   (301.1)       (179.1)       (92.5)
Earnings (loss) per share:
  As reported..................................  $ (4.49)      $ (2.73)      $(1.85)
  Pro forma....................................    (4.52)        (2.75)       (1.88)
</TABLE>

     Because the FAS 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 outstanding stock options at
December 31, 1997, 1996 and 1995 and changes during the years then ended is
presented in the table and narrative below:

<TABLE>
<CAPTION>
                                   NON-EMPLOYEES                               EMPLOYEES
                                 ------------------   ------------------------------------------------------------
                                        1997                 1997                 1996                 1995
                                 ------------------   ------------------   ------------------   ------------------
                                           WEIGHTED             WEIGHTED             WEIGHTED             WEIGHTED
                                           AVERAGE              AVERAGE              AVERAGE              AVERAGE
                                 SHARES    EXERCISE   SHARES    EXERCISE   SHARES    EXERCISE   SHARES    EXERCISE
                                 (000'S)    PRICE     (000'S)    PRICE     (000'S)    PRICE     (000'S)    PRICE
                                 -------   --------   -------   --------   -------   --------   -------   --------
<S>                              <C>       <C>        <C>       <C>        <C>       <C>        <C>       <C>
Options outstanding at January
  1............................      --     $  --        968     $ 9.92     2,588     $ 8.25     2,027     $8.66
Options granted................   3,965      0.01        952      11.10       456      12.54       738      7.16
Options exercised..............      --        --       (154)      7.80    (1,889)      8.33       (38)     7.69
Options canceled...............      --        --       (260)     11.20      (187)      9.30      (139)     8.66
                                  -----     -----      -----     ------    ------     ------     -----     -----
Options outstanding at December
  31...........................   3,965     $0.01      1,506     $10.66       968     $ 9.91     2,588     $8.25
                                  =====     =====      =====     ======    ======     ======     =====     =====
Options exercisable at December
  31...........................     793     $0.01        486     $ 9.05       427     $ 8.27     2,081     $8.34
Shares available for grant at
  December 31..................     N/A                1,340                1,329                1,269
</TABLE>

     The non-employee stock options were granted to LGE during 1997. See Note
Six for further discussion.

     Of the employee options outstanding at December 31, 1997, 516,300 had
exercise prices between $6.25 and $10.69, with a weighted average exercise price
of $8.30 and a weighted average remaining contractual life of 6.52 years. The
remaining 989,500 had exercise prices between $11.00 and $14.75, with a weighted
average exercise price of $11.90 and a weighted average remaining contractual
life of 9.05 years.

                                       38
<PAGE>   39
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     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;
weighted average risk-free interest rates of 5.76 percent, 6.25 percent and 6.83
percent for grants in 1997,1996, and 1995, respectively; zero expected dividend
yields, and expected volatility of 43.69 percent for 1997 and 62.35 percent for
years 1996 and 1995. A 3.5 year estimated life was used for all employee grants.
The weighted average fair value of employee options granted during 1997, 1996
and 1995 was $11.16, $13.93 and $7.16, respectively.

     Restricted stock awards: The company had 234,500 and 270,090 restricted
stock awards issued and outstanding as of December 31, 1997 and 1996,
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 1997 and 1996, related to these awards, was not material.

NOTE NINETEEN -- RETIREMENT PLANS AND EMPLOYEE BENEFITS:

     Virtually all employees in the United States are eligible to participate in
noncontributory defined contribution retirement plans after completing one full
year of service. The plans provide for an annual minimum contribution of between
3 and 6 percent of employees' eligible compensation, based partially on
employees' contribution to the plans. Contributions above the minimum could be
required based upon profits in excess of a specified return on net worth.
Retirement plan expenses were $7.8 million, $8.6 million, $8.8 million and in
1997, 1996 and 1995, respectively. The company's 1997 contribution to the
retirement plans will be made during 1998. The company's 1996 and 1995
contributions to the retirement plans were partially funded through the issuance
of approximately 466,535 and 782,000 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.

NOTE TWENTY -- EARNINGS PER SHARE:

     In accordance with FAS 128, "Earnings Per Share", the company computed
earnings per share by dividing net income (loss) by the weighted average number
of shares of common stock outstanding during the year. Diluted earnings (loss)
per share, assuming conversion of the 6 1/4 percent convertible subordinated
debentures, the 8.5 percent Senior Subordinated Convertible Debentures due 2001
and outstanding stock options are not presented because the effect of the
assumed conversion is antidilutive.

<TABLE>
<CAPTION>
                                                         FOR THE YEAR ENDED
                                                 ----------------------------------
                                                  1997          1996          1995
                                                  ----          ----          ----
<S>                                              <C>           <C>           <C>
Net Income (Loss)..............................  $(299.4)      $(178.0)      $(90.8)
Weighted average common shares outstanding.....     66.6          65.2         49.2
Earnings per share.............................  $ (4.49)      $ (2.73)      $(1.85)
</TABLE>

NOTE TWENTY ONE -- 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.

                                       39
<PAGE>   40
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     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. A
suit arising in connection with this change in distribution was filed in April
1995 by an independent distributor. The lawsuit sought 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 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 and is awaiting the appellate court's
decision.

     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.

                                       40
<PAGE>   41

                    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, 1997 and 1996, 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, 1997. 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, 1997 and 1996, and
the results of their operations and their cash flows for each of the three years
in the period ended December 31, 1997, in conformity with generally accepted
accounting principles.

     The accompanying consolidated financial statements have been prepared
assuming that the company will continue as a going concern. As discussed in Note
Two to the financial statements, the Company has suffered recurring losses from
operations and has negative working capital that raises substantial doubt about
the ability to continue as a going concern. Management's plans in regards to
these matters are also described in Note Two. The financial statements do not
include any adjustments that might result from the outcome of this uncertainty.

     As explained in Note Five to the financial statements, the Company changed
its methods of accounting for tooling costs in 1997, and picture tube
inventories in 1996.

/s/ ARTHUR ANDERSEN LLP
---------------------------------------------
Arthur Andersen LLP

Chicago, Illinois
March 27, 1998

                                       41
<PAGE>   42

                   UNAUDITED QUARTERLY FINANCIAL INFORMATION

<TABLE>
<CAPTION>
                                               1997 QUARTERS ENDED                              1996 QUARTERS ENDED
                                  ----------------------------------------------   ----------------------------------------------
                                  DEC. 31,(1)   SEPT. 27,   JUNE 28,   MARCH 29,   DEC. 31,(2)   SEPT. 28,   JUNE 29,   MARCH 30,
                                  -----------   ---------   --------   ---------   -----------   ---------   --------   ---------
                                                              (IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<S>                               <C>           <C>         <C>        <C>         <C>           <C>         <C>        <C>
Net sales.......................    $ 347.7      $304.5      $261.8     $259.1       $427.6       $340.8      $282.1     $237.4
Gross margin....................      (32.0)       (3.8)       15.8       12.6        (10.0)        20.4        12.4        8.1
Net income (loss)...............     (155.7)      (69.2)      (49.3)     (25.2)       (69.3)       (40.2)      (33.2)     (35.3)
Per share of common stock:
  Net income (loss).............    $ (2.32)     $(1.04)     $ (.74)    $ (.38)      $(1.05)      $ (.61)     $ (.51)    $ (.56)
New York Stock Exchange market price per share:
  High..........................     10 1/4     12 15/16     13 1/8     12 1/2       16 5/8       17 1/2      25 3/4      7 1/2
  Low...........................      5 1/8       9 3/4       9 5/8          9       10 1/4        8 1/8       6 1/8      5 7/8
  End of quarter................     5 7/16     9 13/16     11 15/16    10 1/8       10 7/8       15 5/8      12 1/8      6 5/8
</TABLE>

-------------------------
(1) Includes $53.7 million of charges for asset impairment.

(2) Includes $9.3 million of Restructuring and other charges.

                                       42
<PAGE>   43

                  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 of Zenith Electronics Corporation included
in this Form 10-K, and have issued our report thereon dated March 27, 1998. Our
report on the basic consolidated financial statements includes an explanatory
paragraph with respect to the Company's ability to continue as a going-concern
as discussed in Note Two to the financial statements. Our audits were made for
the purpose of forming an opinion on the basic consolidated financial 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
March 27, 1998

                                       43
<PAGE>   44

                          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, 1997.........    $  6.2          $   --            $ --          $6.2(1)     $   --
                                           ======          ======            ====          ====        ======
  Year Ended December 31, 1996.........    $  3.6          $  5.2            $ --          $2.6(2)     $  6.2
                                           ======          ======            ====          ====        ======
  Year Ended December 31, 1995.........    $  3.1          $   .8            $ --          $ .3(2)     $  3.6
                                           ======          ======            ====          ====        ======
Valuation allowance for deferred tax
  assets:
  Year Ended December 31, 1997.........    $310.5          $156.5            $ --          $ --        $467.0
                                           ======          ======            ====          ====        ======
  Year Ended December 31, 1996.........    $188.3          $122.2            $ --          $ --        $310.5
                                           ======          ======            ====          ====        ======
  Year Ended December 31, 1995.........    $183.9          $  4.4            $ --          $ --        $188.3
                                           ======          ======            ====          ====        ======
</TABLE>

-------------------------
(1) Amount sold under accounts receivable securitization agreement.

(2) Uncollectable accounts written off, net of recoveries.

                                       44