<PAGE>   1
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D. C. 20549
                                  -------------



                                    FORM 10-Q



(Mark one)

[X]      Quarterly report pursuant to Section 13 or 15(d) of the Securities
         Exchange Act of 1934 for the quarterly period ended SEPTEMBER 30, 1996
         or

[ ]      Transition report pursuant to Section or 15(d) of the Securities
         Exchange Act of 1934 for the transition period from __________ to
         __________.


Commission file number 0-13218


                         COMPRESSION LABS, INCORPORATED
             (Exact name of registrant as specified in its charter)


DELAWARE                                                              94-2390960
(State or other jurisdiction                (I.R.S. Employer Identification No.)
of incorporation or organization)




                  350 EAST PLUMERIA, SAN JOSE, CALIFORNIA 95134
               (Address of principal executive office) (Zip Code)

       Registrant's telephone number, including area code: (408) 435-3000







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

                               Yes   X      No 
                                   -----       -----


Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.

Class                                    Shares outstanding at October 31, 1996
-----                                    --------------------------------------
Common Stock                                          15,864,053




<PAGE>   2
                         COMPRESSION LABS, INCORPORATED

                                      INDEX




                                                                          Page
                                                                          Number

PART I.  FINANCIAL INFORMATION

Item 1.  Financial Statements
             Condensed Consolidated Statements of Operations --
                  For the Three Months Ended September 30, 1996 and 1995... 1

             Condensed Consolidated Statements of Operations --
                  For the Nine Months Ended September 30, 1996 and 1995.... 2

             Condensed Consolidated Balance Sheets --
                  September 30, 1996 and December 31, 1995................. 3

             Condensed Consolidated Statements of Cash Flows --
                  For the Nine Months Ended September 30, 1996 and 1995.... 4

             Notes to Condensed Consolidated Financial Statements --
                  September 30, 1996....................................... 5

Item 2.  Management's Discussion and Analysis of Financial
             Condition and Results of Operations........................... 8


PART II  OTHER INFORMATION

Item 1.  Legal Proceedings.................................................11

Item 6.  Exhibits and Reports on Form 8-K..................................13

         SIGNATURES........................................................14


<PAGE>   3
PART I.   FINANCIAL INFORMATION

ITEM 1.   FINANCIAL STATEMENTS

                         COMPRESSION LABS, INCORPORATED
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                    (In thousands, except per share amounts)
                                   (Unaudited)



<TABLE>
<CAPTION>
                                               Three months ended September 30,
                                               --------------------------------
                                                     1996            1995
                                                   --------        --------
<S>                                                <C>             <C>     
REVENUES                                           $ 20,577        $ 28,444
Cost of revenues                                     10,955          16,295
                                                   --------        --------
       GROSS MARGIN                                   9,622          12,149
OPERATING EXPENSES:
       Selling, general and administrative            7,934           9,665
       Research and development                       3,039           2,377
                                                   --------        --------
                                                     10,973          12,042
                                                   --------        --------
             INCOME (LOSS) FROM OPERATIONS           (1,351)            107
Interest, net                                          (259)           (216)
                                                   --------        --------
       Net loss from continuing operations           (1,610)           (109)
       Net loss from discontinued operations           --               (82)
                                                   --------        --------
NET LOSS                                           $ (1,610)       $   (191)
                                                   ========        ========

NET LOSS PER SHARE:
       Net loss from continuing operations         $  (0.10)       $  (0.01)
       Net loss from discontinued operations           --              --
                                                   --------        --------
NET LOSS PER SHARE                                 $  (0.10)       $  (0.01)
                                                   ========        ========

Weighted average common shares outstanding           15,774          15,265
                                                   ========        ========
</TABLE>


See accompanying Notes to Condensed Consolidated Financial Statements.




                                      - 1 -


<PAGE>   4
                         COMPRESSION LABS, INCORPORATED
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                    (In thousands, except per share amounts)
                                   (Unaudited)



<TABLE>
<CAPTION>
                                                 Nine months ended September 30,
                                                 -------------------------------
                                                       1996            1995
                                                     --------        --------
<S>                                                  <C>             <C>     
REVENUES                                             $ 65,612        $ 86,224
Cost of revenues                                       36,232          51,987
                                                     --------        --------
       GROSS MARGIN                                    29,380          34,237
OPERATING EXPENSES:
        Selling, general and administrative            26,786          29,199
        Research and development                        9,472           6,934
        Settlement of litigation                         --               897
                                                     --------        --------
                                                       36,258          37,030
                                                     --------        --------
             NET LOSS FROM OPERATIONS                  (6,878)         (2,793)
Interest, net                                            (662)           (762)
                                                     --------        --------
       Net loss from continuing operations             (7,540)         (3,555)
       Net income from discontinued operations           --             1,374
                                                     --------        --------
NET LOSS                                             $ (7,540)       $ (2,181)
                                                     ========        ========
NET INCOME (LOSS) PER SHARE:
       Net loss from continuing operations           $  (0.48)       $  (0.23)
       Net income from discontinued operations           --              0.09
                                                     --------        --------
NET LOSS PER SHARE                                   $  (0.48)       $  (0.14)
                                                     ========        ========

Weighted average common shares outstanding             15,616          15,191
                                                     ========        ========
</TABLE>


See accompanying Notes to Condensed Consolidated Financial Statements.

                                     - 2 -
<PAGE>   5
                         COMPRESSION LABS, INCORPORATED
                      CONDENSED CONSOLIDATED BALANCE SHEETS
                      (In thousands, except share amounts)

<TABLE>
<CAPTION>
                                                                                                   September 30,     December 31,
                                                                                                       1996             1995
                                                                                                    (Unaudited)       (Audited)
                                                                                                     ---------        ---------
ASSETS
CURRENT ASSETS
<S>                                                                                                  <C>              <C>      
       Cash and cash equivalents                                                                     $   5,761        $  12,638
       Accounts receivable, less allowance for doubtful accounts of
            $6,848 in 1996, $10,028 in 1995                                                             31,565           46,798
       Inventories                                                                                      12,640           22,821
       Other current assets                                                                                749            1,096
                                                                                                     ---------        ---------
            Total current assets                                                                        50,715           83,353

PROPERTY AND EQUIPMENT
       Furniture and fixtures                                                                            8,242            9,551
       Machinery and equipment                                                                          22,835           25,802
       Equipment under capital leases                                                                     --              2,090
                                                                                                     ---------        ---------
                                                                                                        31,077           37,443
       Accumulated depreciation and amortization                                                       (19,911)         (20,171)
                                                                                                     ---------        ---------
                                                                                                        11,166           17,272

CAPITALIZED SOFTWARE, NET                                                                                3,560            3,828
OTHER ASSETS                                                                                               285              300
                                                                                                     ---------        ---------
            Total assets                                                                             $  65,726        $ 104,753
                                                                                                     =========        =========

LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
       Short-term debt                                                                               $  12,408        $  13,452
       Current portion of capital lease obligations                                                       --                506
       Accounts payable                                                                                 11,394           26,169
       Accrued liabilities                                                                               7,951           21,689
       Deferred revenue                                                                                  4,748            6,278
                                                                                                     ---------        ---------
             Total current liabilities                                                                  36,501           68,094
                                                                                                     ---------        ---------

LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS                                                              --                985

STOCKHOLDERS' EQUITY
       Preferred stock -
            Undesignated preferred stock, $.001 par value; 4,000,000
            shares authorized, none issued and outstanding                                                --               --
       Common stock -
            $.001 par value; 25,153,658 shares authorized; shares issued
            and outstanding: 15,863,788 in 1996 and 15,491,475 in 1995                                      16               15
       Additional paid-in capital                                                                      121,786          120,696
       Accumulated deficit                                                                             (92,577)         (85,037)
                                                                                                     ---------        ---------
            Total stockholders' equity                                                                  29,225           35,674
                                                                                                     ---------        ---------
            Total liabilities and stockholders' equity                                               $  65,726        $ 104,753
                                                                                                     =========        =========
</TABLE>

See accompanying Notes to Condensed Consolidated Financial Statements.

                                      - 3 -

<PAGE>   6
                         COMPRESSION LABS, INCORPORATED
                CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                           (Unaudited, in thousands)


<TABLE>
<CAPTION>
                                                                      Nine months ended September 30,
                                                                      -------------------------------
                                                                           1996            1995
                                                                         --------        --------

CASH FLOWS FROM OPERATING ACTIVITIES
<S>                                                                      <C>             <C>      
     Net loss                                                            $ (7,540)       $ (2,181)
     Non-cash expenses included in operations-
          Depreciation and amortization                                     5,229           8,825
     Changes in certain assets and liabilities -
          Accounts receivable                                               7,137          (3,970)
          Inventories                                                        (678)          2,672
          Other current assets                                                310             658
          Accounts payable                                                (14,775)           (810)
          Accrued liabilities                                             (13,738)          5,289
          Deferred revenue                                                 (1,530)           (914)
          Discontinued operations                                          12,638          (1,572)
                                                                         --------        --------
              Net cash generated by (used in) operations                  (12,947)          7,997
                                                                         --------        --------

CASH FLOWS FROM INVESTING ACTIVITIES
     Property and equipment additions                                      (2,051)         (5,765)
     Net proceeds from sale of assets of discontinued operations           10,528            --
     Increase in capitalized software                                        (978)         (7,046)
     (Increase) decrease in other assets                                       15          (5,852)
                                                                         --------        --------
              Net cash generated by (used in) investing activities          7,514         (18,663)
                                                                         --------        --------

CASH FLOWS FROM FINANCING ACTIVITIES
     Sales of common stock, net                                             1,091           6,128
     Payments of capital lease obligations                                   (549)           (608)
     Collateralized borrowings                                             (1,599)          1,855
     (Payments) borrowings under line of credit agreements                   (387)          2,979
                                                                         --------        --------
              Net cash generated by (used in) financing activities         (1,444)         10,354
                                                                         --------        --------

NET DECREASE IN CASH AND CASH EQUIVALENTS                                  (6,877)           (312)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD                           12,638          11,319
                                                                         --------        --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD                               $  5,761        $ 11,007
                                                                         ========        ========
</TABLE>

See accompanying Notes to Condensed Consolidated Financial Statements.





                                      - 4 -


<PAGE>   7

                         COMPRESSION LABS, INCORPORATED

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)

                               SEPTEMBER 30, 1996

1.       BASIS OF PRESENTATION
         The accompanying unaudited condensed consolidated financial statements
         contain all adjustments of a normal recurring nature and certain
         one-time charges that in the opinion of management are necessary to
         present fairly the financial position and results of operations of
         Compression Labs, Incorporated (the Company). Interim results of
         operations are not necessarily indicative of the results to be expected
         for the full year.

         The Company's interim fiscal quarters end on the Friday of the
         thirteenth week following the end of the previous quarter. Accordingly,
         the actual dates of the end of the third quarters of 1996 and 1995 were
         September 27 and September 29, respectively. The fiscal year end will
         remain as December 31. The comparability of the financial statements
         between years is not materially affected by this presentation.

         The condensed consolidated financial statements should be read in
         conjunction with the financial statements and the notes thereto for the
         year ended December 31, 1995, included in the Company's 1995 Annual
         Report to Stockholders.

2.       DISCONTINUED OPERATIONS
         During November 1995, the Company adopted a strategic plan to
         discontinue its broadcast products division. This division generally
         manufactures and sells broadcast video products to commercial
         end-users. The results for the division have been accounted for as
         discontinued operations in accordance with Accounting Principles Board
         Opinion No. 30, and prior years' financial statements have been
         restated to reflect the discontinuation of the division.

         On June 27, 1996 the Company completed the sale of certain assets of
         its broadcast products division to Charger Industries (Charger), a
         subsidiary of General Instrument Corporation, in exchange for $12.5
         million in cash (subject to post-closing adjustments) and the
         assumption of $2.0 million in liabilities. Charger will assume past
         warranty obligations associated with the product family covered by the
         sale. With the exception of the accounts receivable, the Company
         disposed of the remaining assets of the division to a separate buyer.
         The components of net assets of discontinued operations included in the
         Condensed Consolidated Balance Sheets at September 30, 1996 and
         December 31, 1995 are summarized as follows (in thousands):

<TABLE>
<CAPTION>
                                                September 30,  December 31,
                                                    1996          1995
                                                   -------       -------
<S>                                                <C>           <C>    
                 Accounts receivable, net          $ 6,833       $14,929
                 Inventories                          --          10,859
                 Property and equipment, net          --           4,174
                 Other assets                         --              38
                                                   -------       -------
                                                   $ 6,833       $30,000
                                                   =======       =======
</TABLE>

         Revenues from the discontinued division were approximately $0 and
         $8,368,000 for the three months ended September 30, 1996 and 1995,
         respectively and $11,211,000 and $29,035,000 for the nine months ended
         September 30, 1996 and 1995, respectively.

3.       NET INCOME (LOSS) PER SHARE
         Net income per share is computed using the weighted average number of
         common shares outstanding during each period including dilutive common
         share equivalents (common stock options and warrants).

         Net loss per share is computed using the weighted average number of
         common shares outstanding. Common share equivalents have not been
         included in the net loss per share calculation because the effect would
         be anti-dilutive.


                                     - 5 -
<PAGE>   8



4.       UNBILLED RESEARCH AND DEVELOPMENT CONTRACTS RECEIVABLE AND ADVANCES
         As of September 30, 1996, the Company had net unbilled receivables of
         $864,000 primarily relating to research and development contracts
         entered into with Thomson Consumer Electronics, Inc. and North American
         Philips Corporation. These receivables are generally billable either in
         quarterly installments or upon the delivery of specific items.

5.       INVENTORIES
         Inventories are summarized as follows (in thousands):

<TABLE>
<CAPTION>
                                                                 September 30,  December 31,
                                                                     1996          1995
                                                                    -------       -------
                 <S>                                             <C>           <C>    
                 Raw material                                       $ 2,223       $ 2,189
                 Work-in-process                                      1,584         3,858
                 Finished products
                  - Products on hand                                  7,558        13,488
                  - Products under rental and loan agreements         1,275         3,286
                                                                    -------       -------
                                                                    $12,640       $22,821
                                                                    =======       =======
</TABLE>

6.       CAPITALIZED SOFTWARE
         The Company capitalized approximately $446,000 of software development
         costs during the three months ended September 30, 1996. During the nine
         months ended September 30, 1996 the Company capitalized approximately
         $978,000 of software development costs and purchased software.
         Amortization of capitalized software development costs and purchased
         software was $447,000 for the quarter ended September 30, 1996 and
         $1,246,000 for the nine months ended September 30, 1996.

7.       BANK LINE OF CREDIT AND LONG-TERM DEBT
         The Company has $15,000,000 of total borrowing commitment through a
         revolving credit facility with a bank that bears interest at the London
         Interbank Offered Rate (LIBOR), which was 5.39% for October 1996, plus
         4.81%, which expires on June 30, 1997. The line of credit agreement is
         secured by substantially all of the Company's assets. Under the
         agreement, the Company may not declare or make any cash or stock
         dividends. At September 30, 1996, the balance outstanding under this
         line of credit was $12,408,000.

         In 1995, the Company entered into long-term loan agreements for
         $2,172,000 that bear interest rates from 10.76% to 11.48% over
         thirty-six and forty-eight months. These loans, secured by specific
         capital assets, were paid off in conjunction with the sale of
         discontinued operations (see Note 2).

8.       INCOME TAXES
         Substantially all of the Company's federal income taxes to date have
         been offset by utilization of net operating loss carryforwards. When
         all such carryforwards are utilized, the Company anticipates a future
         provision for federal income taxes that will more closely approximate
         the statutory rates.

9.       SUBSEQUENT EVENT
         On October 24, 1996, the Company entered into a purchase agreement with
         an institutional investor for the private placement of up to 1 million
         shares of the Company's convertible preferred stock, $.001 par value,
         at $20 per share stated value, and warrants to purchase up to 450,000
         shares of the Company's common stock. The Company is required to
         register for resale the common stock underlying the preferred stock and
         warrants subject to the agreement.

         Pursuant to the agreement, the preferred stock is issuable in three
         installments at the Company's option through approximately December 31,
         1997, with each installment being between 180 to 210 days apart. The
         preferred stock is non-voting and senior to other securities in right
         of payment of the $20 stated value per share and related unpaid
         dividends. The dividends are cumulative, accrue at 4% per year on the
         stated value, without interest, and payable quarterly in cash (at the
         option of the Company) or shares of common stock. Each preferred share
         is also convertible into shares of common stock at a ratio equal to the
         stated value plus unpaid dividends divided by the conversion price, as
         defined. The conversion price, among other things, is dependent on the
         average market price, as defined, of the common stock on the preferred
         stock issue date and the date the conversion option is exercised. The
         preferred shares become convertible at the option of the holder the
         earlier of (1) 90 days after the original issue date of the preferred
         shares or (2) the effective date of the registration statement required
         by the agreement. Once the registration statement 

                                     - 6 -
<PAGE>   9

         becomes effective, the preferred shares are convertible at the option
         of the Company one year after the original issue date of the preferred
         shares.

         The agreement also provides for the issuance of warrants to purchase
         375,000 shares of common stock under the first installment and 75,000
         shares of common stock if issued under the second installment. Warrants
         issued under the first installment are exercisable at any time and
         expire after five years, with those issued under the second installment
         expiring after four years. The exercise price for the warrants is
         dependent upon a percentage of the average market price within five
         days of the issue date.

         On October 25, 1996, the Company completed an initial placement of
         350,000 shares of Class C Preferred Stock and received approximately
         $7.0 million net of certain issuance costs, pursuant to the agreement.
         The conversion price of Class C Preferred Stock is the lower of $4.225
         or 80% of the average per share market value for the five days
         preceding the conversion date. The warrants to purchase 375,000 of
         common stock expire in October 2001 and are exercisable at
         approximately $5.70 per share.


                                     - 7 -
<PAGE>   10



ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
         RESULTS OF OPERATIONS

This Management's Discussion and Analysis of Financial Condition and Results of
Operations contains forward-looking statements that involve risks and
uncertainties. The Company's actual results may differ significantly from the
results discussed in the forward-looking statements. Factors that might cause
such a difference include, but are not limited to, those discussed in the
Company's Form 10-K for the year ended December 31, 1995 under the caption
"Business."

Unless noted otherwise, the following discussion pertains to the Company's
continuing operations. Discussion of discontinued operations is contained in
Note 2 of Notes to Condensed Consolidated Financial Statements.

RESULTS OF OPERATIONS

REVENUES
Revenues in the third quarter of 1996 were $20.6 million compared to $28.4
million in the third quarter of 1995, a decrease of 28%. For the nine months
ended September 30, 1996 and 1995, revenues were $65.6 million and $86.2
million, respectively, a decrease of 24%. The decrease in revenues for both the
three months and nine months ended September 30, 1996 was due primarily to a
decrease in videoconferencing unit shipments. Codec shipments were 391 units in
the third quarter of 1996 compared to 580 units in the third quarter of 1995.

International revenues increased to $3.2 million, or 15% of revenues for the
three months ended September 30, 1996, compared to $2.5 million, or 9% of
revenues for the third quarter of 1995. International revenues were $12.3
million, or 19% of revenues for the first nine months of 1996, compared to $13.8
million, or 16% of revenues for the first nine months of 1995.

GROSS MARGIN
Gross margin as a percentage of revenues was 47% and 43% for the three months
ended September 30, 1996 and 1995, respectively. For the nine months ended
September 30, 1996 and 1995, gross margin as a percentage of revenues was 45%
and 40%, respectively. The increase in gross margin for both the three months
and nine months ended September 30, 1996 compared to the same three months and
nine months ended September 30, 1995 was primarily due to a change in product
mix to include a greater proportion of higher margin Radiance and eclipse group
videoconferencing systems and to reduced manufacturing costs.

The Company continues to seek improvement in gross margin through introduction
of new products with higher margins, as well as through cost reductions of
existing products. However, the Company anticipates that product gross margin on
revenues will continue to be subject to fluctuations caused by the introduction
of new products, changes in product mix, and variations in manufacturing costs.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses decreased to $7.9 million, or 39%
of revenues, for the third quarter of 1996 compared to $9.7 million, or 34% of
revenues, for the third quarter of 1995. The decrease in selling, general and
administrative expenses is mainly due to headcount reductions that were
partially offset by one-time costs associated with consolidating operating
divisions, including relocating employees into a single facility. For the nine
months ended September 30, 1996 and 1995, selling, general and administrative
expenses increased to 41% of revenues compared to 34% of revenues, respectively.
The increase in selling, general and administrative expenses as a percentage of
revenues during the three months and nine months of ended September 30, 1996
compared to the same periods in 1995 was primarily due to a decrease in revenues
and $1.7 million of additional expenses resulting from the Company's decision to
restructure its videoconferencing division. The additional expenses consisted
primarily of severance and related costs associated with headcount reductions in
the first quarter of 1996. The Company anticipates that selling, general and
administrative expenses will generally increase with increases in the level of
revenues but may vary from quarter to quarter as a percentage of revenues.

RESEARCH AND DEVELOPMENT EXPENSE
Research and development expense was 15% and 8% of revenues for the third
quarter of 1996 and 1995, respectively. For the nine months ended September 30,
1996 and 1995, research and development expense was 14% and 8% of revenues,
respectively. The increase in research and development expense as a percentage
of revenues for both the three months and nine months ended September 30, 1996
compared to the same periods in 1995 was due principally to decreased revenues,
as well as an increase in the portion of engineering spending that was dedicated
to research and development instead of capitalized software activity. The
Company expects that the level of research and development

                                     - 8 -
<PAGE>   11

expenses as a percentage of revenues will fluctuate due to varying levels of
research and development activities, external funding, and amounts capitalized
in conjunction with software development activities.

NET INTEREST EXPENSE
Net interest expense was $0.3 million for the third quarter of 1996 compared to
$0.2 million for the third quarter of 1995. Net interest expense was $0.7
million for the first nine months of 1996 compared to $0.8 million for nine
months of 1995. See Note 7 of Notes to Condensed Consolidated Financial
Statements.

NET INCOME (LOSS)
Net loss from continuing operations was $1.6 million for the third quarter of
1996 compared to $0.1 million in the third quarter of 1995. This increase was
due primarily to decreased revenues and higher research and development expense
which were partially offset by increased gross margins and decreased selling,
general and administrative expenses. The net loss from continuing operations
increased to $7.5 million during the first nine months of 1996 from $3.6 million
during the first nine months of 1995. This increase was primarily due to lower
revenues as well as $1.7 million of additional expenses resulting from the
Company's decision to restructure its videoconferencing division, partially
offset by improved gross margins on videoconferencing product sales.

FACTORS AFFECTING FUTURE RESULTS
The Company continues to seek improvement in operating results through
introduction of new products that are expected to have higher margins, as well
as through cost reductions of existing products. However, there can be no
assurance that the Company will be successful in its efforts. In the future, the
Company's operating results may be impacted by a number of factors, including
cancellation or delays of customer orders, interruption or delays in the supply
of key components, changes in customer base or product mix, seasonal patterns of
capital spending by customers, new product announcements by the Company or its
competitors, pricing pressures, and changes in general economic conditions.
Historically, a significant portion of the Company's shipments have been made in
the last month of each quarter. As a result, a shortfall in revenue compared to
expectation may not evidence itself until late in the quarter. Additionally, the
timing of expenditures for research and development activities and sales and
marketing programs, as well as the timing of orders by major customers, may
cause operating results to fluctuate between quarters and between years.

LIQUIDITY AND CAPITAL RESOURCES
The Company has used internally generated funds, public and private offerings of
common stock and preferred stock, sale and leaseback arrangements, and bank
credit lines to finance its growth since 1983. Cash used in operations was $12.9
million in the first nine months of 1996 compared to cash generated by
operations of $8.0 million in the first nine months of 1995. This increase in
cash used in operations was primarily due to the paydown of accounts payable and
other liabilities, increased net loss, and lower depreciation and amortization,
partially offset by a decrease in accounts receivable and inventories, as well
as the reduction in carrying value of assets related to the Company's
discontinued operations. Net cash generated by investing activities was $7.5
million for the first nine months of 1996 compared to net cash used in investing
activities of $18.7 million for the nine months ended September 30, 1995. This
change is due primarily to cash generated from the sale of assets related to the
Company's discontinued operations, as well as lower levels of spending related
to property, equipment and intangible assets, as well as decreased
capitalization of software. The Company expects the level of capital
expenditures to decrease in 1996 compared to 1995. Net cash used in financing
activities was $1.4 million during the first nine months of 1996 compared to net
cash generated by financing activities of $10.4 million during the first nine
months of 1995. This change is due primarily to lower sales of common stock,
which was $4.9 million in the third quarter of 1995, and payments made to reduce
collateralized borrowings during the second quarter of 1996. See Note 7 of Notes
to Condensed Consolidated Financial Statements.

As of September 30, 1996, the Company had cash and cash equivalents totaling
$5.8 million. The Company has a line of credit, which expires on June 30, 1997,
in the amount of $15.0 million, of which $12.4 million was outstanding at
September 30, 1996. See Note 7 of Notes to Condensed Consolidated Financial
Statements. Working capital was $14.2 million at September 30, 1996, compared to
$15.3 million at December 31, 1995. The Company's operating and product
development activities have required significant cash.

On October 24, 1996, the Company entered into a financing commitment with an
institutional investor for the private placement of up to $20 million of
convertible preferred stock, pursuant to which the Company completed an initial
placement of approximately $7 million with the option to fund the remaining
amount in two separate installments by the fourth quarter of 1997. See Note 9 of
Notes to Condensed Consolidated Financial Statements.

                                     - 9 -
<PAGE>   12

The Company anticipates that existing cash, lines of credit, and financing
commitment, together with sources of additional liquidity, such as private or
public offerings, sale and leaseback arrangements, equipment lease lines and
bank credit lines, will be sufficient to meet cash requirements through the
third quarter of 1997. Should additional funding be required, however, there can
be no assurance that such funding will be available on acceptable terms as and
when required by the Company.



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<PAGE>   13



PART II.          OTHER INFORMATION

ITEM 1.           LEGAL PROCEEDINGS

CIT GROUP/OSUERF
On August 24, 1993, the Company filed a complaint against Oklahoma State
University Education and Research Foundation, Inc. (OSUERF) in United States
District Court claiming that OSUERF breached an exclusive subcontract for the
Company to provide equipment to OSUERF under OSUERF's prime contract with the
United States Army, TRADOC Division. On November 18, 1993, the Company amended
the complaint to add Federal Leasing, Inc. (FLI) as a defendant. On February 4,
1994, the CIT Group/Equipment Financing Inc. (CIT), as an assignee of FLI's
rights under the Financing Agreement, filed a complaint against the Company in
United States District Court claiming indemnification from the Company. The
Company responded to CIT's complaint by denying the material charging
allegations and stating certain affirmative defenses. The OSUERF and CIT actions
have been consolidated. On April 21, 1995, CIT filed a second amended complaint
asserting, among other things, a claim for fraud against OSUERF. In March 1995,
CIT and FLI separately moved for summary judgment against the Company seeking
damages in the amount of $2.0 million. The Company opposed the respective
motions. By order dated October 11, 1995 the court denied the summary judgment
motions of CIT and FLI, respectively.

Subsequent to the denial of the summary judgment and for a variety of reasons,
including the resignation of one judge, the case has been reassigned several
times. Due to the recent recusal of another judge, the case is currently
unassigned and awaiting reassignment. As a result, all pretrial dates and the
trial date originally set for November 4, 1996, have been vacated.

The Company is currently in settlement discussions with CIT, FLI, and OSUERF, as
well as Southwestern Bell Telephone Company in a related action. The Company
believes that the ultimate resolution of this matter will not have a material
adverse impact on the Company's financial position.

DATAPOINT CORPORATION
In a complaint filed December 20, 1993, in the United States District Court in
Dallas, Texas, Datapoint Corporation (Datapoint) alleged that the Company had
infringed two United States patents owned by Datapoint relating to video
conferencing networks. The complaint seeks a judgment of infringement, monetary
damages, injunctive relief and reasonable attorney's fees. The Company responded
to the complaint on February 16, 1994 by denying the material allegations of the
complaint and asserting affirmative defenses. Pursuant to court order, the
parties have participated in mediation before a court-appointed mediator.
Discovery in the case has commenced. On September 27, 1995, the Company filed a
motion to construe the scope of the patent claims at issue in the litigation so
as to elucidate whether Datapoint can assert that the Company is infringing the
patents in suit, or whether Datapoint's patents are invalid in light of the
prior art. On April 24, 1996, a Special Master submitted a report which did not
recommend that the Court adopt the Company's positions set forth in the motion.

The Court on September 16, 1996, adopted the report of the Special Master that
the claims of the patents in suit be construed in a manner favorable to the
plaintiff, and a trial date of February 3, 1997, has been scheduled. The parties
at the request of the Court have filed status reports indicating that additional
time will be required to prepare for trial. In the meantime the Company has
filed motions to certify for appeal to the Federal Circuit on the issue of claim
construction and to stay discovery, which motions are pending.

The Company believes that it has meritorious defenses to the allegations of the
complaint and is pursuing an aggressive defense; however, there can be no
assurance that the Company will prevail. If any of the claims were to be decided
adversely to the defendants, the Company could be liable for monetary damages to
the plaintiff and be subject to injunctive relief. The Company believes that the
ultimate resolution of this matter will not have a material adverse impact on
the Company's financial position.

SOUTHWESTERN BELL TELEPHONE COMPANY
On April 6, 1995, the Company filed a complaint against Southwestern Bell
Telephone Company (SWBT) in Santa Clara, California Superior Court alleging that
SWBT intentionally interfered with CLI's contracts with OSUERF and Hughes
Network Systems (HNS). SWBT moved to quash service of summons for lack of
personal jurisdiction, which motion was granted on July 11, 1995. On July 25,
1995, the Company refiled the complaint in the United States District Court for
the Western District of Oklahoma. The complaint was served on SWBT which filed
its answer on October 17, 1995, denying the material allegations of the
complaint.

                                     - 11 -
<PAGE>   14

In September 6, 1995, CLI filed its notice of appeal of the Superior Court's
order granting SWBT's motion to quash service of summons for lack of personal
jurisdiction. The appeal was argued before the California Court of Appeal for
the Sixth Appellate District on July 18, 1996. By decision dated July 26, 1996,
the Court of Appeals affirmed the holding of the Superior Court.

The parties subsequently notified the United States District Court for the
Western District of Oklahoma to reopen the case and to take it out of
administrative closure. On October 2, 1996, the Court issued its Scheduling
Order pursuant to which the matter has been set for trial in May 1997, with
discovery to close April 1, 1997.

The Company is currently in settlement discussions with SWBT, as well as the
parties in the related CIT Group/OSUERF litigation. The Company believes that
the ultimate resolution of this matter will not have a material adverse impact
on the Company's financial position.

PHILIPS CONSUMER ELECTRONICS COMPANY
The Company entered into a Joint Development and Marketing Agreement (JDMA) with
Philips Consumer Electronics Company (Philips) dated January 12, 1994, for the
supply of certain decoder units discussed in the Jabil matter below. By
amendment to the JDMA on May 24, 1995, Philips agreed to pay the Company $2.6
million for all intellectual property jointly developed under the JDMA. In a
related license agreement of May 12, 1995, the Company agreed to pay Philips
$5.6 million for a license under background patents and other intellectual
property. Philips owes the Company $1.3 million under the amendment, $0.9
million of which was due December 29, 1995. The Company owes Philips $3.3
million under the license agreement, $2.1 million of which was due December 29,
1995. The Company believes that Philips has failed to make certain technology
disclosures required under the license agreement. The Company has initiated and
is engaged in negotiations with Philips regarding disposition of rights and
monies owed under the amendment and license agreement. Philips has indicated an
interest in reaching a mutually acceptable, amicable solution. The Company
believes that the ultimate resolution of this matter will not have a material
adverse impact on the Company's consolidated financial position.

JABIL CIRCUITS, INC.
To fulfill a purchase order from Philips for the supply of certain decoder
units, the Company placed a purchase order with Jabil Circuits, Inc. (Jabil) for
the procurement of the component parts and the manufacture of the units. Due to
the cancellation of the Philips purchase order, the Company canceled its
purchase order with Jabil. By letter dated January 11, 1996, Jabil demanded that
the Company issue a purchase order for approximately $6.5 million for the
components which were outside the cancellation and reschedule windows. The
Company has negotiated with Philips and Jabil regarding the disposition of the
component inventory and responsibility for cost of inventory that cannot be
disposed of by Jabil. A resolution of the inventory issue has been reached as
between Jabil and Philips. CLI has made a claim against Philips for damages
associated with the Jabil inventory. The Company believes that the ultimate
resolution of this matter will not have a material adverse impact on the
Company's consolidated financial position.

MUELLER/SHIELDS
On or about March 15, 1996, a complaint was filed against the Company by
Mueller/Shields OME in Superior Court of Orange County, California alleging
breach of a marketing research contract. In the action entitled Mueller/Shields
OME v. Compression Labs, Inc., Case No. 761079, Mueller/Shields sought $682,425
in compensatory damages, plus attorneys' fees provided by contract. Since the
filing of its complaint, Mueller/Shields served notice of its application for a
writ of attachment. Following service of the complaint and service of the writ
application, the Company and Mueller/Shields reached agreement on the terms of a
Settlement Agreement whereby the Company agreed to pay a total of approximately
$600,000 (principal and interest) on an installment basis beginning in April
1996 and concluding in September 1996. The total principal and interest has been
paid, and the underlying action was dismissed with prejudice on October 9, 1996.

GENERAL
In the normal course of business, the Company receives and makes inquiries with
regard to other possible patent infringement. Where deemed advisable, the
Company may seek or extend licenses or negotiate settlements. Outcomes of such
negotiations may not be determinable at any point in time; however, management
does not believe that such licenses or settlements will, individually or in the
aggregate, have a material adverse affect on the Company's consolidated
financial position.



                                     - 12 -
<PAGE>   15



ITEM 6.           EXHIBITS AND REPORTS ON FORM 8-K

         (a)      Exhibits

                  27.1  Article 5 of Regulation S-X, Financial Data Schedules
                        for Compression Labs, Incorporated for the Quarter
                        Ending September 30, 1996.

         (b)      Reports on Form 8-K

                  1.    Report on Form 8-K/A Amendment No. 1 dated June 24,
                        1996, filed on August 23, 1996, reporting under Item 7
                        amending Report on Form 8-K, dated June 24, 1996, filed
                        on July 9, 1996.



                                     - 13 -
<PAGE>   16



SIGNATURES

Pursuant to the requirements 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.



                       COMPRESSION LABS, INCORPORATED



                       BY /s/ Michael E. Seifert
                          ------------------------------------------------------
                            Michael E. Seifert
                            Vice President, Finance and Chief Accounting Officer
November 11, 1996



                                      -14-
<PAGE>   17
                                 EXHIBIT INDEX

Exhibit No.                     Description

   27                          Financial Data Schedule