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                           CHANGE OF CONTROL AGREEMENT


        AGREEMENT by and between SpaceLabs Medical, Inc., a Delaware corporation
(the "Company"), and Eugene V. DeFelice (the "Executive"), dated as of the 24th
day of July, 1998.

        The Board of Directors of the Company (the "Board") has determined that
it is in the best interests of the Company and its shareholders to assure that
the Company will have the continued dedication of the Executive, notwithstanding
the possibility, threat or occurrence of a Change of Control (as defined in
Section 2) of the Company. The Board believes it is imperative to diminish the
inevitable distraction of the Executive by virtue of the personal uncertainties
and risks created by a pending or threatened Change of Control and to encourage
the Executive's full attention and dedication to the Company currently and in
the event of any threatened or pending Change of Control, and to provide the
Executive with compensation and benefits arrangements upon a Change of Control
which ensure that the compensation and benefits expectations of the Executive
will be satisfied and which are competitive with those of other corporations.
Therefore, in order to accomplish these objectives, the Board has caused the
Company to enter into this Agreement.

        NOW, THEREFORE, IT IS HEREBY AGREED AS FOLLOWS:

1.      Certain Definitions

        (a) The "Effective Date" shall mean the first date during the Change of
Control Period (as defined in Section 1(b)) on which a Change of Control occurs.
Anything in this Agreement to the contrary notwithstanding, if a Change of
Control occurs and if the Executive's employment with the Company is terminated
prior to the date on which the Change of Control occurs, and if it is reasonably
demonstrated by the Executive that such termination of employment (i) was at the
request of a third party who has taken steps reasonably calculated to effect the
Change of Control or (ii) otherwise arose in connection with or anticipation of
the Change of Control, then for all purposes of this Agreement the "Effective
Date" shall mean the date immediately prior to the date of such termination of
employment.

        (b) The "Change of Control Period" shall mean the period commencing on
the date hereof and ending on the third anniversary of the date hereof;
provided, however, that commencing on the first anniversary of the date hereof,
and on each successive annual anniversary of the date hereof (such date and each
annual anniversary thereof shall be hereinafter referred to as the "Renewal
Date"), the Change of Control Period shall be automatically extended so as to
terminate three years from such Renewal Date, unless at 

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                                      -2-


least 60 days prior to the Renewal Date the Company shall give notice to the
Executive that the Change of Control Period shall not be so extended.

2.      Change of Control

        For the purpose of this Agreement, a "Change of Control" shall mean:

        (a) A "Board Change" which, for purposes of this Agreement, shall have
occurred if a majority of the seats (other than vacant seats) on the Company's
Board were to be occupied by individuals who were neither (i) nominated by a
majority of the Incumbent Directors nor (ii) appointed by directors so
nominated. An "Incumbent Director" is a member of the Board who has been either
(i) nominated by a majority of the directors of the Company then in office or
(ii) appointed by directors so nominated, but excluding, for this purpose, any
such individual whose initial assumption of office occurs as a result of either
an actual or threatened election contest or other actual or threatened
solicitation of proxies or consents by or on behalf of a Person (as defined
herein) other than the Board; or


        (b) The acquisition by an individual, entity or group (within the
meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934,
as amended (the "Exchange Act")) (a "Person") of beneficial ownership (within
the meaning of Rule 13d-3 promulgated under the Exchange Act) of 20% or more of
either (i) the then outstanding shares of common stock of the Company (the
"Outstanding Company Common Stock") or (ii) the combined voting power of the
then outstanding voting securities of the Company entitled to vote generally in
the election of directors (the "Outstanding Company Voting Securities");
provided, however, that the following acquisitions shall not constitute a Change
of Control: (x) any acquisition by the Company, (y) any acquisition by any
employee benefit plan (or related trust) sponsored or maintained by the Company
or any corporation controlled by the Company or (z) any acquisition by any
corporation, if, following such reorganization, merger or consolidation, the
conditions described in clauses (i), (ii) and (iii) of subsection (c) of this
Section 2 are satisfied; or

        (c) Approval by the shareholders of the Company of a reorganization,
merger or consolidation, in each case, unless following such reorganization,
merger or consolidation, (i) more than 60% of, respectively, the then
outstanding shares of common stock of the corporation resulting from such
reorganization, merger or consolidation and the combined voting power of the
then outstanding voting securities of such corporation entitled to vote
generally in the election of directors is then beneficially owned, directly or
indirectly, by all or substantially all of the individuals and entities who were
the beneficial owners, respectively, of the Outstanding Company Common Stock and
Outstanding Company Voting Securities immediately prior to such reorganization,
merger or consolidation in substantially the same proportions as their
ownership, immediately prior to such reorganization, merger or consolidation, of
the Outstanding Company Common Stock and Outstanding Company Voting Securities,
as the case may 

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                                      -3-


be, (ii) no Person (excluding the Company, any employee benefit plan (or related
trust) of the Company or such corporation resulting from such reorganization,
merger or consolidation and any person beneficially owning, immediately prior to
such reorganization, merger or consolidation, directly or indirectly, 33% or
more of the Outstanding Company Common Stock or Outstanding Voting Securities,
as the case may be) beneficially owns, directly or indirectly, 33% or more of,
respectively, the then outstanding shares of common stock of the corporation
resulting from such reorganization, merger or consolidation or the combined
voting power of the then outstanding voting securities of such corporation
entitled to vote generally in the election of directors and (iii) at least a
majority of the members of the board of directors of the corporation resulting
from such reorganization, merger or consolidation were the Incumbent Directors
at the time of the execution of the initial agreement providing for such
reorganization, merger or consolidation; or

        (d) Approval by the shareholders of the Company of (i) a complete
liquidation or dissolution of the Company or (ii) the sale or other disposition
of all or substantially all of the assets of the Company, other than to a
corporation, with respect to which following such sale or other disposition, (A)
more than 60% of, respectively, the then outstanding shares of common stock of
such corporation and the combined voting power of the then outstanding voting
securities of such corporation entitled to vote generally in the election of
directors is then beneficially owned, directly or indirectly by all or
substantially all of the individuals and entities who were the beneficial
owners, respectively, of the Outstanding Company Common Stock and Outstanding
Company Voting Securities immediately prior to such sale or other disposition in
substantially the same proportion as their ownership, immediately prior to such
sale or other disposition, of the Outstanding Company Common Stock and
Outstanding Company Voting Securities, as the case may be, (B) no Person
(excluding the Company and any employee benefit plan (or related trust) of the
Company or such Corporation and any Person beneficially owning, immediately
prior to such sale or other disposition, directly or indirectly, 33% or more of
the Outstanding Company Common Stock or Outstanding Company Voting Securities,
as the case may be) beneficially owns, directly or indirectly, 33% or more of,
respectively, the then outstanding shares of common stock of such corporation
and the combined voting power of the then outstanding voting securities of such
corporation entitled to vote generally in the election of directors and (C) at
least a majority of the members of the board of directors of such corporation
were approved by a majority of the Incumbent Directors at the time of the
execution of the initial agreement or action of the Board providing for such
sale or other disposition of assets of the Company.

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                                      -4-


3.      Employment Period

        The Company hereby agrees to continue the Executive in its employ, and
the Executive hereby agrees to remain in the employ of the Company, in
accordance with the terms and provisions of this Agreement, for the period
commencing on the Effective Date and ending on the third anniversary of such
date (the "Employment Period"), in the executive capacity of vice president,
general counsel and secretary of the business enterprise currently operating as
the Company, responsible for, among other things, all matters pertaining to the
Company's legal affairs and corporate governance and subject to the general
supervision of the Board as required by the General Corporation Law of Delaware
not inconsistent with the express terms of this Agreement. Such employment may
be with the Company or any of its principal operating subsidiaries, as
appropriate to the management structure developed by the Company.

4.      Terms of Employment

        (a)    Position and Duties.

               (i) During the Employment Period, (A) the Executive's position
(including status, offices, titles and reporting requirements), authority,
duties and responsibilities shall be in accordance with Section 3 hereof and (B)
the Executive's services shall be performed at the location where the Executive
was employed on the Effective Date or any office which is the headquarters of
the Company and is less than 5 miles from such location.

               (ii) During the Employment Period, and excluding any periods of
vacation and sick leave to which the Executive is entitled, the Executive agrees
to devote reasonable attention and time during normal business hours to the
business and affairs of the Company and, to the extent necessary to discharge
the responsibilities assigned to the Executive hereunder, to use the Executive's
reasonable best efforts to perform faithfully and efficiently such
responsibilities. During the Employment Period it shall not be a violation of
this Agreement for the Executive to (A) serve on corporate, civic or charitable
boards or committees, (B) deliver lectures, fulfill speaking engagements or
teach at educational institutions and (C) manage personal investments, so long
as such activities do not significantly interfere with the performance of the
Executive's responsibilities as an employee of the Company in accordance with
this Agreement. It is expressly understood and agreed that to the extent that
any such activities have been conducted by the Executive prior to the Effective
Date, the continued conduct of such activities (or the conduct or activities
similar in nature and scope thereto) subsequent to the Effective Date shall not
thereafter be deemed to interfere with the performance of the Executive's
responsibilities to the Company.

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                                      -5-


        (b)    Compensation.

               (i) Base Salary. During the Employment Period, the Executive
shall receive an annual base salary ("Annual Base Salary"), which shall be paid
in equal installments on a monthly basis, at least equal to twelve times the
highest monthly base salary paid or payable to the Executive by the Company and
its affiliated companies in respect of the twelve-month period immediately
preceding the month in which the Effective Date occurs. During the Employment
Period, the Annual Base Salary shall be reviewed at least annually and shall be
increased at any time and from time to time and shall be substantially
consistent with increases in base salary generally awarded in the ordinary
course of business to other peer executives of the Company and its affiliated
companies. Any increase in Annual Base Salary shall not serve to limit or reduce
any other obligation to the Executive under this Agreement. Annual Base Salary
shall not be be reduced after any such increase and the term Annual Base Salary
as utilized in this Agreement shall refer to Annual Base Salary as so increased.
As used in this Agreement, the term "affiliated companies" shall include any
company controlled by, controlling or under common control with the Company.

               (ii) Annual Bonus. In addition to Annual Base Salary, the
Executive shall be awarded, for each fiscal year ending during the Employment
Period, an annual bonus (the "Annual Bonus") in cash at least equal to the
average annualized (for any fiscal year consisting of less than twelve full
months or with respect to which the Executive has been employed by the Company
for less than twelve full months) bonus paid or payable, including by reason of
any deferral, to the Executive by the Company and its affiliated companies in
respect of the three fiscal years immediately preceding the fiscal year in which
the Effective Date occurs (the "Recent Average Bonus"). Each such Annual Bonus
shall be paid no later than the end of the third month of the fiscal year next
following the fiscal year for which the Annual Bonus is awarded, unless the
Executive shall elect to defer the receipt of such Annual Bonus.

               (iii) Incentive, Savings and Retirement Plans. During the
Employment Period, the Executive shall be entitled to participate in all
incentive, savings and retirement plans, practices, policies and programs
applicable generally to other peer executives of the Company and its affiliated
companies, but in no event shall such plans, practices, policies and programs
provide the Executive with incentive opportunities (measured with respect to
both regular and special incentive opportunities, to the extent, if any, that
such distinction is applicable), savings opportunities and retirement benefit
opportunities, in each case, less favorable, in the aggregate, than the most
favorable of those provided by the Company and its affiliated companies for the
Executive under such plans, practices, policies and programs as in effect at any
time during the 90-day period immediately preceding the Effective Date or if
more favorable to the Executive, those provided generally at any time after the
Effective Date to other executives of the Company and its affiliated companies.

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                                      -6-


               (iv) Welfare Benefit Plans. During the Employment Period, the
Executive and/or the Executive's family, as the case may be, shall be eligible
for participation in and shall receive all benefits under welfare benefit plans,
practices policies and programs provided by the Company and its affiliated
companies (including, without limitation, medical, prescription, dental,
disability, salary continuance, employee life, group life, accidental death and
travel accident insurance plans and programs) to the extent applicable generally
to other peer executives of the Company and its affiliated companies, but in no
event shall such plans, practices policies and programs provide the Executive
with benefits which are less favorable, in the aggregate, than the most
favorable of such plans, practices, policies and programs in effect for the
Executive at any time during the 90-day period immediately preceding the
Effective Date or, if more favorable to the Executive, those provided generally
at any time after the Effective Date to other peer executives of the Company and
its affiliated companies.

               (v) Expenses. During the Employment Period, the Executive shall
be entitled to receive prompt reimbursement for all reasonable employment
expenses incurred by the Executive in accordance with the most favorable
policies, practices and procedures of the Company and its affiliated companies
in effect for the Executive at any time during the 90-day period immediately
preceding the Effective Date or, if more favorable to the Executive, as in
effect generally at any time thereafter with respect to other peer executives of
the Company and its affiliated companies.

               (vi) Fringe Benefits. During the Employment Period, the Executive
shall be entitled to fringe benefits in accordance with the most favorable
plans, practices, programs and policies of the Company and its affiliated
companies in effect for the Executive at any time during the 90-day period
immediately preceding the Effective Date or, if more favorable to the Executive,
as in effect generally at any time thereafter with respect to other peer
executives of the Company and its affiliated companies.

               (vii) Office of Support Staff. During the Employment Period, the
Executive shall be entitled to an office or offices of a size and with
furnishings and other appointments, and to exclusive personal secretarial and
other assistance, at least equal to the most favorable of the foregoing provided
to the Executive by the Company and its affiliated companies at any time during
the 90-day period immediately preceding the Effective Date or, if more favorable
to the Executive, as provided generally at any time thereafter with respect to
other peer executives of the Company and its affiliated companies.

               (viii) Vacation. During the Employment Period, the Executive
shall be entitled to paid vacation in accordance with the most favorable plans,
policies, programs and practices of the Company and its affiliated companies as
in effect for the Executive at any time during the 90-day period immediately
preceding the Effective Date or, if more favorable to the Executive, as in
effect generally at any time thereafter with respect to other peer executives of
the Company and its affiliated companies.

<PAGE>   7
                                      -7-


5.      Termination of Employment

        (a) Death or Disability. The Executive's employment shall terminate
automatically upon the Executive's death during the Employment Period. If the
Company determines in good faith that the Disability of the Executive has
occurred during the Employment Period (pursuant to the definition of Disability
set forth below), it may give to the Executive written notice in accordance with
Section 12(b) of its intention to terminate the Executive's employment. In such
event, the Executive's employment with the Company shall terminate effective on
the 30th day after receipt of such notice by the Executive (the "Disability
Effective Date"), provided that, within the 30 days after such receipt, the
Executive shall not have returned to full-time performance of the Executive's
duties. For purposes of this Agreement, "Disability" shall mean the absence of
the Executive from the Executive's duties with the Company on a full-time basis
for 180 consecutive business days as a result of incapacity due to mental or
physical illness which is determined to be total and permanent by a physician
selected by the Company or its insurers and acceptable to the Executive or the
Executive's legal representative (such agreement as to acceptability not to be
withheld unreasonably).

        (b) Cause. The Company may terminate the Executive's employment during
the Employment Period for Cause. For purposes of this Agreement, "Cause" shall
mean (i) a material breach by the Executive of the Executive's obligations under
Section 4(a) (other than as a result of incapacity due to physical or mental
illness) which is demonstrably willful and deliberate on the Executive's part,
which is committed in bad faith or without reasonable belief that such breach is
in the best interests of the Company and which is not remedied in a reasonable
period of time after receipt of written notice from the Company specifying such
breach or (ii) the conviction of the Executive of a felony involving moral
turpitude.

        (c) Good Reason. The Executive's employment may be terminated during the
Employment Period by the Executive for Good Reason. For purposes of this
Agreement, "Good Reason" shall mean:

               (i) the assignment to the Executive of any duties inconsistent in
any respect with the Executive's position (including status, offices, titles and
reporting requirements), authority, duties or responsibilities as contemplated
by Sections 3 and 4(a) or any other action by the Company which results in a
diminution in such position, authority, duties or responsibilities, excluding
for this purpose an isolated, insubstantial and inadvertent action not taken in
bad faith and which is remedied by the Company promptly after receipt of notice
thereof given by the Executive;

               (ii) any failure by the Company to comply with any of the
provisions of Section 4(b), other than an isolated, insubstantial and
inadvertent failure not occurring in bad faith and which is remedied by the
Company promptly after receipt of notice thereof given by the Executive;

<PAGE>   8
                                      -8-


               (iii) the Company's requiring the Executive to be based at any
office or location other than that described in Section 4(a)(i)(B);

               (iv) any purported termination by the Company of the Executive's
employment otherwise than as expressly permitted by this Agreement;

               (v) any failure by the Company to comply with and satisfy Section
11(c), provided that such successor has received at least ten days' prior
written notice from the Company or the Executive of the requirements of Section
11(c); or

               (vi) any violation of law, or act that the Executive reasonably
believes involves moral turpitude by or on behalf of the Company, if such
violation or act materially adversely affects the Executive, in the Executive's
good faith judgment.

For purposes of this Section 5(c), any good faith determination of "Good Reason"
made by the Executive shall be conclusive. Anything in this Agreement to the
contrary notwithstanding, a termination by the Executive for any reason during
the six-month period immediately following the first anniversary of the
Effective Date shall be deemed to be a termination for Good Reason for all
purposes of this Agreement.

        (d) Notice of Termination. Any termination by the Company for Cause or
by the Executive for Good Reason shall be communicated by Notice of Termination
to the other party hereto given in accordance with Section 12(b). For purposes
of this Agreement, a "Notice of Termination" means a written notice which (i)
indicates the specific termination provision in this Agreement relied upon, (ii)
to the extent applicable, sets forth in reasonable detail the facts and
circumstances claimed to provide a basis for termination of the Executive's
employment under the provision so indicated and (iii) if the Date of Termination
(as defined below) is other than the date of receipt of such notice, specifies
the termination date (which date shall not be more than 15 days after the giving
of such notice). The failure by the Executive or the Company to set forth in the
Notice of Termination any fact or circumstance which contributes to a showing of
Good Reason or Cause shall not waive any right of the Executive or the Company
hereunder or preclude the Executive or the Company from asserting such fact or
circumstance in enforcing the Executive's or the Company's rights hereunder.

        (e) Date of Termination. "Date of Termination" means (i) if the
Executive's employment is terminated by the Company for Cause, or by the
Executive for Good Reason, the date of receipt of the Notice of Termination or
any later date specified therein, as the case may be, (ii) if the Executive's
employment is terminated by the Company other than for Cause or Disability, the
Date of Termination shall be the date on which the Company notifies the
Executive of such termination and (iii) if the Executive's employment is
terminated by reason of death or Disability, the Date of Termination shall be
the date of death of the Executive or the Disability Effective Date, as the case
may be.

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                                      -9-


6.      Obligations of the Company Upon Termination

        (a) Good Reason; Other than for Cause, Death or Disability. If, during
the Employment Period, the Company shall terminate the Executive's employment
other than for Cause or Disability or the Executive shall terminate employment
for Good Reason:

               (i)  the Company shall pay to the Executive in a lump sum in cash
within 30 days after the Date of Termination the aggregate of the following
amounts:

                    A.   the sum of (1) the Executive's Annual Base Salary 
through the Date of Termination to the extent not theretofore paid, (2) the
product of (x) the greater of (i) the Annual Bonus paid or payable, including by
reason of any deferral, to the Executive (and annualized for any fiscal year
consisting of less than twelve full months or for which the Executive has been
employed for less than twelve full months) for the most recently completed
fiscal year during the Employment Period, if any, and (ii) the Recent Average
Bonus (such greater amount shall be hereinafter referred to as the "Highest
Annual Bonus"), and (y) a fraction, the numerator of which is the number of days
in the current fiscal year through the Date of Termination, and the denominator
of which is 365 and (3) any compensation previously deferred by the Executive
(together with any accrued interest or earnings thereon) and any accrued
vacation pay, in each case to the extent not theretofore paid (the sum of the
amounts described in clauses (1), (2) and (3) shall be hereinafter referred to
as the "Accrued Obligations"); and

                    B.   the amount equal to the product of (1) two and (2) the
sum of (x) the Executive's Annual Base Salary and (y) the Highest Annual Bonus;
and

                    C.   a separate lump sum supplemental retirement benefit 
equal to the difference between (1) the actuarial equivalent (utilizing for this
purpose the actuarial assumptions utilized with respect to the Company's
Retirement Plan (or any successor plan thereto) (the "Retirement Plan") during
the 90-day period immediately preceding the Effective Date) of the benefit
payable under the Retirement Plan and any supplemental and/or excess retirement
plan of the Company and its affiliated companies providing benefits for the
Executive (the "SERP") which the Executive would receive if the Executive's
employment continued at the compensation level provided for in Sections 4(b)(i)
and 4(b)(ii) for the remainder of the Employment Period, assuming for this
purpose that all accrued benefits are fully vested and that benefit accrual
formulas are no less advantageous to the Executive than those in effect during
the 90-day period immediately preceding the Effective Date, and (2) the
actuarial equivalent (utilizing for this purpose the actuarial assumptions
utilized with respect to the Retirement Plan during the 90-day period
immediately preceding the Effective Date) of the Executive's actual benefit
(paid or payable), if any, under the Retirement Plan and the SERP; and

               (ii) for the remainder of the Employment Period, or such longer
period as any plan, program, practice or policy may provide, the Company shall
continue benefits to the Executive and/or the Executive's family at least equal
to those which 

<PAGE>   10
                                      -10-


would have been provided to them in accordance with the plans, programs,
practices and policies described in Sections 4(b)(iv) and 4(b)(vi) if the
Executive's employment had not been terminated in accordance with the most
favorable plans, practices, programs or policies of the Company and its
affiliated companies as in effect and applicable generally to other executives
and their families during the 90-day period immediately preceding the Effective
Date or, if more favorable to the Executive, as in effect generally at any time
thereafter with respect to other executives of the Company and its affiliated
companies and their families, provided, however, that if the Executive becomes
reemployed with another employer and is eligible to receive medical or other
welfare benefits under another employer provided plan, the medical and other
welfare benefits described herein shall be secondary to those provided under
such other plan during such applicable period of eligibility (such continuation
of such benefits for the applicable period herein set forth shall be hereinafter
referred to as "Welfare Benefit Continuation"). For purposes of determining
eligibility of the Executive for retiree benefits pursuant to such plans,
practices, programs and policies, the Executive shall be considered to have
remained employed until the end of the Employment Period and to have retired on
the last day of such period; provided, however, that the Executive shall be
entitled to the more favorable of the retiree benefits in effect on the Date of
Termination or the retiree benefits in effect on the date that would have been
the last date of the Employment Period if the Executive had remained employed;
and

               (iii) to the extent not theretofore paid or provided, the Company
shall timely pay or provide to the Executive and/or the Executive's family any
other amounts or benefits required to be paid or provided or which the Executive
and/or the Executive's family is eligible to receive pursuant to this Agreement
and under any plan, program, policy or practice or contract or agreement of the
Company and its affiliated companies as in effect and applicable generally to
other executives and their families during the 90-day period immediately
preceding the Effective Date or, if more favorable to the Executive, as in
effect generally thereafter with respect to other peer executives of the Company
and its affiliated companies and their families (such other amounts and benefits
shall be hereinafter referred to as the "Other Benefits").

        (b)    Death. If the Executive's employment is terminated by reason of 
the Executive's death during the Employment Period, this Agreement shall
terminate without further obligations to the Executive's legal representatives
under this Agreement, other than for payment of Accrued Obligations (which shall
be paid to the Executive's estate or beneficiary, as applicable, in a lump sum
in cash within 30 days of the Date of Termination) and the timely payment or
provision of the Welfare Benefit Continuation and Other Benefits.

        (c)    Disability. If the Executive's employment is terminated by reason
of the Executive's Disability during the Employment Period, this Agreement shall
terminate without further obligations to the Executive, other than for payment
of Accrued Obligations (which shall be paid to the Executive in a lump sum in
cash within 30 days of 

<PAGE>   11
                                      -11-


the Date of Termination) and the timely payment or provision of the Welfare
Benefit Continuation and Other Benefits.

        (d) Cause; Other Than for Good Reason. If the Executive's employment
shall be terminated for Cause during the Employment Period, this Agreement shall
terminate without further obligations to the Executive other than the obligation
to pay the Executive Annual Base Salary through the Date of Termination plus the
amount of any compensation previously deferred by the Executive, in each case to
the extent theretofore unpaid. If the Executive terminates employment during the
Employment Period, other than for Good Reason, this Agreement shall terminate
without further obligations to the Executive, other than for Accrued Obligations
and the timely payment or provision of Other Benefits. In such case, all Accrued
Obligations shall be paid to the Executive in a lump sum in cash within 30 days
of the Date of Termination.

7.      Nonexclusivity of Rights

        Nothing in this Agreement shall prevent or limit the Executive's
continuing or future participation in any plan, program, policy or practice
provided by the Company or any of its affiliated companies and for which the
Executive may qualify, nor shall anything herein limit or otherwise affect such
rights as the Executive may have under any contract or agreement with the
Company or any of its affiliated companies. Amounts which are vested benefits or
which the Executive is otherwise entitled to receive under any plan, policy,
practice or program of or any contract or agreement with the Company or any of
its affiliated companies at or subsequent to the Date of Termination shall be
payable in accordance with such plan, policy, practice or program or contract or
agreement except as explicitly modified by this Agreement.

8.      Full Settlement; Resolutions of Disputes

        (a) The Company's obligation to make the payments provided for in this
Agreement and otherwise to perform its obligations hereunder shall not be
affected by any set-off, counterclaim, recoupment, defense or other claim, right
or action which the Company may have against the Executive or others. In no
event shall the Executive be obligated to seek other employment or take any
other action by way of mitigation of the amounts payable to the Executive under
any of the provisions of this Agreement and, except as provided in Section
6(a)(ii), such amounts shall not be reduced whether or not the Executive obtains
other employment. The Company agrees to pay promptly upon invoice, to the full
extent permitted by law, all legal fees and expenses which the Executive may
incur as a result of any contest (regardless of the outcome thereof) by the
Company, the Executive or others of the validity or enforceability of, or
liability under, any provision of this Agreement or any guarantee of performance
thereof (including as a result of any contest by the Executive about the amount
of any payment pursuant to this Agreement).

<PAGE>   12
                                      -12-


        (b) If there shall be any dispute between the Company and the Executive
(i) in the event of any termination of the Executive's employment by the
Company, whether such termination was for Cause, or (ii) in the event of any
termination of employment by the Executive, whether Good Reason existed, then,
unless and until there is a final, nonappealable judgment by a court of
competent jurisdiction declaring that such termination was for Cause or that the
determination by the Executive of the existence of Good Reason was not made in
good faith, the Company shall pay all amounts, and provide all benefits, to the
Executive and/or the Executive's family or other beneficiaries, as the case may
be, that the Company would be required to pay or provide pursuant to Section
6(a) as though such termination were by the Company without Cause or by the
Executive with Good Reason; provided, however, that the Company shall not be
required to pay any disputed amounts pursuant to this paragraph except upon
receipt of an undertaking by or on behalf of the Executive to repay all such
amounts to which the Executive is ultimately adjudged by such court not to be
entitled.

9.      Gross-Up Payment; Certain Limitations on Payments and Benefits

        (a) In the event that (i) the Executive becomes entitled to payments
under Section 6(a) hereof or any other benefits or payments in connection with a
Change of Control or the termination of the Executive's employment, whether
pursuant to the terms of this Agreement or otherwise (collectively, the "Total
Benefits"), and (ii) any of the Total Benefits will be subject to the "Excise
Tax," the Company shall pay to the Executive an additional amount (the "Gross-Up
Payment") such that the net amount retained by the Executive from the Gross-Up
Payment, after deduction of any federal, state and local income taxes, Excise
Tax, and FICA and Medicare withholding taxes upon the Gross-Up Payment, shall be
equal to the Excise Tax on the Total Benefits. For purposes of determining the
amount of such Excise Tax, the amount of the Total Benefits that shall be
treated as subject to the Excise Tax shall be equal to (i) the Total Benefits,
minus (ii) the amount of such Total Benefits that, in the opinion of tax counsel
selected by the Company and reasonably acceptable to the Executive ("Tax
Counsel"), are not excess parachute payments (within the meaning of Section
280G(b)(1) of the Code). "Excise Tax" as used herein shall mean any excise tax
imposed under Section 4999 of the Code.

        (b) For purposes of this Section 9, the Executive shall be deemed to pay
federal income taxes at the highest marginal rate of federal income taxation in
the calendar year in which the Excise Tax is (or would be) payable and state and
local income taxes at the highest marginal rate of taxation in the state and
locality of the Executive's residence on the Date of Termination, net of the
reduction in federal income taxes which could be obtained from deduction of such
state and local taxes (calculated by assuming that any reduction under Section
68 of the Code in the amount of itemized deductions allowable to the Executive
applies first to reduce the amount of such state and local income taxes that
would otherwise be deductible by the Executive). Except as otherwise provided
herein, 

<PAGE>   13
                                      -13-


all determinations required to be made under this Section 9 shall be made by Tax
Counsel, which determinations shall be conclusive and binding on the Executive
and the Company absent manifest error.

        (c) In the event that the Excise Tax on the Total Benefits is
subsequently determined to be less than the amount taken into account hereunder
at the time of termination of the Executive's employment, the Executive shall
repay to the Company, at the time that the amount of such reduction in Excise
Tax is finally determined, the portion of the Gross-Up Payment attributable to
such reduction (plus that portion of the Gross-Up Payment attributable to the
Excise Tax, federal, state and local income taxes and FICA and Medicare
withholding taxes imposed on the Gross-Up Payment being repaid by the Executive
to the extent that such repayment results in a reduction in any such taxes
and/or a federal, state or local income tax deduction) plus interest on the
amount of such repayment at the rate provided in Section 1274(b)(2)(B) of the
Code. In the event that the Excise Tax on the Total Benefits is determined to
exceed the amount taken into account hereunder at the time of the termination of
the Executive's employment (including by reason of any payment the existence or
amount of which cannot be determined at the time of the Gross-Up Payment), the
Company shall make an additional Gross-Up Payment (which shall be calculated by
Tax Counsel in the same manner and using the same assumptions as set forth in
Sections 9(a) and 9(b) hereof) to the Executive in respect of such excess (plus
any interest, penalties or additions payable by the Executive with respect to
such excess to the Internal Revenue Service or any other federal, state, local
or foreign taxing authority) at the time that the amount of such excess is
finally determined.


10.      Confidential Information

        The Executive shall hold in a fiduciary capacity for the benefit of the
Company all secret or confidential information, knowledge or data relating to
the Company or any of its affiliated companies, and their respective businesses,
which shall have been obtained by the Executive during the Executive's
employment by the Company or any of its affiliated companies and which shall not
be or become public knowledge (other than by acts by the Executive or
representatives of the Executive in violation of this Agreement). After
termination of the Executive's employment with the Company, the Executive shall
not, without the prior written consent of the Company or as may otherwise be
required by law or legal process, communicate or divulge any such information,
knowledge or data to anyone other than the Company and those designated by it.
In no event shall an asserted violation of the provisions of this Section 10
constitute a basis for deferring or withholding any amounts otherwise payable to
the Executive under this Agreement.

<PAGE>   14
                                      -14-


11.     Successors

        (a) This Agreement is personal to the Executive and without the prior
written consent of the Company shall not be assignable by the Executive
otherwise than by will or the laws of descent and distribution. This Agreement
shall inure to the benefit of and be enforceable by the Executive's legal
representatives.

        (b) This Agreement shall inure to the benefit of and be binding upon the
Company and its successors and assigns.


        (c) The Company will require any successor (whether direct or indirect,
by purchase, merger, consolidation or otherwise) to all or substantially all of
the business and/or assets of the Company to assume expressly and agree to
perform this Agreement in the same manner and to the same extent that the
Company would be required to perform it if no such succession had taken place.
As used in this Agreement, "Company" shall mean the Company as hereinbefore
defined and any successor to its business and/or assets as aforesaid which
assumes and agrees to perform this Agreement by operation of law, or otherwise.

10.      Miscellaneous

        (a) This Agreement shall be governed by and construed in accordance with
the laws of the State of Washington, without reference to principles of conflict
of laws. The captions of this Agreement are not part of the provisions hereof
and shall have no force or effect. This Agreement may not be amended or modified
otherwise than by a written agreement executed by the parties hereto or their
respective successors and legal representatives.

        (b) All notices and other communications hereunder shall be in writing
and shall be given by hand delivery to the other party or by registered or
certified mail, return receipt requested, postage prepaid, addressed as follows:

               If to the Executive:

               Eugene V. DeFelice
               4417 251st Way N.E.
               Redmond, Washington  98063

               If to the Company:

               SpaceLabs Medical, Inc.
               15220 N.E. 40th Street
               Redmond, Washington  98073
               Attention:  General Counsel

<PAGE>   15
                                      -15-


or to such other address as either party shall have furnished to the other in
writing in accordance herewith. Notice and communications shall be effective
when actually received by the addressee.

        (c) The invalidity or unenforceability of any provision of this
Agreement shall not affect the validity or enforceability of any other provision
of this Agreement.

        (d) The Company may withhold from any amounts payable under this
Agreement such Federal, state or local taxes as shall be required to be withheld
pursuant to any applicable law or regulation.

        (e) The Executive's or the Company's failure to insist upon strict
compliance with any provision hereof or any other provision of this Agreement or
the failure to assert any right the Executive or the Company may have hereunder,
including without limitation, the right of the Executive to terminate employment
for Good Reason pursuant to Section 5(c)(i)-(vi), shall not be deemed to be a
waiver of such provision or right or any other provision or right of this
Agreement.

        (f) The Executive and the Company acknowledge that, except as may
otherwise be provided under any other written agreement between the Executive
and the Company, the employment of the Executive by the Company is "at will"
and, prior to the Effective Date, may be terminated by either the Executive or
the Company at any time. Moreover, if prior to the Effective Date, the
Executive's employment with the Company terminates, then the Executive shall
have no further rights under this Agreement.

<PAGE>   16
                                      -16-


        IN WITNESS WHEREOF, the Executive has hereunto set the Executive's hand
and, pursuant to the authorization from its Board of Directors, the Company has
caused these presents to be executive in its name on its behalf, all as of the
day and year first above written.



                                             /s/ Eugene V. DeFelice
                                             -----------------------------------
                                             Eugene V. DeFelice




                                             SPACELABS MEDICAL, INC.



                                             By /s/ Carl A. Lombardi
                                               ---------------------------------
                                                 Carl A. Lombardi
                                              Its Chief Executive Officer,
                                             Chairman of the Board and President