<PAGE>   1
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                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

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

                                    FORM 10-Q

             [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
                 OF THE SECURITIES EXCHANGE ACT OF 1934

                 FOR THE QUARTERLY PERIOD ENDED OCTOBER 2, 1999

                                       OR

             [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934

                 FOR THE TRANSITION PERIOD FROM _____ TO _____.

                         COMMISSION FILE NUMBER 0-20083

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

                             SPACELABS MEDICAL, INC.
             (Exact name of registrant as specified in its charter)

             DELAWARE                                         91-1558809
   (State or other jurisdiction of                         (I.R.S. Employer
   incorporation or organization)                         Identification No.)

        15220 N.E. 40TH STREET, P.O. BOX 97013, REDMOND, WASHINGTON 98073
               (Address of principal executive offices) (Zip Code)


       Registrant's telephone number, including area code: (425) 882-3700


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 [ ]


      Common stock, par value $.01 per share: 9,458,732 shares outstanding
                             as of October 29, 1999







================================================================================


<PAGE>   2
                             SPACELABS MEDICAL, INC.

                                    FORM 10-Q

                 FOR THE QUARTERLY PERIOD ENDED OCTOBER 2, 1999


                                TABLE OF CONTENTS



<TABLE>
<CAPTION>
                                                                                                Page
                                                                                                ----
<S>         <C>                                                                                 <C>
PART I.     Financial Information

Item 1.     Financial Statements
            Condensed Consolidated Balance Sheets
                 - October 2, 1999 (unaudited) and December 31, 1998.........................    3
            Condensed Consolidated Statements of Operations (unaudited)
                - Three and Nine Months Ended October 2, 1999 and September 26, 1998.........    4
            Condensed Consolidated Statements of Cash Flows (unaudited)
                - Nine Months Ended October 2, 1999 and September 26, 1998...................    5
            Notes to Condensed Consolidated Financial Statements.............................    6

Item 2.     Management's Discussion and Analysis of Financial Condition
              and Results of Operations......................................................   10

Item 3.     Quantitative and Qualitative Disclosures About Market Risk.......................   19


PART II.    Other Information

Item 6.     Exhibits and Reports on Form 8-K.................................................   20
</TABLE>




                                      (2)
<PAGE>   3

PART I.

Item 1.  Financial Statements

                             SPACELABS MEDICAL, INC.

                      CONDENSED CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                    October 2,        December 31,
(in thousands)                                         1999              1998
----------------------------------------------------------------------------------
                                                    (unaudited)
<S>                                                 <C>               <C>
                  ASSETS
Current assets
  Cash and cash equivalents .................        $   3,011         $   1,467
  Receivables ...............................           87,658            82,575
  Inventories ...............................           75,265            65,912
  Prepaid expenses ..........................            2,860             3,387
  Deferred income taxes .....................           26,231            27,171
                                                     ---------         ---------
                 Total current assets .......          195,025           180,512

Property, plant and equipment, net ..........           63,600            65,146
Deferred income taxes .......................            1,184             1,558
Other assets, net ...........................           35,838            38,831
                                                     ---------         ---------
                                                     $ 295,647         $ 286,047
                                                     =========         =========
    LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities
  Short-term borrowings .....................        $   1,388         $   2,666
  Current portion of long-term obligations ..              750               750
  Accounts payable and accrued expenses .....           45,119            48,059
  Deferred revenue ..........................            4,601             5,660
  Taxes on income ...........................               83             2,748
                                                     ---------         ---------
                  Total current liabilities .           51,941            59,883

Long-term obligations .......................           76,654            65,143

Shareholders' equity
  Common stock and additional paid-in capital          100,490           100,803
  Treasury shares at cost ...................          (40,397)          (41,239)
  Accumulated other comprehensive loss ......           (4,857)           (3,556)
  Retained earnings .........................          111,816           105,013
                                                     ---------         ---------
  Total shareholders' equity ................          167,052           161,021
                                                     ---------         ---------
                                                     $ 295,647         $ 286,047
                                                     =========         =========
  Common shares outstanding .................            9,454             9,425
                                                     =========         =========
</TABLE>

     See accompanying notes to condensed consolidated financial statements.



                                      (3)
<PAGE>   4

                             SPACELABS MEDICAL, INC.

                 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                       Three Months Ended                    Nine Months Ended
                                                    ---------------------------------------------------------------
                                                     Oct. 2,          Sept. 26,          Oct. 2,          Sept. 26,
(in thousands, except per share data)                 1999               1998             1999               1998
-------------------------------------------------------------------------------------------------------------------
                                                                               (unaudited)
<S>                                                 <C>               <C>               <C>               <C>
Revenue ....................................        $  75,032         $  67,477         $ 219,186         $ 199,998

Cost of Sales ..............................           39,454            34,658           113,298           112,966
                                                    ---------         ---------         ---------         ---------

Gross margin ...............................           35,578            32,819           105,888            87,032
                                                    ---------         ---------         ---------         ---------

Operating expenses
    Selling, general and administrative ....           23,097            22,213            69,132            66,958
    Research and development ...............            7,359             7,203            22,193            23,497
    Restructuring of operations ............               --                --                --             3,559
                                                    ---------         ---------         ---------         ---------
                                                       30,456            29,416            91,325            94,014
                                                    ---------         ---------         ---------         ---------

Income (loss) from operations ..............            5,122             3,403            14,563            (6,982)

Other income (expense)
    Interest income ........................              100               124               299               384
    Interest expense .......................           (1,229)           (1,191)           (3,645)           (3,469)
    Other income (expense), net ............             (215)              369              (709)           10,942
                                                    ---------         ---------         ---------         ---------

Income before income taxes .................            3,778             2,705            10,508               875

Provision for income taxes .................            1,321             1,013             3,705               344
                                                    ---------         ---------         ---------         ---------

Net income .................................        $   2,457         $   1,692         $   6,803         $     531
                                                    =========         =========         =========         =========

Basic net income per share .................        $    0.26         $    0.18         $    0.72         $    0.06
                                                    =========         =========         =========         =========

Diluted net income per share ...............        $    0.26         $    0.18         $    0.72         $    0.06
                                                    =========         =========         =========         =========

Weighted average common shares outstanding -
    Basic ..................................            9,404             9,425             9,389             9,442
                                                    =========         =========         =========         =========
    Diluted ................................            9,451             9,498             9,472             9,522
                                                    =========         =========         =========         =========
</TABLE>


     See accompanying notes to condensed consolidated financial statements.




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<PAGE>   5

                             SPACELABS MEDICAL, INC.

                 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                                 Nine Months Ended
                                                                          -----------------------------
                                                                              Oct. 2,         Sept. 26,
(in thousands)                                                                 1999             1998
-------------------------------------------------------------------------------------------------------
                                                                                    (unaudited)
<S>                                                                          <C>              <C>
Operating activities
   Net income .......................................................        $  6,803         $    531
   Adjustments to reconcile net income to net cash
   used by operating activities
      Depreciation and amortization .................................           7,468            7,149
      Loss (gain) on sale of assets .................................              82          (13,109)
      Asset write downs .............................................              --            4,119
      Deferred income tax provision (benefit) .......................           1,360           (3,233)
      Contribution to ISSOP 401(k) plan in common stock .............             645              492
      Changes in operating assets and liabilities
         Increase in receivables ....................................          (6,110)          (2,093)
         Increase in inventories ....................................         (10,190)          (3,701)
         (Increase) decrease in prepaid expenses ....................             505             (222)
         Increase (decrease) in accounts payable and accrued expenses          (2,950)           4,622
         Increase (decrease) in deferred revenue ....................          (1,100)           1,008
         Increase (decrease) in taxes on income .....................            (501)             665
      Other .........................................................             (48)            (422)
                                                                             --------         --------
Net cash used by operating activities ...............................          (4,036)          (4,194)
                                                                             --------         --------

Investing activities
   Proceeds on sale of assets .......................................             106           13,135
   Investment in property, plant and equipment ......................          (4,485)          (4,818)
   Proceeds on maturity of short-term investments, net ..............              --            1,023
   Other ............................................................            (338)              --
                                                                             --------         --------
Net cash provided (used) by investing activities ....................          (4,717)           9,340
                                                                             --------         --------

Effect of exchange rate changes on cash .............................             185             (717)
                                                                             --------         --------

Financing activities
   Increase (decrease) in short-term borrowings .....................          (1,136)           2,176
   Borrowings against (principal payments on) long-term debt, net ...          11,608           (8,190)
   Purchase of treasury stock .......................................            (371)          (1,615)
   Exercise of stock options ........................................              11              142
                                                                             --------         --------
Net cash provided (used) by financing activities ....................          10,112           (7,487)
                                                                             --------         --------

Increase (decrease) in cash and cash equivalents ....................           1,544           (3,058)
Cash and cash equivalents at beginning of period ....................           1,467           11,911
                                                                             --------         --------

Cash and cash equivalents at end of period ..........................        $  3,011         $  8,853
                                                                             ========         ========
</TABLE>


     See accompanying notes to condensed consolidated financial statements.




                                      (5)
<PAGE>   6

                             SPACELABS MEDICAL, INC.

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


1.   Basis of Presentation

     The accompanying condensed consolidated financial statements include the
     accounts of Spacelabs Medical, Inc. and its subsidiaries, collectively
     referred to as the "Company." The unaudited interim condensed consolidated
     financial statements and related notes have been prepared pursuant to the
     rules and regulations of the Securities and Exchange Commission.
     Accordingly, certain information and footnote disclosures normally included
     in financial statements prepared in accordance with generally accepted
     accounting principles have been omitted pursuant to such rules and
     regulations. The accompanying condensed consolidated financial statements
     and related notes should be read in conjunction with the consolidated
     financial statements and notes thereto included in the Company's 1998
     Annual Report to Shareholders.

     The preparation of financial statements in conformity with generally
     accepted accounting principles requires management to make estimates and
     assumptions that affect the reported amounts of assets and liabilities and
     disclosure of contingent assets and liabilities at the date of the
     financial statements and the reported amounts of revenues and expenses
     during the reporting period. The information furnished reflects, in the
     opinion of management, all adjustments, consisting of normally recurring
     items, necessary for a fair presentation of the results for the interim
     periods presented. Interim results are not necessarily indicative of
     results for a full year.

2.   Inventories

<TABLE>
<CAPTION>
                                                   --------------------------
                                                   October 2,    December 31,
        (in thousands)                                1999           1998
        ------------------------------------       ----------    ------------
<S>                                                <C>           <C>
        Raw materials and components .......        $21,981        $18,067
        Work in process ....................          9,213         10,511
        Finished products ..................         21,705         18,468
        Demonstration equipment ............          6,243          5,502
        Customer service parts and equipment         16,123         13,364
                                                    -------        -------
                                                    $75,265        $65,912
                                                    =======        =======
</TABLE>

3.  Long-Term Obligations

     During the third quarter of 1999, the Company's long-term loan agreement
     with its primary lenders was amended to increase the revolving loan
     commitment from $35.0 million to $45.0 million.

4.   Gross Margin

     Gross margin for the nine month period ended September 26, 1998 includes a
     $1.2 million charge reflecting the expected cost of addressing year 2000
     compliance in products that were



                                      (6)
<PAGE>   7

     sold to customers during previous periods, $2.0 million in charges related
     to the write-off of intangible assets associated with obsolete product line
     technology and a $4.0 million charge related to the write-down of inventory
     to expected market value in accordance with the Company's accelerated
     introduction of certain monitoring products.

5.   Restructuring of Operations

     During the first and second quarters of 1998, the Company incurred $3.6
     million in restructuring charges associated with initiatives to improve the
     Company's cost structure.

6.   Other Income (Expense)

     During the first and second quarters of 1998, the Company realized gains
     totaling $13.1 million related to its equity investment in Physio Control
     International Corporation. Other income (expense) for the nine months ended
     September 26, 1998 also includes $2.1 million in charges related to
     write-downs on certain investments.

7.   Net Income per Share

     Basic net income per share is based on the weighted-average number of
     common shares outstanding for the period. Diluted net income per share
     includes the effect of dilutive potential common shares outstanding,
     consisting of stock options and unvested restricted shares, using the
     treasury stock method. Unvested restricted shares and unexercised,
     out-of-the-money stock options representing the potential rights to
     2,562,525 and 1,714,925 shares for the third quarter of 1999 and first nine
     months of 1999, respectively, are excluded as their effects would be
     antidilutive. For the third quarter and first nine months of 1998, the
     potential rights to 1,532,150 and 1,520,150 shares, respectively, are
     excluded as their effects would be antidilutive. The following schedule
     represents a reconciliation of the numerators and denominators of basic and
     diluted net income per share calculations on a quarter and year-to-date
     basis for 1999 and 1998.

<TABLE>
<CAPTION>
                                                                         Weighted
                                                                          Average
                                                         Income            Shares           Income
    (In thousands, except per share data)             (Numerator)       (Denominator)      Per Share
    ----------------------------------------          -----------       -------------      ---------
<S>                                                   <C>               <C>                <C>
    Three months ended October 2, 1999:
       Basic net income per share ..........            $ 2,457              9,404          $  0.26
                                                                                            =======
       Effect of dilutive stock options and
         unvested restricted stock .........                 --                 47
                                                        -------            -------
       Diluted net income per share ........            $ 2,457              9,451          $  0.26
                                                        =======            =======          =======

    Three months ended September 26, 1998:
       Basic net income per share ..........            $ 1,692              9,425          $  0.18
                                                                                            =======
       Effect of dilutive stock options and
         unvested restricted stock .........                 --                 73
                                                        -------            -------
       Diluted net income per share ........            $ 1,692              9,498          $  0.18
                                                        =======            =======          =======
</TABLE>


                                      (7)
<PAGE>   8

<TABLE>
<S>                                                   <C>               <C>                <C>
     Nine months ended October 2, 1999:
        Basic net income per share .........            $ 6,803              9,389          $  0.72
                                                                                            =======
        Effect of dilutive stock options and
          unvested restricted stock ........                 --                 83
                                                        -------            -------
        Diluted net income per share .......            $ 6,803              9,472          $  0.72
                                                        =======            =======          =======

     Nine months ended September 26, 1998:
        Basic net income per share .........            $   531              9,442          $  0.06
                                                                                            =======
        Effect of dilutive stock options and
           unvested restricted stock .......                 --                 80
                                                        -------            -------
        Diluted net income per share .......            $   531              9,522          $  0.06
                                                        =======            =======          =======
</TABLE>

8.   Business Segments

     In accordance with Statement of Financial Accounting Standards ("SFAS") No.
     131, "Disclosures about Segments of an Enterprise and Related Information,"
     the Company has identified three reportable business segments: US
     Monitoring Systems, US Cardiology Systems and International. Business
     segments were determined based upon management responsibility using a
     combination of product and geographic factors. Segment profit is measured
     as operating income exclusive of research and development, restructuring
     charges, and certain unallocated corporate general and administrative
     expenses. The Company has no inter-segment revenue.

     The following analysis provides a breakdown of revenue and profit of each
     reportable business segment for the three and nine month periods ended
     October 2, 1999 and September 26, 1998.

<TABLE>
<CAPTION>
                                                      Three Months Ended                   Nine Months Ended
                                                  ---------------------------         ---------------------------
                                                   Oct. 2,          Sept. 26,          Oct. 2,          Sept. 26,
     (in thousands)                                 1999              1998              1999               1998
     -------------------------------------        ---------         ---------         ---------         ---------
<S>                                               <C>               <C>               <C>               <C>
     Revenue:
        US Monitoring Systems ............        $  42,901         $  36,524         $ 123,704         $ 107,683
        US Cardiology Systems ............           10,936             9,042            31,396            29,473
        International ....................           21,195            21,911            64,086            62,842
                                                  ---------         ---------         ---------         ---------
        Total Revenue ....................        $  75,032         $  67,477         $ 219,186         $ 199,998
                                                  =========         =========         =========         =========


     Segment Profit:
        US Monitoring Systems ............        $  10,987         $   8,761         $  32,079         $  21,557
        US Cardiology Systems ............            1,174               769             2,600             2,657
        International ....................            1,407             2,233             5,742             6,784
                                                  ---------         ---------         ---------         ---------
        Total Segment Profit .............        $  13,568         $  11,763         $  40,421         $  30,998


     Reconciliation  of segment  profit to
      income before income taxes:
        Unallocated general and
        administrative expenses ..........        $  (1,087)        $  (1,157)        $  (3,665)        $  (3,756)
        Unallocated cost of sales ........               --                --                --            (7,168)(a)
        Research and development .........           (7,359)           (7,203)          (22,193)          (23,497)
        Restructuring costs ..............               --                --                --            (3,559)
        Other income (expense) ...........           (1,344)             (698)           (4,055)            7,857
                                                  ---------         ---------         ---------         ---------
        Income before income taxes .......        $   3,778         $   2,705         $  10,508         $     875
                                                  =========         =========         =========         =========
</TABLE>

----------

(a)  See Note 4.




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<PAGE>   9

9.   Comprehensive Income

     Comprehensive income, in general, refers to the total change in equity
     during a period except those changes that result from investments by owners
     and distributions to owners. Comprehensive income includes net income as
     well as an other comprehensive income component comprised of certain
     revenues, expenses, gains and losses that under generally accepted
     accounting principles are reflected in shareholders' equity but excluded
     from the determination of net income. The Company has segregated the total
     accumulated other comprehensive income (specifically, accumulated foreign
     currency translation adjustments and unrealized gains and losses on
     investments available-for-sale) from the other components of shareholders'
     equity in the accompanying Condensed Consolidated Balance Sheets.

     Comprehensive income (loss) for the three and nine month periods ended
     October 2, 1999 and September 26, 1998 are detailed below:


<TABLE>
<CAPTION>
                                                             Three Months Ended             Nine Months Ended
                                                           ----------------------        -----------------------
                                                           Oct. 2,        Sept. 26,      Oct. 2,        Sept. 26,
     (in thousands)                                          1999           1998          1999            1998
     ----------------------------------------------        -------        -------        -------         -------
<S>                                                        <C>            <C>            <C>             <C>
     Net income ...................................        $ 2,457        $ 1,692        $ 6,803         $   531
     Other comprehensive income (loss), net of tax:
        Foreign currency translation adjustments ..            152             63         (1,301)           (561)
        Reclassification adjustment for portion of
        net realized gain included in results of
        operations and previously reported in other
        comprehensive income ......................             --             --             --          (6,392)
                                                           -------        -------        -------         -------
     Comprehensive income (loss), net of tax ......        $ 2,609        $ 1,755        $ 5,502         $(6,422)
                                                           =======        =======        =======         =======
</TABLE>


10.  Supplemental Cash Flow Information

     The following provides additional information concerning cash flow
activities:

<TABLE>
<CAPTION>
                               Three Months Ended           Nine Months Ended
                              ----------------------      ----------------------
                              Oct. 2,      Sept. 26,      Oct. 2,      Sept. 26,
     (in thousands)            1999          1998          1999          1998
     -----------------        ------        ------        ------        ------
<S>                           <C>           <C>           <C>           <C>
     Interest paid ...        $1,219        $1,134        $4,139        $3,724
                              ======        ======        ======        ======
     Income taxes paid        $  178        $  199        $2,868        $2,773
                              ======        ======        ======        ======
</TABLE>



                                      (9)
<PAGE>   10

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


                              RESULTS OF OPERATIONS

<TABLE>
<CAPTION>
                                            Three months ended                    Nine months ended
                                     ----------------------------------  ----------------------------------
(dollars in  millions,                 Oct.     Sept.   Dollar  Percent   Oct.     Sept.    Dollar  Percent
except per share data)               2, 1999  26, 1998  Change  Change   2, 1999  26, 1998  Change  Change
-----------------------------------------------------------------------------------------------------------
<S>                                  <C>      <C>       <C>     <C>      <C>      <C>       <C>     <C>
Revenue............................   $75.0    $67.5    $7.5    11.2%    $219.2   $200.0    $19.2     9.6%

Gross margin ......................    35.6     32.8     2.8     8.4%     105.9     87.0     18.9    21.7%
  As a % of revenue ...............    47.4%    48.6%                      48.3%    43.5%

Operating expenses:
   Selling, general and
     administrative ...............    23.1     22.2     0.9     4.0%      69.1     67.0      2.1     3.2%
     As a % of revenue ............    30.8%    32.9%                      31.5%    33.5%

   Research and development .......     7.4      7.2     0.2     2.2%      22.2     23.5     (1.3)   (5.5%)
     As a % of revenue ............     9.8%    10.7%                      10.1%    11.7%

   Restructuring of operations ....       -        -       -       -          -      3.6     (3.6) (100.0%)

Provision for income taxes ........     1.3      1.0     0.3    30.4%       3.7      0.3      3.4   977.0%
  Effective tax rate ..............    35.0%    37.4%                      35.3%    39.3%

Net income ........................    $2.5     $1.7    $0.8     45.2      $6.8     $0.5     $6.3  1181.2%

 Basic and diluted net income per
   share...........................   $0.26    $0.18   $0.08    44.4%     $0.72    $0.06    $0.66  1100.0%
-----------------------------------------------------------------------------------------------------------
</TABLE>


Revenue

Worldwide revenue for the third quarter of 1999 was $75.0 million, an increase
of 11.2% when compared to the third quarter of 1998.

Third quarter 1999 US revenue increased 18.2% to $53.8 million from $45.6
million in the same quarter of 1998. Current quarter US Monitoring Systems
revenue increased 17.5% to $42.9 million from $36.5 million during the same
quarter of the prior year. The increase in US Monitoring Systems revenue
reflects continued customer interest in the Ultraview Care Network products
introduced in 1998. Third quarter 1999 US Cardiology Systems revenue increased
20.9% to $10.9 million from $9.0 million in 1998 due to growth in the new
hospital distribution channel as well as in the core physician office market.
While management is encouraged by the current year results, the US market
continues to be extremely competitive as a result of changes in the US
healthcare delivery system. At this time, management sees no identifiable factor
in the environment that would definitively signal an end to this condition.

In the third quarter of 1999, International revenue, including export sales,
decreased 3.3%, to $21.2 million, from $21.9 million in the same quarter of
1998. For the 1999 quarter, International revenue comprised 28.2% of total
revenue as compared to 32.5% of total revenue in the third quarter of 1998. The
decline in revenue is attributable, in part, to continued economic instability
in Latin



                                      (10)
<PAGE>   11

America and Asia.

On a year-to-date basis, worldwide revenue was $219.2 million, an increase of
9.6% when compared to the same period a year ago.

Total US revenue for the first nine months of 1999 increased 13.1% to $155.1
million as compared to $137.2 million during the same period of 1998. US
Monitoring Systems revenue increased 14.9% to $123.7 million in 1999 versus
$107.7 million during the first nine months of 1998. US Cardiology Systems
revenue increased 6.5% to $31.4 million for the first nine months of 1999 versus
$29.5 million in the same period in 1998.

International revenue for the first nine months increased 2.0% to $64.1 million,
or 29.2% of current year revenue, as compared to $62.8 million, or 31.4% of
total revenue during the first nine months of 1998.

The Company's ability to produce consistent future revenue growth is, to a
certain extent, dependent on its backlog of currently shippable orders. Backlog
is subject to seasonal variations and there is no guarantee that the Company
will have sufficient backlog in any given quarter to meet its revenue
objectives. In addition, international revenue is subject to a higher degree of
uncertainty from quarter to quarter than is US revenue due to the need for
foreign government approvals, more complex financing arrangements, greater
variability in the financial stability of the customers and instability of
currencies in parts of the world.


Gross Margin

Gross margin was 47.4% of revenue in the third quarter of 1999 as compared to
48.6% during the same quarter a year ago. The decline in gross margin is
primarily due to the adverse impact of competitive pressures on pricing. Other
factors that contributed to the decrease include expenditures on year 2000
compliance programs, mix variations in distribution channels and the
strengthening of the US dollar against certain foreign currencies. The Company
believes that pressure on gross margin from aggressive worldwide competitive
pricing will continue in the foreseeable future.

Gross margin for the first nine months of 1999 was 48.3% of revenue compared to
43.5% during the same period a year ago. The increase in year-to-date gross
margin resulted from various factors including, continued customer interest in
the higher-margin Ultraview Care Network line introduced during 1998, the
realization of cost savings as a result of restructuring initiatives introduced
during 1998 and the effect of increased revenue on the fixed components of the
Company's cost of sales. Additionally, prior year margins were negatively
impacted by certain unusual charges including a $4.0 million write-down of
inventory as a result of the accelerated introduction of certain monitoring
products, $1.2 million in charges related to the expected cost of addressing
year 2000 compliance in products sold to customers during previous periods and a
$2.0 million charge related to the write-off of intangible assets associated
with obsolete product line technology. Excluding these charges, the Company's
gross margin for the first nine months of 1998 would have been 47.1%.


Operating Expenses

During the third quarter of 1999, selling, general and administrative expenses
increased $0.9 million



                                      (11)
<PAGE>   12

to $23.1 million from $22.2 million in the third quarter of 1998, primarily due
to an increase in variable selling expenses associated with higher worldwide
revenue. Selling, general and administrative expenses as a percentage of revenue
decreased to 30.8% in the third quarter of 1999 as compared to 32.9% in the
third quarter of 1998, reflecting the favorable impact of higher revenue
relative to the fixed cost components of these activities. On a year-to-date
basis, selling, general and administrative expenses increased $2.1 million to
$69.1 million from $67.0 million during the first nine months of 1998. Selling
general and administrative expenses represented 31.5% of current year revenue as
compared to 33.5% for the same period a year ago. The year-to-date variances
were caused by the same factors that drove the third quarter variances.

Research and development expenses increased $0.2 million to $7.4 million in the
third quarter of 1999 from $7.2 million during the same quarter of the prior
year. On a year-to-date basis, research and development expenses decreased $1.3
million to $22.2 million, or 10.1% of revenue, as compared to $23.5 million, or
11.7% of revenue, during the first nine months of 1998. During the first nine
months of 1999, the Company continued to invest in the development of its
anesthesia delivery system and other future products and programs including the
Company's new hypertension-focused internet website, Lifeclinic.com. These
expenditures were offset by cost reduction efforts initiated during the first
half of 1998 and a continued focus on cost containment. The Company has not
capitalized software development costs in its existing product line, however,
the development of certain newer products may require such treatment.

During the first nine months of 1998, the Company incurred approximately $3.6
million in charges associated with various restructuring programs in order to
improve the Company's cost structure. The charges represent the cost of employee
severance benefits and related expenses, office closure and moving costs
associated with closing two research offices and three sales offices and related
asset impairment charges.


Segment Profit

The Company measures segment profit as operating income before research and
development, restructuring charges, and certain unallocated corporate general
and administrative expenses. During the third quarter of 1999, segment profit
for the Company's US Monitoring Systems business increased 25.4% to $11.0
million from $8.8 million during the third quarter of 1998. On a year-to-date
basis, US Monitoring Systems segment profit increased 48.8% to $32.1 million
during the first nine months of 1999 as compared to $21.6 million during the
first nine months of the prior year. The growth in the Company's segment profit
on both a quarter and year-to-date basis, despite continued competitive pricing
pressures, was primarily attributable to increased revenue, the realization of
cost savings related to new generation products and cost reduction initiatives.

US Cardiology Systems segment profit of $1.2 million for the third quarter of
1999 was 52.7% higher than third quarter 1998 profit of $0.8 million, primarily
as the result of increased revenue in the 1999 period. On a year-to-date basis,
US Cardiology Systems segment profit was $2.6 million as compared to $2.7
million during the first nine months of 1998.

During the third quarter of 1999, segment profit for the Company's International
business unit decreased to $1.4 million from $2.2 million for the third quarter
of 1998. Year-to-date 1999 International segment profit totaled $5.7 million
versus $6.8 million during the same period in 1998. This decline in third
quarter and year-to-date segment profitability was primarily due to competitive
pricing pressures in certain overseas markets and the strength of the US dollar
relative to other



                                      (12)
<PAGE>   13

currencies.


Other Income (Expense)

Interest expense for the third quarter of 1999 was approximately $1.2 million, a
3.2% increase from the same period of 1998. On a year-to-date basis, interest
expense totaled approximately $3.6 million during 1999 as compared to $3.5
million during the first nine months of the prior year. The increase was due to
higher average borrowing levels during the 1999 period. Interest income was
approximately $100,000 for the third quarter of 1999 compared to $124,000 during
the third quarter of 1998. On a year-to-date basis, interest income totaled
approximately $299,000 in 1999 versus approximately $384,000 in 1998.

The Company recognized a $2,000 loss from foreign currency exchange rate
fluctuations in the third quarter of 1999 as compared to a $462,000 gain during
the same quarter a year ago. On a year-to-date basis, the Company experienced an
exchange loss totaling $353,000 during 1999 versus a gain of $336,000 due to
exchange rate fluctuations in 1998. The exchange losses reflect the impact of
the strengthening US dollar against the currencies of the Company's foreign
operations.

During the first nine months of 1998, the Company recognized a gain of $13.1
million on the sale of its investment in Physio Control International
Corporation ("Physio") common stock and incurred $2.1 million in charges
primarily related to the write-down of certain investments.


Taxes and Net Income

The effective tax rate for the third quarter of 1999 was 35.0% versus 37.4% in
the same period a year ago. On a year-to-date basis, the effective tax rate for
1999 was 35.3% as compared to 39.3% during 1998. The decline in the effective
tax rates, both on a quarterly and year-to-date basis, reflect the Company's
efforts to minimize its tax burden by implementing various tax strategies.
Management expects the benefits of these tax strategies, several of which are
one-time in nature, to be less favorable after 1999.

As a result of the above, the Company reported net income of $2.5 million, or
$0.26 per share, during the third quarter of 1999 as compared to net income of
$1.7 million, or $0.18 per share, during the third quarter of 1998. During the
first nine months of 1999, the Company reported net income of $6.8 million, or
$0.72 per share, as compared to net income of $0.5 million, or $0.06 per share,
during the first nine months of the prior year.








                                      (13)
<PAGE>   14

                          CAPITAL RESOURCES & LIQUIDITY

<TABLE>
<CAPTION>
                                                        Oct. 2,     December 31,   Dollar    Percent
(dollars in millions)                                     1999          1998       Change     Change
----------------------------------------------------------------------------------------------------
<S>                                                     <C>         <C>            <C>       <C>
Cash and cash equivalents.......................        $  3.0        $  1.5       $ 1.5      105.2%

Working capital.................................         143.1         120.6        22.5       18.6%

Long-term obligations...........................          76.7          65.1        11.5       17.7%

Shareholders' equity............................         167.1         161.0         6.0        3.7%
----------------------------------------------------------------------------------------------------
</TABLE>



Capital Resources and Liquidity


As of October 2, 1999, cash and cash equivalents totaled $3.0 million compared
to $1.5 million on December 31, 1998. The increase in cash is attributable to
the receipt of customer payments near the end of the quarter that, due to the
timing of their receipt, were not used to reduce the Company's outstanding
long-term debt.

Working capital increased by $22.5 million during the first nine months of 1999
to $143.1 million as compared to $120.6 million as of December 31, 1998. The
increase in working capital was primarily due to increases in receivables and
inventories. The increase in accounts receivables resulted from the timing of
shipments within the quarter. Inventories were increased to support Year 2000
customer update activity, product line expansion, the anticipated introduction
of a new anesthesia delivery system and the Company's continued transition to a
newer generation product line.

During the first nine months of 1999, the Company used $4.0 million in operating
activities as compared to $4.2 million during the same period a year ago. Net
income after adjustment for certain non-cash charges represented the main source
of operating cash during the nine-month period ended October 2, 1999. The
Company's primary use of operating cash during the first three quarters of 1999
related to the increases in receivables and inventories as discussed above.

The Company used $4.7 million in cash in investing activities during the first
nine months of 1999 as compared to generating $9.3 million in cash from
investing activities during the same period in 1998. On a year-to-date basis,
capital expenditures totaled $4.5 million during the current year versus $4.8
million during the first nine months of 1998. Management expects capital
expenditures for the fourth quarter of 1999 to continue at approximately the
same levels as the first three quarters of the year. Prior year cash provided by
investing activities included $13.1 million in proceeds on the sale of the
Company's investment in Physio common stock.

During the first nine months of 1999, the Company generated approximately $10.1
million in cash through financing activities as compared to using $7.5 million
in financing activities during the same period a year ago. Net borrowings under
the Company's long-term debt totaled $11.6 million during the current year.
Significant financing uses of cash during the current year included repayments
of approximately $1.1 million of short-term borrowings and $0.4 million in
Company stock repurchases.



                                      (14)
<PAGE>   15

As of October 2, 1999, approximately 848,600 shares remain authorized for
repurchase under the share repurchase programs approved by the Company's Board
of Directors in 1995 and 1997. Shares acquired under the repurchase programs are
being used to service the Company's various employee benefit plans and may be
used for other purposes the Company deems appropriate. The primary financing use
of cash during the first nine months of 1998 related to the net repayment of
approximately $8.2 million in long-term debt.


Future Cash Flow and Liquidity

During the third quarter of 1999, the Company's long-term loan agreement with
its primary lenders was amended to increase the revolving loan commitment from
$35.0 million to $45.0 million. As a result, the total amount available under
the facility increased from $65.0 million to $75.0 million.

As of October 2, 1999, the Company had approximately $12.8 million available for
future borrowings under its $75.0 million long-term credit facility; a US
unsecured bank line of credit totaling $5.0 million for issuances of letters of
credit, banker's acceptances and performance bonds; and approximately $5.0
million available under several small international credit lines used to meet
the operating requirements of its international subsidiaries.

Given the nature of the current worldwide economic environment, the Company is
subject to a certain degree of liquidity risk with respect to the collectability
of customer accounts and the cash flow impact of unfavorable changes in foreign
exchange rates. However, management believes that existing cash and cash flow
from operations, together with available credit facilities, will continue to be
sufficient to meet ongoing operating requirements as well as the Company's
investment in capital additions and research and development activities for the
foreseeable future. In connection with research and development, cash may be
used from time to time to acquire technology or to fund strategic ventures.

The Year 2000 Issue

The "Year 2000 Issue" refers to various problems that may result from the
improper processing of dates and date-sensitive calculations by computers and
other machinery as we enter the year 2000. These problems generally arise from
the fact that many computer programs and embedded microchips in equipment use
only two-digits to identify the year in a date. This may result in a computer or
information system component failing to distinguish or properly characterize
dates after 1999. This could cause system failures or miscalculations leading to
disruptions including, but not limited to, the operations of the Company, data
and financial information management, the receipt of goods from the Company's
suppliers and the provision of goods and services to the Company's customers.

State of Readiness

The Company has implemented a comprehensive program in an effort to properly
address Year 2000 issues with its internal systems, its products and with its
third party suppliers and service providers. Components of this program include:
(1) an inventory of material computer systems and embedded technologies produced
or used by the Company; (2) assessment of Year 2000 compliance with material
information technology ("IT") and non-IT systems; (3) repair or replacement of
items that are determined not to be Year 2000 compliant; (4) test for material
Year 2000 compliance; and (5) design, where necessary, of appropriate
contingency plans.




                                      (15)
<PAGE>   16

Internal systems: During 1998, the Company completed the inventory and
assessment phase of the program with respect to its material internal computer
systems and embedded technologies. This assessment revealed non-compliance with
respect to several significant systems, which have been repaired or replaced. In
July 1999, the Company completed the replacement of accounting and business
software used by the Company's international subsidiaries with compliant
financial software. This software will also assist the Company in accounting for
Euro-currency transactions. The Company also completed the replacement of its
primary service call tracking software with a new compliant system in July 1999.
The Company's primary business and manufacturing software (Maxcim) required
minor Year 2000 modifications, which were completed in 1998. The Company's
Spacelabs Burdick operation completed the process of upgrading to compliant
versions of its business, manufacturing and service call tracking software in
1998. In addition, the Company has completed the upgrade of certain of its
mainframe and network operating systems to Year 2000 compliant versions. The
Company continues to repair or replace certain other non-critical software
applications, which are not fully Year 2000 compliant.

Products: The Company has completed the inventory and assessment phases with
respect to products shipped since January 1, 1985 that contain software or
embedded microchips. Each of the Company's products have been assigned to one of
three categories as defined by the Company: "Year 2000 Compliant," "Year 2000
Compliant - software upgrade required," and "Not Year 2000 Compliant." The
Company maintains a list of these products and their current status on its web
site, which is periodically updated as new information becomes available or as
corrections to previous status updates become known. In addition, registered
customers receive periodic customer service bulletins which provide information
on assessing Year 2000 compliance of the Company's products and obtaining and
installing fixes where necessary. As of October 2, 1999, the Company was
approximately 99% complete with the development and testing of software upgrades
for its products that will be made Year 2000 compliant. Certain software
upgrades to correct Year 2000 issues are provided free of charge to the
Company's customers. Installation services are provided free for certain
products and for customers with current maintenance agreements. Some older
products will not be made Year 2000 Compliant and those products have been and
are being identified by the Company. In the second quarter of 1998, the Company
accrued approximately $1.2 million related to the costs of replacing
non-compliant embedded microchips with compliant microchips in certain older
monitors covered under service agreements. The Company began delivering these
updates in the fourth quarter of 1998 and expects to be substantially complete
with this program by the end of 1999.

Suppliers and service providers: The Company's Year 2000 program includes
contacting the Company's significant suppliers who provide both IT assets and
non-IT related goods and services. The Company has initiated this program to (1)
evaluate such suppliers' or service providers' Year 2000 compliance plans and
state of readiness and (2) determine the extent to which the Company is
vulnerable to those third parties' failure to remediate their Year 2000
compliance issues. During the fourth quarter of 1998 and the first part of 1999,
the Company expanded this program to include a broader analysis of suppliers and
service providers throughout all areas of the corporation. To date, the Company
has obtained information on Year 2000 compliance from all of its critical
suppliers and has obtained written certifications or acceptable responses from
all such suppliers of their Year 2000 compliance.

Costs to Address the Year 2000 Issue

The total cost to the Company of achieving Year 2000 compliance is currently
expected to range



                                      (16)
<PAGE>   17

between $6.0 and $7.0 million. The total includes, but is not limited to: (1)
the cost of identifying, assessing and repairing or replacing internal IT and
non-IT systems, including capitalizable costs of approximately $2.6 million
associated with implementation of the Company's new international business and
accounting software and new service call tracking software, which projects were
accelerated in order to be available as Year 2000 solutions; (2) the cost of
developing and testing software and hardware fixes for non-compliant products;
(3) customer satisfaction costs associated with communication, delivery and
installation of product fixes; (4) costs associated with evaluating the Year
2000 compliance status of suppliers and service providers; and (5) the cost of
developing contingency plans. Included in the total costs of $6.0 to $7.0
million is $1.2 million relating to the Year 2000 upgrade of products previously
sold to customers, which was accrued for in the second quarter of 1998.
Expenditures from the inception of the project through October 2, 1999, totaled
approximately $5.4 million.

Risks and Contingency Plans

The Company is continuing its assessment of the risks associated with the Year
2000 issue and its program to address such issues is ongoing. The Company's
determination is not complete and there are no assurances that it will be
completed in a timely manner or, if it is completed, that it will be completely
accurate. Based on the results of this evaluation to date, the Company has
developed preliminary contingency plans for its critical systems and processes.
These contingency plans include selection of backup suppliers, increases in
inventory levels of certain key components, expanded customer support in early
January 2000 and the replacement of IT systems with manual systems. Such
contingency plans will continue to be developed and refined throughout the
remainder of 1999. There are no assurances that such plans will be adequate or
completed in a timely manner. If the Company is unable to remediate its Year
2000 issues in a timely manner, the Company's manufacturing operations may be
unable to build and deliver products due to internal system failures, and
vendors may be unable to deliver services, raw materials, and components. The
failure to remediate material systems, suppliers, or products may have a
material adverse effect on the operations of the Company. Additionally, the
Company and many other businesses have potential unquantifiable exposure arising
from third-party systems outside of the general operational control of the
Company, which may be effected by Year 2000 issues. These include, but are not
limited to, such systems as the national and worldwide banking information
systems, transportation, governmental systems and utilities. It may not be
possible to develop adequate or any risk assessment and contingency plans for
such widespread systems failures. Finally, this Year 2000 disclosure contains
estimates and forward-looking statements. Those estimates and statements are
subject to inherent uncertainty and there is no guaranty that they are accurate.


The Euro Conversion

Effective January 1, 1999, the authority to direct monetary policy for certain
participating countries in the European Union came under the control of the new
European Central Bank. During a transition period between January 1, 1999 and
January 1, 2002, private parties may pay for goods and services using either the
Euro or the participating country's legacy currency on a "no compulsion, no
prohibition" basis. Beginning January 1, 2002, the participating countries will
only use new Euro-denominated bills and coins.

The Euro conversion may create technical challenges to adapt information
technology and other systems to accommodate Euro-denominated transactions. The
participating countries' adoption of a single currency may result in greater
transparency of pricing for the Company's products, making Europe a more
competitive environment. Currently, the effects of the Euro conversion on the



                                      (17)
<PAGE>   18

operations of the Company are uncertain. The Company has initiated but not yet
completed an analysis to facilitate the development of a plan for the
conversion. While management currently believes that it will complete an
adequate analysis, plan and implement the plan in a timely manner, and avoid any
material adverse effect, there is the possibility that this may not occur.



Forward Looking Information

Statements that are not based on historical facts are forward-looking statements
subject to uncertainties and risks, including, but not limited to, product and
service demand and acceptance, adverse economic conditions, adverse exchange
rate fluctuations and political risks, the impact of competition on pricing,
capacity and supply constraints or difficulties, the failure to achieve product
development objectives, reliance on single-source vendors for important
component products, and other risks detailed in this document and other of the
Company's Securities and Exchange Commission filings.





                                      (18)
<PAGE>   19

Item 3.  Quantitative and Qualitative Disclosures About Market Risk

Foreign Currency

Substantially all of the revenue and operating expenses of the Company's foreign
subsidiaries are denominated in local currencies and translated into US dollars
at rates of exchange approximating those existing at the date of the
transactions. Foreign currency translation impacts primarily revenue and
operating expenses as a result of foreign exchange rate fluctuations. Because
the Company's inventories are manufactured in the United States, foreign
currency fluctuations generally do not affect its cost of goods sold. The
Company's foreign currency transaction risk is primarily limited to current
amounts receivable from its foreign subsidiaries, which are denominated in local
currencies (approximately $10.4 million at October 2, 1999). To minimize foreign
currency transaction risk, the Company ensures that its foreign subsidiaries
remit amounts to the US parent in a timely manner. Foreign country short-term
borrowing facilities are utilized where necessary to ensure prompt payments. The
Company does not currently utilize foreign currency hedging contracts.

Interest Rates

The Company's earnings are affected by changes in short-term interest rates as a
result of its short and long term borrowings. To limit the potential effects of
interest rate changes, the Company has entered into interest rate swap
agreements to convert a portion of its variable interest rate debt into fixed
rates. The Company does not enter into derivative or interest rate transactions
for speculative purposes. At October 2, 1999, the Company's variable rate
long-term debt totaled $74.3 million and variable rate short-term borrowings
totaled $1.4 million. The Company has interest rate swap agreements with a
notional amount aggregating $42.4 million, effectively converting $12.4 million
and $30.0 million of its variable rate long-term debt to fixed rates of 6.66%
and 7.07%, respectively.




                                      (19)
<PAGE>   20

PART II.


Item 6.  Exhibits and Reports on Form 8-K

     (a) Exhibits:

<TABLE>
<CAPTION>
            Number        Description
            ------        -----------
<S>                       <C>
            10.41         Fourth Amendment to Amended and Restated Loan Agreement
                          dated August 27, 1999.

             27.1         Financial Data Schedule
</TABLE>



     (b) Reports on Form 8-K:

         There were no reports on Form 8-K filed during the three months ended
         October 2, 1999.





                                      (20)
<PAGE>   21

                                    SIGNATURE


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.


                                      SPACELABS MEDICAL, INC.
                                           (Registrant)





DATE:  November 15, 1999       BY:        /s/ CARL A. LOMBARDI
                                   ----------------------------------------
                                              Carl A. Lombardi
                                         Chairman of the Board and
                                          Chief Executive Officer




                               BY:        /s/ JAMES A. RICHMAN
                                   ----------------------------------------
                                              James A. Richman
                                             Vice President and
                                            Corporate Controller



                                      (21)
<PAGE>   22

                             SPACELABS MEDICAL, INC.

                                  EXHIBIT INDEX


Exhibits:

<TABLE>
<CAPTION>
   Number           Description
   ------           -----------
<S>                 <C>
   10.41            Fourth Amendment to Amended and Restated Loan Agreement
                    dated August 27, 1999.

    27.1            Financial Data Schedule
</TABLE>


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