TRANSITION AGREEMENT AND RELEASE

Exhibit 10.26

T RANSITION A GREEMENT AND R ELEASE DATED J ANUARY 30, 2004

B ETWEEN R EGISTRANT AND T IM . C. J OHNSON

TRANSITION AGREEMENT AND RELEASE

RECITALS

This Transition Agreement and Release (“Agreement”) is made by and between Tim C. Johnson (“Executive”) and Natus Medical Inc. (“Company”) (collectively referred to as the “Parties”):

WHEREAS, Executive is an employee and officer and director of the Company;

WHEREAS, the Company and Executive entered into an Employment Agreement dated November 18, 2002 (“Employment Agreement”), a Confidential Information and Invention Assignment Agreement (the “Confidentiality Agreement”), and an Indemnity Agreement dated August 16, 2000 (“Indemnity Agreement”);

WHEREAS, the Company and Executive have entered into stock option agreements, listed on the attached Exhibit E, granting Executive the option to purchase 378,889 shares of the Company’s common stock subject to the terms and conditions of the Company’s 1991 and 2000 Stock Option Plans and the Stock Option Agreements (the “Stock Agreements”);

WHEREAS, the Company and Executive have entered into a Security Agreement dated March 26, 1999 (“Security Agreement”), pursuant to which Executive has obtained a $250,000.00 line of credit evidenced by a promissory note (“Note”), and, as security for the Note, the Company, has pledged as collateral a certificate of deposit for $310,000.000, and further pursuant to the Security Agreement, Executive has pledged 26,688 shares of Company’s Common Stock (“Pledged Shares”) as security for the repayment of the Note, and the Pledged Shares are held in escrow by the Secretary of the Company;

WHEREAS, the Parties, and each of them, wish to resolve any and all disputes, claims, complaints, grievances, charges, actions, petitions and demands that the Executive may have against the Company as defined herein, including, but not limited to, any and all claims arising or in any way related to Executive’s employment with, or separation from, the Company;

WHEREAS, the Parties wish to set forth the terms of the orderly transition of Executive’s employment duties;

WHEREAS, the Company and the Executive have mutually agreed that Executive’s employment with the Company shall be terminated upon the terms and conditions set forth herein;

NOW THEREFORE, in consideration of the promises made herein, the Parties hereby agree as follows:

COVENANTS

1.    Transition.

(a).     Transition Position .    Executive agrees to remain with the Company in his current position until his replacement is hired and begins work (the “Termination Date”). During this transition period, Executive shall continue to perform those duties and responsibilities normally associated with his position as President, CEO, and COO, and shall continue to serve as a member of the board of directors of the Company. Executive understands and agrees that he shall relinquish all rights under the Severance Agreement (as defined herein) if, prior to the Termination Date, he is terminated for Cause or leaves the employment of the Company without Good Reason as defined in the Employment Agreement.

2.     Salary and Benefits .    For services performed under section 1 of this Agreement, the Company will continue to pay Executive as compensation his base salary at an annualized rate of $330,000 in accordance with the Company’s normal payroll practices, and the Executive shall also receive health and insurance benefits and be allowed to

participate in all employee benefit plans as provided by the Company to its employees. Accrued and unpaid PTO shall be paid on the Termination Date. All outstanding expenses will be reimbursed by the Company on the Termination Date. Executive will be allowed the use of a Company office of adequate size and space for thirty days after the Termination Date to facilitate the transition. Executive shall be reimbursed by the Company for reasonable travel expenses incurred from April 1, 2004 until the Termination Date for travel between Minneapolis and the Company’s headquarters Consideration . In consideration for the execution by Executive of a general release on the Termination Date, the form of which is attached hereto as Exhibit A (the “Severance Agreement and Release”), the Company agrees to pay Executive severance and other consideration as per Exhibit A. If, after appropriate notification by the Company, Executive does not execute the Severance Agreement and Release by his Termination Date, his employment with the Company will immediately terminate, and he will be paid out all accrued but unused PTO on that date and shall be entitled to no further severance.

3.     Repayment of Note .    On or before its due date, March 26, 2004, Executive shall fully pay off, including all interest owing thereon, the Note, being loan number 94-310166. The parties acknowledge and agree that, by no later than March 26, 2004, pursuant to the Security Agreement, Executive shall make an additional pledge of shares of the Company’s stock in the number that together with the Pledged Shares equals (at the previous day’s closing market price) at least the value of the Note (including principal and interest), and the Company shall purchase such stock including the Pledged Stock from Executive at the previous day’s closing market price.

4.     Confidential Information .    Executive shall continue to comply with the terms and conditions of the Confidentiality Agreement between Executive and the Company. Except as stipulated in Exhibit A, Executive shall return all of the Company’s property and confidential and proprietary information in his possession to the Company on the Termination Date

5.     Confidentiality .    The Parties acknowledge that Executive’s agreement to keep the terms and conditions of this Agreement confidential was a material factor on which all parties relied in entering into this Agreement. Executive hereto agrees to use his best efforts to maintain in confidence: (i) the existence of this Agreement, (ii) the contents and terms of this Agreement, (iii) the consideration for this Agreement, and (iv) any allegations of wrongdoing relating to the Company or its officers or employees with respect to Executive’s employment with the Company, except as otherwise provided for in this Agreement (hereinafter collectively referred to as “Settlement Information”). Executive agrees to take every reasonable precaution to prevent disclosure of any Settlement Information to third parties, and agrees that he will not cause publicity, directly or indirectly, concerning any Settlement Information. Executive agrees to take every precaution to disclose Settlement Information only to those attorneys, accountants, governmental entities, and family members who have a reasonable need to know of such Settlement Information. Notwithstanding the foregoing, Executive may disclose with no liability any Settlement Information requested of him by Company management, or that otherwise must be disclosed as part of normal Company operations. The Parties agree that if Company proves that Executive breached this Confidentiality provision, it shall be entitled to an award of its costs spent enforcing this provision, including all reasonable attorneys’ fees associated with the enforcement action, without regard to whether the Company can establish actual damages from the breach by Executive.

6.     Release of Claims .    Executive agrees that the foregoing consideration represents settlement in full of all outstanding obligations owed to Executive by the Company and its officers, managers, supervisors, agents and employees. Executive, on his own behalf, and on behalf of his respective heirs, family members, executors, agents, and assigns, hereby fully and forever releases the Company and its officers, directors, employees, agents, investors, shareholders, administrators, affiliates, divisions, subsidiaries, predecessor and successor corporations, and assigns, from, and agree not to sue concerning, any claim, duty, obligation or cause of action relating to any matters of any kind, whether presently known or unknown, suspected or unsuspected, that Executive may possess arising from any omissions, acts or facts that have occurred up until and including the Effective Date of this Agreement including, without limitation:

(a).    any and all claims under the law of any jurisdiction including, but not limited to, wrongful discharge of employment; constructive discharge from employment; termination in violation of public policy; discrimination; breach of contract, both express and implied; breach of a covenant of good faith and fair dealing, both express and implied; promissory estoppel; negligent or intentional infliction of emotional distress; negligent or intentional misrepresentation; negligent or intentional interference with contract or prospective economic advantage; unfair business practices; defamation; libel; slander; negligence; personal injury; assault; battery; invasion of privacy; false imprisonment; and conversion;

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(b).    any and all claims for violation of any federal, state or municipal statute, including, but not limited to, Title VII of the Civil Rights Act of 1964, the Civil Rights Act of 1991, the Age Discrimination in Employment Act of 1967, the Americans with Disabilities Act of 1990, the Fair Labor Standards Act, the Employee Retirement Income Security Act of 1974, The Worker Adjustment and Retraining Notification Act, Older Workers Benefit Protection Act; the California Fair Employment and Housing Act, and the California Labor Code.;

(c).    any and all claims for violation of the federal, or any state, constitution;

(d).    any and all claims arising out of any other laws and regulations relating to employment or employment discrimination;

(e).    any claim for any loss, cost, damage, or expense arising out of any dispute over the non-withholding or other tax treatment of any of the proceeds received by Executive as a result of this Agreement; and

(f).    any and all claims for attorneys’ fees and costs.

The Company, on behalf of itself, its officers, managers, supervisors, agents, and employees, hereby fully and forever releases Executive and assigns, from, and agrees not to sue concerning, any claim, duty, obligation or cause of action relating to any matters of any kind, whether presently known or unknown, suspected or unsuspected, that Company may possess arising from any omissions, acts or facts that have occurred up until and including the Effective Date of this Agreement.

The Company and Executive agree that the release set forth in this section shall be and remain in effect in all respects as a complete general release as to the matters released. This release does not extend to any obligations incurred under this Agreement. This release does not extend to any obligations of Employee or the Company under the Employment Agreement, the Security Agreement, the Confidentiality Agreement, the Indemnity Agreement, or the Stock Agreements.

Executive acknowledges and agrees that any material breach of any provision of this Agreement shall constitute a material breach of this Agreement and shall entitle the Company to cease the severance benefits provided to Executive under this Agreement, if such breach has not been cured within seven (7) days of written notice received by Executive.

7.     Non-Disparagement .    Executive agrees to refrain from any defamation, libel or slander of the Company or tortious interference with the contracts of the Company. Company agrees to refrain from any defamation, libel or slander of Executive or tortious interference with the future business of Executive. Upon Executive’s execution of this Agreement, the Company shall promptly issue Exhibit B as a publicly available press release, and Executive shall use Exhibit C as the basis for an internal announcement to Company employees. Further, when responding to future inquiries from potential employers concerning Executive, Company shall impart to such employers substantially the same facts as set forth on Exhibit D.

8.     Costs .    Subject to Paragraph 17 “Attorneys’ Fees”, The Parties shall each bear their own costs, expert fees, attorneys’ fees and other fees incurred in connection with this Agreement.

9.     Arbitration .    The Parties agree that any and all disputes arising out of the terms of this Agreement, their interpretation, and any of the matters herein released, shall be subject to binding arbitration in San Mateo County before the American Arbitration Association under its National Rules for the Resolution of Employment Disputes. The Parties agree that the prevailing party in any arbitration shall be entitled to injunctive relief in any court of competent jurisdiction to enforce the arbitration award or to obtain provisional relief in aid of arbitration. The Parties agree that the prevailing party in any arbitration shall be awarded its reasonable attorneys’ fees and costs. The Parties hereby agree to waive their right to have any dispute between them resolved in a court of law by a judge or jury.

10.     Authority .    The Company represents and warrants that the undersigned has the authority to act on behalf of the Company and to bind the Company and all who may claim through it to the terms and conditions of this

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Agreement. Executive represents and warrants that he has the capacity to act on his own behalf and on behalf of all who might claim through him to bind them to the terms and conditions of this Agreement. Each party warrants and represents that there are no liens or claims of lien or assignments in law or equity or otherwise of or against any of the claims or causes of action released herein.

11.     No Representations .    Each party represents that it has had the opportunity to consult with an attorney, and has carefully read and understands the scope and effect of the provisions of this Agreement. Neither party has relied upon any representations or statements made by the other party hereto which are not specifically set forth in this Agreement.

12.     Severability .    In the event that any provision hereof becomes or is declared by a court of competent jurisdiction to be illegal, unenforceable or void, this Agreement shall continue in full force and effect without said provision so long as the remaining provisions remain intelligible and continue to reflect the original intent of the Parties.

13.     Entire Agreement .    This Agreement (including Exhibits A-E) represents the entire agreement and understanding between the Company and Executive concerning the subject matter of this Agreement and Executive’s relationship with the Company, and supersedes and replaces any and all prior agreements and understandings between the Parties concerning the subject matter of this Agreement and Executive’s relationship with the Company, with the exception of the Employment Agreement, the Indemnity Agreement, the Confidentiality Agreement, the Security Agreement and the Stock Agreements.

14.     No Waiver .    The failure of any party to insist upon the performance of any of the terms and conditions in this Agreement, or the failure to prosecute any breach of any of the terms and conditions of this Agreement, shall not be construed thereafter as a waiver of any such terms or conditions. This entire Agreement shall remain in full force and effect as if no such forbearance or failure of performance had occurred.

15.     No Oral Modification .    Any modification or amendment of this Agreement, or additional obligation assumed by either party in connection with this Agreement, shall be effective only if placed in writing and signed by both Parties or by authorized representatives of each party.

16.     Governing Law .    This Agreement shall be deemed to have been executed and delivered within the State of California, and it shall be construed, interpreted, governed, and enforced in accordance with the laws of the State of California, without regard to choice of law principles.

17.     Attorneys’ Fees .    In the event that either Party brings an action to enforce or effect its rights under this Agreement, the prevailing party shall be entitled to recover its costs and expenses, including the costs of mediation, arbitration, litigation, court fees, plus reasonable attorneys’ fees, incurred in connection with such an action.

18.     Effective Date .    This Agreement is effective after it has been signed by both parties and after eight (8) days have passed since Executive has signed the Agreement (the “Effective Date”), unless revoked by Executive within seven (7) days after the date the Agreement was signed by Executive.

19.     Counterparts .    This Agreement may be executed in counterparts, and each counterpart shall have the same force and effect as an original and shall constitute an effective, binding agreement on the part of each of the undersigned.

20.     Voluntary Execution of Agreement .    This Agreement is executed voluntarily and without any duress or undue influence on the part or behalf of the Parties hereto, with the full intent of releasing all claims. The Parties acknowledge that:

(a).    They have read this Agreement;

(b).    They have been represented in the preparation, negotiation, and execution of this Agreement by legal counsel of their own choice or that they have voluntarily declined to seek such counsel;

(c).    They understand the terms and consequences of this Agreement and of the releases it contains; and

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(d). They are fully aware of the legal and binding effect of this Agreement.

IN WITNESS WHEREOF, the Parties have executed this Agreement on the respective dates set forth below.

Exhibit A: Severance Agreement and Release

Exhibit B: Press Release

Exhibit C: Internal announcement

Exhibit D: Response to future employer requests

Exhibit E: List of Stock Options

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EXHIBIT A

SEVERANCE AND NONCOMPETITION AGREEMENT AND RELEASE

This Supplemental Severance and Noncompetition Agreement and Release (“Supplemental Agreement”) is made by and between Tim C. Johnson (“Executive”) and Natus Medical Inc. (“Company”) (collectively referred to as the “Parties”):

1.     Transition Agreement .    Company and Executive agree that the terms of the Transition Agreement and Release dated January 30, 2004 (the “Transition Agreement”) shall remain in full force and effect and that it is fully incorporated herein except to the extent it is inconsistent with this Severance Agreement and Release.

2.     Consideration .    In consideration for the execution by the Executive of this Severance and Noncompetition Agreement and Release, the Company agrees to pay or provide the Executive the following:

(a).     Monetary Payments .    Executive shall be entitled to receive continuing payments (less applicable wi