Exhibit 10.3

THE SECURITIES REPRESENTED BY THIS NOTE HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, NOR ANY COMMON WEALTH, FOREIGN OR STATE
SECURITIES LAWS AND MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED, HYPOTHECATED, OR
OTHERWISE TRANSFERRED UNLESS A REGISTRATION STATEMENT UNDER SUCH ACT AND OTHER
APPLICABLE SECURITIES LAWS WITH RESPECT TO SUCH SECURITIES IS THEN IN EFFECT OR
SUCH REGISTRATION IS NOT REQUIRED.

Notwithstanding anything herein to the contrary, this Note, and all of the
Maker’s obligations hereunder, and all of each Payee’s rights and remedies
hereunder, shall be subordinate, subject and junior to all Senior Indebtedness
(as defined in Section 7 hereof) on the terms and conditions set forth in
Schedule A hereto, which Schedule A is incorporated herein by reference and made
a part hereof as if set forth herein in its entirety.

NON-NEGOTIABLE SUBORDINATED PROMISSORY NOTE

 

One Million Seventy-Two Thousand Two Hundred Forty-Four   Wixom, Michigan
($1,072,243) Dollars   July 3, 2006

FOR VALUE RECEIVED, the undersigned (the “Maker”) promises to pay to the order
of Michael C. Azar (the “Payees’ Representative”), but solely as escrow agent
for, on behalf of and for further distribution to, each of the parties listed on
Schedule B attached hereto and made a part hereof (each, a “Payee” and
collectively, the “Payees”), the aggregate principal sum of One Million
Seventy-Two Thousand Two Hundred Forty-Four and No/100 ($1,072,244) Dollars,
together with interest thereon from the date hereof, at the Prime Rate, through
the first to occur of (i) the Maturity Date (as defined below) or (ii) the
prepayment in full of the entire principal amount hereof pursuant to Section 4
of this Note. Interest on this Note shall be computed on the basis of a 360-day
year for the actual number of days elapsed and shall be payable on the first
Business Day of each calendar quarter commencing on September 1, 2006 (each, an
“Interest Payment Date”) on the unpaid principal amount of the Note.

For purposes of this Note, “Business Day” shall mean any day other than a
Saturday, Sunday or a legal holiday under the laws of the State of Michigan. For
PURPOSES OF CALCULATING THE INTEREST PAYABLE ON THIS NOTE, “PRIME RATE” SHALL
MEAN the rate of interest announced by Comerica Bank at its offices in Detroit,
Michigan, as its prime or base rate on the last Business Day immediately
preceding the applicable Interest Payment Date. A certificate made by an officer
of Comerica Bank stating the Prime Rate in effect on any given day, for the
purposes hereof, shall be conclusive evidence of the Prime Rate in effect on
such day.

This Non-Negotiable Subordinated Promissory Note (this “Note”) is issued subject
to the following additional terms and conditions:

1. Type of Payment. Payment of both principal and interest shall be made in
currency of the United States of America which at the time of payment shall be
legal tender for the payment of public and private debts.

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2. Manner of Payment. All payments required by this Note shall be made by
delivery of the required payment to the Payees’ Representative at 33 Bloomfield
Hills Parkway, Suite 240, Bloomfield Hills, Michigan 48304, or to such account
or other address as the Payees’ Representative shall designate in a written
notice to the Maker at least 10 days prior to the payment date.

3. Maturity Date. This Note shall mature and the principal sum hereof, together
with all accrued and unpaid interest thereon, shall become due and payable upon
the first to occur of:

(a) July 2, 2009;

(b) the date that the Maker receives cash proceeds of at least $25,000,000
pursuant to a sale of its common stock (or any security convertible into or
exchangeable for its common stock ) in a transaction that is either registered
or exempt from registration under the Securities Act of 1933, as amended; or

(c) the date that a “Change of Control” of the Maker occurs (where “Change of
Control” means: (i) the acquisition (other than from the Maker) by any person or
entity (other than a Payee or any of Payees’ respective affiliates, individually
or as part of a group), in any one transaction or a series of related
transactions, of beneficial ownership (within the meaning of Rule 13d-3
promulgated under the Securities Exchange Act of 1934, as amended) of in excess
of fifty percent (50%) of the combined voting power of the Maker’s then
outstanding voting securities; or (ii) consummation by the Maker, in any one
transaction or a series of related transactions, of (a) a merger or
consolidation involving the Maker if the shareholders of the Maker, immediately
before such merger or consolidation, do not, as a result of such merger or
consolidation, own, directly or indirectly, more than fifty percent (50%) of the
combined voting power of the then outstanding voting securities of the entity
resulting from such merger or consolidation; (b) a complete liquidation or
dissolution of the Maker; or (c) an agreement for the sale or other disposition
of all or substantially all of the assets of the Maker, determined on a
consolidated basis.

4. Optional Prepayment. Anything herein to the contrary notwithstanding, the
Maker may prepay this Note, in whole or in part, at any time and from time to
time, without premium or penalty. Any partial prepayment shall be applied first
against any accrued interest hereunder and then against the principal balance
remaining due hereunder.

5. Default Rate of Interest. In the event that this Note is accelerated
following the occurrence of an Event of Default (as defined in Section 6 below),
and whether or not a judgment has been entered, interest shall accrue on all
sums outstanding hereunder at the Prime Rate plus three percent (3%) per annum
until all sums due hereunder, including without limitation, any costs of
collection provided in Section 6, principal and accrued interest and/or amounts
under any judgment rendered pursuant to this Note are paid.

6. Events of Default. The occurrence of any of the following events shall
constitute an “Event of Default” under this Note:

(a) Failure to pay when due any payment of principal or interest under this Note
within five (5) days of the date such payment is due (calculated by including
the due date); or

(b) A bankruptcy occurs with respect to the Maker while this Note is still
outstanding. “Bankruptcy” shall mean (i) the adjudication of the Maker as
bankrupt or insolvent, (ii)

 

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the institution by or against the Maker of a petition for arrangement or of any
other type of insolvency proceeding under the United States Bankruptcy Code, as
amended (but, with respect to an involuntary proceeding, only if such proceeding
is not discharged within 60 days), (iii) the making by the Maker of a general
assignment for the benefit of creditors, (iv) the appointment of a liquidator,
administrator, receiver or trustee in bankruptcy of the Maker or the Maker’s
assets or (v) the taking, making or institution of any like or similar act or
proceeding involving the Maker.

Upon the occurrence of an Event of Default, all amounts due under this Note,
including the unpaid balance of principal and interest hereof, shall become
immediately due and payable at the option of the Payees’ Representative (but
automatically with respect to an Event of Default described in clause (b) of the
definition thereof), and Payee may exercise any of Payee’s rights and remedies
granted herein, under applicable law or which Payee may otherwise have against
Maker.

The Maker agrees to pay all costs of collection, including attorney’s reasonable
fees and expenses, in case the principal of this Note or any payment of any
interest thereon is not paid at the due date thereof, whether suit be brought or
not.

7. Subordination. This Note is and shall be subordinate, to the extent and in
the manner set forth in Schedule A, in right of payment to the prior payment in
full of all obligations of the Maker under the Senior Indebtedness. “Senior
Indebtedness” means the principal and interest in respect of agreements or
instruments evidencing, any indebtedness of the Maker for borrowed money,
whether now existing or hereafter arising, which is not made expressly
subordinate in right of payment to the indebtedness evidenced by this Note.

8. Payees’ Representative. The Payees’ Representative shall collect, receive and
disburse all amounts paid to it under this Note not as a “Payee” (except to the
extent that the Payees’ Representative is also one of the Payees listed on
Schedule B), but as escrow agent on behalf of the Payees. The Maker shall have
no obligation or responsibility to see to the application of such funds by the
Payees’ Representative, nor any liability for any failure by the Payees’
Representative to disburse all or any portion of such funds to the Payees as and
when required. The Maker shall be entitled to rely upon any notice, instrument
or other writing delivered to it by the Payees’ Representative pursuant to this
Note, without being required to determine the authenticity of, or the
correctness of any fact stated in, that document. The Maker may act in reliance
upon any instrument or signature of the Payees’ Representative believed by it to
be genuine. It is expressly understood and agreed that no Payee shall be
entitled to make any demand, issue any instructions, give any notice, waive any
term of, or exercise any rights under this Note and that all such rights, powers
and privileges (to the extent available under this Note) are exclusively vested
in the Payees’ Representative.

9. Purchase Agreement; Right of Set-Off. This Note is being issued pursuant to
Section 2.2 of that certain Purchase Agreement, dated as of the date hereof,
among the Maker, Quantum Value Management, LLC, a Delaware limited liability
company, and the members of Quantum Value Management, LLC (the “Purchase
Agreement”). The obligations of the Maker under this Note are subject to a right
of set-off in favor of the Maker as provided in Section 9.7 of the Purchase
Agreement.

10. Assignment. This Note shall be non-negotiable and non-transferable. Without
limiting the generality of the foregoing, the Payee shall have no right to
assign, pledge, hypothecate or otherwise transfer this Note or any of its rights
or interests hereunder without the prior written

 

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consent of the Maker, which consent may be granted or denied in the Maker’s sole
discretion. Notwithstanding the foregoing, the Payee may assign its rights
hereunder to a successor Payee Representative on behalf of the Payee, provided
that such successor Payee Representative is reasonable satisfactory to the
Maker.

11. Miscellaneous.

(a) This Note shall be binding upon the Maker and its successors and assigns.

(b) If any provision hereof shall be held invalid or unenforceable by any court
of competent jurisdiction or as a result of future legislative action, such
holding or action shall be strictly construed and shall not affect the validity
or effect of any other provision hereof.

(c) The validity, interpretation and effect of this Note shall be exclusively
governed by, and construed in accordance with, the laws of the State of
Michigan, excluding the “conflict of laws” rules thereof.

(d) This Note may not be amended or modified, nor shall any waiver of any
provision hereof be effective, except by an instrument in writing executed by
the Maker and the Payees’ Representative.

(e) By acceptance of this Note, each Payee irrevocably and unconditionally
(a) agrees that any suit, action or other legal proceeding arising out of or
relating to this Agreement shall be brought in the circuit court located in
Oakland County, Michigan or the court of the United States, Eastern District of
Michigan; (b) consents to the jurisdiction of each such court located in any
such suit, action or proceeding; (c) waives any objection which it may have to
the laying of venue of any such suit, action or proceeding in any of such
courts; and (d) agrees that service of any court paper may be affected on such
party by mail, as provided in this Agreement or in such other manner as may be
provided under applicable laws or court rules in said state.

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Veri-Tek International, Corp. By:  

/s/ Donald F. Brown

Name:   Donald F. Brown Title:   President and Chief Operating Officer

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SCHEDULE A

Section 1.01. Subordination of Liabilities. Veri-Tek International, Corp. (the
“Maker”), for itself, its successors and assigns, covenants and agrees, and each
holder of the Note and the Payees’ Representative by its acceptance thereof
likewise covenants and agrees, that the payment of the principal of, interest
on, and all other amounts owing in respect of, the Note (the “Subordinated
Indebtedness”) is hereby expressly subordinated, to the extent and in the manner
set forth below, to the prior payment in full in cash of all Senior Indebtedness
(as defined in Section 7 of the Note to which this Schedule A is attached). The
provisions of this Schedule A shall constitute a continuing offer to all persons
or other entities who, in reliance upon such provisions, become holders of, or
continue to hold, Senior Indebtedness, and such holders are made obligees
hereunder the same as if their names were written herein as such, and they
and/or each of them may proceed to enforce such provisions.

Section 1.02. Maker Not to Make Payments with Respect to Subordinated
Indebtedness in Certain Circumstances. (a) Upon the maturity of any Senior
Indebtedness (including interest thereon or fees or any other amounts owing in
respect thereof), whether at stated maturity, by acceleration or otherwise, all
obligations owing in respect of the Senior Indebtedness shall first be paid in
full in cash in accordance with the terms thereof, before any payment of any
kind or character, whether in cash, property, securities or otherwise, is made
on account of the Subordinated Indebtedness.

(b) The Maker may not, directly or indirectly (and no person or other entity on
behalf of the Maker may), make any payment of any Subordinated Indebtedness and
may not acquire any Subordinated Indebtedness for cash or property until all
Senior Indebtedness has been paid in full in cash if any default or event of
default under any issue of Senior Indebtedness is then in existence or would
result therefrom. Each holder of the Note and the Payees’ Representative hereby
agree that, so long as any such default or event of default in respect of any
issue of Senior Indebtedness exists, it will not sue for, or otherwise take any
action to enforce the Maker’s obligations to pay, amounts owing in respect of
the Note. Each holder of the Note and the Payees’ Representative understand and
agree that to the extent that clause (a) of this Section 1.02 or this clause
(b) prohibits the payment of any Subordinated Indebtedness, such unpaid amount
shall not constitute a payment default under the Note and the holder of the Note
may not sue for, or otherwise take action to enforce the Maker’s obligation to
pay such amount, provided that such unpaid amount shall remain an obligation of
the Maker to the holder of the Note pursuant to the terms of the Note.

Section 1.03. Subordination to Prior Payment of All Senior Indebtedness on
Dissolution, Liquidation or Reorganization of Maker. Upon any distribution of
assets of the Maker upon dissolution, winding up, liquidation or reorganization
of the Maker (whether in bankruptcy, insolvency or receivership proceedings or
upon an assignment for the benefit of creditors or otherwise):

(a) the holders of all Senior Indebtedness shall first be entitled to receive
payment in full in cash of all Senior Indebtedness in accordance with the terms
thereof (including, without limitation, post-petition interest at the rate
provided in the documentation with respect to the Senior Indebtedness, whether
or not such post-petition interest is an allowed claim against the debtor in any
bankruptcy or similar proceeding) before the holder of the Note is entitled to
receive any payment of any kind or character on account of the Subordinated
Indebtedness; and

(b) any payment or distributions of assets of the Maker of any kind or
character, whether in cash, property or securities to which the holder of the
Note would be entitled except for the provisions of

 

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this Schedule A, shall be paid by the liquidating trustee or agent or other
person making such payment or distribution, whether a trustee in bankruptcy, a
receiver or liquidating trustee or other trustee or agent, directly to the
holders of Senior Indebtedness or their representative or representatives, or to
the trustee or trustees under any indenture under which any instruments
evidencing any such Senior Indebtedness may have been issued as their respective
interests may appear (including by giving effect to any intercreditor or
subordination arrangements among such holders), to the extent necessary to make
payment in full in cash of all Senior Indebtedness remaining unpaid, after
giving effect to any concurrent payment or distribution to the holders of such
Senior Indebtedness.

If the holder of the Note does not file a proper claim or proof of debt in the
form required in any proceeding or other action referred to in the introduction
paragraph of this Section 1.03 prior to 30 days before the expiration of the
time to file such claim or claims, then any of the holders of the Senior
Indebtedness or their representative is hereby authorized to file an appropriate
claim for and on behalf of the holder of the Note.

Section 1.04. Subrogation. Subject to the prior payment in full in cash of all
Senior Indebtedness in accordance with the terms thereof, the holder of the Note
shall be subrogated to the rights of the holders of Senior Indebtedness to
receive payments or distributions of assets of the Maker applicable to the
Senior Indebtedness until all amounts owing on the Note shall be paid in full,
and for the purpose of such subrogation no payments or distributions to the
holders of the Senior Indebtedness by or on behalf of the Maker or by or on
behalf of the holder of the Note by virtue of this Schedule A which otherwise
would have been made to the holder of the Note shall, as between the Maker, its
creditors other than the holders of Senior Indebtedness, and the holder of the
Note, be deemed to be payment by the Maker to or on account of the Senior
Indebtedness, it being understood that the provisions of this Schedule A are and
are intended solely for the purpose of defining the relative rights of the
holder of the Note, on the one hand, and the holders of the Senior Indebtedness,
on the other hand.

Section 1.05. Obligation of the Maker Unconditional. Nothing contained in this
Schedule A or in the Note is intended to or shall impair, as between the Maker
and the holder of the Note, the obligation of the Maker, which is absolute and
unconditional, to pay to the holder of the Note the principal of and interest on
the Note as and when the same shall become due and payable in accordance with
their terms, or is intended to or shall affect the relative rights of the holder
of the Note and creditors of the Maker other than the holders of the Senior
Indebtedness, nor shall anything herein or therein prevent the holder of the
Note from exercising all remedies otherwise permitted by applicable law upon an
event of default under the Note, subject to the provisions of this Schedule A
and the rights, if any, under this Schedule A of the holders of Senior
Indebtedness in respect of cash, property, or securities of the Maker received
upon the exercise of any such remedy. Upon any distribution of assets of the
Maker referred to in this Schedule A, the holder of the Note shall be entitled
to rely upon any order or decree made by any court of competent jurisdiction in
which such dissolution, winding up, liquidation or reorganization proceedings
are pending, or a certificate of the liquidating trustee or agent or other
person making any distribution to the holder of the Note, for the purpose of
ascertaining the persons entitled to participate in such distribution, the
holders of the Senior Indebtedness and other indebtedness of the Maker, the
amount thereof or payable thereon, the amount or amounts paid or distributed
thereon and all other facts pertinent thereto or to this Schedule A.

 

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Section 1.06. Subordination Rights Not Impaired by Acts or Omissions of Maker or
Holders of Senior Indebtedness. No right of any present or future holders of any
Senior Indebtedness to enforce subordination as herein provided shall at any
time in any way be prejudiced or impaired by any act or failure to act on the
part of the Maker or by any act or failure to act by any such holder, or by any
noncompliance by the Maker with the terms and provisions of the Note, regardless
of any knowledge thereof which any such holder may have or be otherwise charged
with. The holders of the Senior Indebtedness may, without in any way affecting
the obligations of the holder of the Note with respect hereto, at any time or
from time to time and in their absolute discretion, change the manner, place or
terms of payment of, change or extend the time of payment of, or renew, increase
or otherwise alter, any Senior Indebtedness or amend, modify or supplement any
agreement or instrument governing or evidencing such Senior Indebtedness or any
other document referred to therein, or exercise or refrain from exercising any
other of their rights under the Senior Indebtedness including, without
limitation, the waiver of default thereunder and the release of any collateral
securing such Senior Indebtedness, all without notice to or assent from the
holder of the Note.

Section 1.07 Miscellaneous. If, at any time, all or part of any payment with
respect to Senior Indebtedness theretofore made by the Maker or any other person
is rescinded or must otherwise be returned by the holders of Senior Indebtedness
for any reason whatsoever (including, without limitation, the insolvency,
bankruptcy or reorganization of the Maker or such other Persons), the
subordination provisions set forth herein shall continue to be effective or be
reinstated, as the case may be, all as though such payment had not been made.

 

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SCHEDULE B

 

PAYEE

   ALLOCABLE PORTION
OF PRINCIPAL  

Lubomir Litchev

   5.00 %

Robert J. Skandalaris

   36.86  

David J. Langevin

   36.86  

Michael C. Azar

   18.43  

Patrick T. Flynn

   1.90  

Michael D. Hull

   0.95  

 

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