Document:

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                                                                    Exhibit 10.8
                                                                    ------------

                          EMC MODULE SUPPLY AGREEMENT

THIS EMC MODULE SUPPLY AGREEMENT (the "Agreement") is made effective as of the -
__ day of May, 1999 (the "Effective Date") by and between Nortel Networks Inc.
("Nortel"), a Delaware corporation, having a place of business at 5555 Windward
                                                                  -------------
Parkway, Alpharetta, Georgia, 30201-3895, and Avici Systems Inc., a Delaware
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corporation, having a place of business at 101 Billerica Avenue, North
Billerica, MA 01862 (hereinafter "Avici").

                             W I T N E S S E T H:

WHEREAS, Avici desires to have Nortel manufacture and assemble certain Products
(as hereinafter defined) for use in Avici's Terabit Router (as described in the
Technology License Agreement (as hereinafter defined)) pursuant to one or more
Purchase Orders (as hereinafter defined) issued by Avici in accordance with this
Agreement.

WHEREAS, Nortel desires to manufacture and assemble such Products for Avici
hereunder;

NOW, THEREFORE, Avici and Nortel, in consideration of the mutual premises
contained herein and for other good an valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, agree as follows:

                            SECTION 1: DEFINITIONS

Capitalized terms used in this Agreement and not otherwise defined herein shall
have the meanings set forth below:

     "Activity Description" shall mean Activity Description No. 98-017, EMC
     Module and Shelf Design Adaptation, entered into by the parties hereto,
     dated September 28, 1998, an addendum to the Assistance Agreement.
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     "Affiliate" of Nortel shall mean, Nortel Networks Corporation, any entity
     of which Nortel directly or indirectly owns or controls at least 50% of the
     voting securities, and any entity of which Nortel Networks Corporation
     directly or indirectly either owns or controls at least 50% of the voting
     securities.

     "Assistance Agreement" shall mean the Nortel-Avici Assistance Agreement
     entered into by the parties hereto, dated as of January 28, 1998.

     "Days" shall mean calendar days, unless otherwise specified, provided that
     if a deadline falls on a Saturday, Sunday, or holiday, it shall be extended
     until the following regular business day.

     "Delivery" shall mean Nortel's delivery of Products, FOB Nortel's North
     American manufacturing facility, distribution center or approved supplier.

     "Delivery Date" shall mean the date of Delivery of Products.

     "Escrow Materials" shall mean the design documentation for tooling
     necessary to manufacture the OC-192 and XE-Core Components of the Products
     described in Schedule C.001000 6, Section 3.2 and 3.3.

     "Events of Release" shall mean the events listed in Section 16.2.

     "Price" shall mean the amount payable for Products or Services, exclusive
     of any commissions, bonds, levees, insurance, taxes, delivery charges and
     other similar amounts.  All Prices and other amounts in this Agreement
     shall be construed to be in U.S. dollars ($U.S.).

     "Products" shall mean any one of:  (1) circuit pack EMC enclosure piece
     part sets: (II) EMC enclosure shelf assemblies (two (2) types); (III)
     backplace EMC gasket hardware kits; and (IV) assembly of the faceplate
     portion of circuit pack EMC enclosure piece part
<PAGE>

     sets, to be delivered as a kit of parts, as such products are more fully
     described in the Activity Description, to be manufactured by Nortel
     pursuant to this Agreement. Delivery quantities will be defined by means of
     Purchase Orders issued under this Agreement.

     "Purchase Order" shall mean an order to purchase a specific quantity of a
     Product submitted by Avici and accepted by Nortel in accordance with this
     Agreement, which refers to the type and volume and timing of Products to be
     manufactured and purchased; price terms; schedule Delivery Dates (unless
     submitted on open Delivery terms); and "sold to," and "ship to" addresses.
     The terms of this Agreement take precedence over any preprinted terms on a
     Purchase Order acknowledgement, confirmation, or invoice and any
     inconsistent terms in a Purchase Order unless expressly accepted by Nortel.

     "Services" shall mean the repair services described in Section 12.

     "Schedule C.00100 6" shall mean Schedule C.00100 6 entered into by the
     parties hereto, dated as of September 30, 1998, a schedule to the
     Technology License and Agreement.

     "Specifications" shall mean the description of the Products, performance
     and test requirements, and in-process and final test criteria, attached
     hereto as Schedule A.  Upon completion of the activity described in the
     Activity Description the parties shall amend the Specifications to conform
     to the results of such activity, to take effect as of the next
     manufacturing cycle of the Product after the date of such amendment.  Any
     changes to the Specifications must be in writing and signed by authorized
     representatives of the parties hereto.

     "Technology License and Agreement" shall mean the Technology License and
     Agreement entered into by the parties hereto, dated as of January 29, 1998.

                           SECTION 2: SCOPE OF WORK

2.1  Scope
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Nortel and Avici acknowledge and agree that this Agreement is an "EMC Supply
Agreement" as defined in Schedule C.00100 6, Section 6, Grant B.  Nortel agrees
to perform for Avici the tasks and Services described hereafter, with respect to
the Products described in this Agreement and according to the terms and
conditions set forth herein, as modified from time to time by mutual agreement,
in writing, signed by both parties, under the specific supervision of the
technical coordinator by Avici.

2.2  Manufacturing of Products

     Nortel shall manufacture and shall coordinate with such of its Affiliates
     or subcontractors as necessary, and Avici shall order the manufacture of,
     Products by Nortel, in accordance with the terms and conditions of this
     Agreement.  Nortel shall deliver to Avici's specified location only that
     quantity of Products specified in Avici's Purchase Orders at the Prices set
     forth herein.  All applicable transportation and insurance costs incurred
     by Nortel in connection with the Delivery of the Products to Avici shall be
     for the account of Avici.

2.3  Manufacturing Scheduling

     Nortel shall coordinate the manufacturing scheduling and pre-process
     material planning with regard to the Products to be manufactured with all
     necessary Affiliates and subcontractors and shall manage the overall
     production plan and Deliveries thereunder in accordance with the Product
     forecasts provided by Avici in accordance with Section 4.3 and the Delivery
     Dates set forth in the Purchase Orders in accordance with Section 4.1.

2.4  Quality Assurance

     Nortel shall build and inspect the Products in accordance with the
     Specifications.  Inspection data will be maintained by Nortel for at least
     two (2) years from the date of such inspection and will be available for
     inspection by Avici during normal business hours upon reasonable notice.

2.5  Repairs

     Nortel shall manage the Product repair process in accordance with Section
     12 of this Agreement.
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2.6  Tooling

     Avici grants to Nortel a license to use or have used, and Avici shall
     deliver to Nortel, the Specific EMC Tooling (as defined in Schedule C.00100
     6, Section 3.3(b)) without charge, to manufacture Products.

                     SECTION 3: PRICING AND PAYMENT TERMS

3.1  Pricing of Products and Services

     Prices for each Product and Service to be paid by Avici for Services
     performed and Product(s) delivered under this Agreement are as follows:

     (i)    Schedule B contains a Price schedule for Products for the initial
            term of this Agreement. Ninety (90) Days prior to the close of the
            first term, at Avici's option in accordance with Section 15, the
            parties shall enter into good faith negotiation with the intent to
            reach agreement on second term pricing in accordance with Schedule
            C.00100 6, Section 6, Grant B, paragraph (d).

     (ii)   Subject to any non-renewal notice provided pursuant to section 15.1,
            thereafter, for each subsequent term, ninety (90) Days prior to the
            close of the previous term, the parties shall enter into good faith
            negotiations for subsequent-term pricing.

     (iii)  Such price negotiation opportunities shall not apply to the
            intellectual property rights buy-out prices set out in Schedule
            C.00100 6.

     (iv)   Subsequent term pricing changes, if any, shall not be effective
            until set out in writing, signed by both parties, and attached to
            this Agreement as an amendment to Schedule B.

3.2  Payment

     Payment terms are as follows:

            (i)  Net forty-five (45) Days from the date of Nortel's Invoice to
                 Avici;

            (ii) Intentionally deleted;
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            (iii)  Avici shall pay Nortel in accordance with the above payment
                   terms the full amount due under each invoice, less amounts
                   for shortages and/or non-conforming Products or Services;

            (iv)   If Avici fails to pay any amount when due, Avici shall pay a
                   late payment charge equal to one percent (1%) per month
                   (twelve (12%) per annum) or the maximum rate permitted by
                   applicable law, whichever is lesser, calculated daily from
                   the due date, on such unpaid amounts, together with all costs
                   and expenses, including reasonable attorney's fees, incurred
                   by Nortel in collecting such overdue amounts;

            (v)    If Avici disputes any invoice rendered, Avici shall so notify
                   Nortel and the parties will use their best efforts to resolve
                   such dispute expeditiously. Provided that Avici so notifies
                   Nortel of a disputed invoice and there is a good-faith basis
                   for such dispute, the time for paying the portion of the
                   invoice in dispute shall be extended by a period of time
                   equal to the time between Nortel's receipt of such notice
                   from Avici and fifteen (15) Days after resolution of such
                   dispute. Avici shall pay for nondisputed items in accordance
                   with the terms of this Agreement.

            (vi)   All payments hereunder shall be made in U.S. dollars ($U.S.).

3.3  Invoicing

     Nortel may invoice for Products upon Delivery of such Products or
     completion of Services, as applicable, pursuant to Purchase Orders.
     Invoices shall be dated no earlier than the Delivery Date for such Products
     and shall identify and show separately quantities of Products, unit prices,
     total amount for each item, applicable sales or use taxes, discounts where
     applicable, estimated shipping charges, if applicable, and total amount
     due.

3.4  Taxes

     Avici shall be responsible for sales, use, or custom taxes or duties
     resulting from the manufacture and sale or Delivery of Products in
     accordance with the Purchase Orders.  Avici shall provide tax exemption
     numbers, if applicable, for such purchases.
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                          SECTION 4: PURCHASE ORDERS

4.1  Purchase Orders

     Subject to its buy-out rights as set out in Schedule C.00100 6, Avici will
     provide to Nortel Purchase Order(s) on a quarterly basis for the following
     quarter, no later than forty-five (45) Days prior to the commencement of
     Delivery for such quarter, unless otherwise agreed by the parties, in
     accordance with the forecast to be provided by Avici to Nortel in
     accordance with Section 4.3.  During the initial 18-month term of the
     Agreement, and notwithstanding Section 5, Avici shall purchase no less than
     1,000 circuit pack EMC enclosure piece part sets.

          4.1.1  In the event the Agreement is extended for a second 18-month
                 term, Avici shall, during such second term, notwithstanding
                 Section 5, purchase no less than 1,000 circuit pack EMC
                 enclosure piece part sets.

          4.1.2  In the event of a conflict between the terms and conditions of
                 a Purchase Order and terms and conditions of this Agreement,
                 this Agreement shall govern unless otherwise mutually agreed.

          4.1.3  All Purchase Orders submitted by Avici to Nortel pursuant to
                 this Agreement shall reference this Agreement.

          4.1.4  The parties acknowledge and agree that the units of circuit
                 pack EMC enclosure piece part sets purchased by Avici from
                 Nortel pursuant to Avici Purchase Order No. 981492, dated April
                 1, 1999, shall be credited towards the 1,000 unit minimum
                 purchase amount described in the opening paragraph of this
                 Section 4.1, and that Nortel shall credit the aggregate
                 difference between the price for the circuit pack EMC enclosure
                 piece part sets purchased pursuant to Purchase Order No. 981492
                 and the Price for circuit pack EMC enclosure piece part sets
                 against payments owned by Avici in respect of circuit pack EMC
                 enclosure piece part sets purchased hereunder.
<PAGE>

4.2  Acceptance of Purchase Orders

     Nortel shall accept all Purchase Orders conforming to the requirements of
     this Agreement delivered via facsimile (and confirmed by telephone
     conversation) to the address and addressee of Nortel set forth in Section
     17.6. Any Purchase Order not rejected within five (5) business days of
     receipt by Nortel shall be deemed accepted. Failure by Nortel to accept a
     conforming Purchase Order shall be considered a material breach of this
     Agreement, provided Avici is not in material breach thereof.

     4.2.1  Nortel will maintain raw material inventory in stock and tooling on
            hand sufficient to meet Avici orders and requirements.

     4.2.2  Notwithstanding any provision in this Agreement to the contrary,
            Nortel's supply of Products shall be limited to the capability, tool
            life and/or quantity of the tools provided to Nortel by Avici
            pursuant to Section 2.5.

     4.2.3  Avici will reimburse Nortel one and one-half percent (1.5%) of the
            cost of finished goods inventory per month maintained by Nortel at
            Avici's request.

4.3  Product Forecasts

     Avici shall provide Nortel with written 12-month forecasts by calendar
     quarter of all Purchase Orders in respect of Products Avici expects to
     place on Nortel, not later than three (3) months prior to the 12-month
     period covered thereby.  Avici shall update such forecasts every three
     months and report to Nortel any significant changes in the forecasts.  Such
     forecasts shall not be binding purchase obligations upon Avici.  Firm
     purchase and sale commitments shall be made through Purchase Orders issued
     by Avici and accepted by Nortel.

             SECTION 5: PURCHASE ORDER RESCHEDULING/CANCELLATIONS

5.1  Rescheduling

     5.1.1  Avici may, by written notice received by Nortel fifteen (15) Days,
            or less, prior to the Delivery Date, at no charge, reschedule the
            Delivery of ordered Products, provided that such rescheduled
            Delivery Date shall not be later than ninety (90) Days from the
            original Delivery Date, and provided such rescheduled Delivery
<PAGE>

            Date shall not exceed the then current term of this Agreement. The
            Delivery Date for a particular Purchase Order may only be
            rescheduled once pursuant to this Section 5.1.1.

     5.1.2  Subsequent rescheduling fifteen (15) Days, or less, prior to the
            Delivery Date will be subject to an additional fee of ten percent
            (10%) of Nortel's Product Price.

     5.1.3  Purchase orders may be rescheduled greater than fifteen (15) days
            but less than forty five (45) days prior to the Delivery Date at no
            charge, provided the rescheduled Delivery Date shall not be later
            than ninety (90) Days from the original Delivery Date.

     5.1.4  Purchase Orders may be re-scheduled more than forty five (45) Days
            prior to the Delivery Date at no charge, provided such rescheduled
            Delivery Date shall not exceed the then current term of this
            Agreement.

     5.1.5  There shall be no rescheduling charge applied to expedited
            deliveries.

5.2  Cancellation Charges

     5.2.1  Avici may cancel all or a portion of a Purchase Order already
            accepted by Nortel by providing Nortel with a written notice of
            cancellation and by paying to Nortel a fee equal to:

     (a)    one hundred percent (100%) of Nortel's Product/material cost of the
            canceled portion of the Purchase Order if the date of Nortel's
            receipt of the cancellation notice is less than fifteen (15) Days
            prior to the scheduled Delivery Date of the Purchase Order.

     (b)    ten percent (10%) of Nortel's Product/material cost of, plus all
            costs in respect of work-in-progress in respect of, the canceled
            portion of the Purchase Order if the date of Nortel's receipt of the
            cancellation notice is between sixteen (16) and thirty (30) Days
            prior to the scheduled Delivery Date of the Purchase Order.
<PAGE>

     (c)    there shall be no charge if the date of Nortel's receipt of the
            cancellation notice is more than thirty (30) Days prior to the
            scheduled Delivery Date of the Purchase Order.

     5.2.2  In no event shall the cancellation charges set forth in this Section
            5.2 exceed the Price of the Products covered by the canceled portion
            of the Purchase Order.

     5.2.3  Nortel will provide Avici with documentation adequate to support its
            claim for cancellation charges. Components and completed work and
            work-in-process that are paid for by Avici pursuant to such
            cancellation charges shall be Avici's property subject to the terms
            herein and shall be held or Delivered to Avici as Avici may
            reasonably request. Notwithstanding the foregoing, Avici shall have
            no obligation to pay cancellation charges if the cancellation is
            occasioned by the failure of Nortel to perform its material
            obligations under this Agreement unless Nortel's failure is the
            result of Avici's failure to perform its material obligations
            hereunder.

5.3  Notwithstanding any provision in this Agreement or Avici Purchase Order No.
     981492, dated April 1, 1999, to the contrary, Avici covenants and agrees
     that Avici may not cancel or reschedule (unless mutually agreed) all or any
     part of Avici Purchase Order No. 981492, dated April 1, 1999, for any
     reason.

                      SECTION 6: SHIPPING/DELIVERY/TITLE

6.1  FOB Terms

     All Deliveries of Products covered under this Agreement shall be made FOB
     Nortel's North American manufacturing facility, distribution center or
     approved supplier, freight collect. Such Delivery shall constitute delivery
     to Avici. As of the moment a Product is delivered to Avici, Avici accepts
     all risk of loss, mishandling, breakage, and other damages relating
     thereto. Avici shall use is best efforts to specify the carrier at least
     five (5) business Days prior to the Delivery Date and shall be responsible
     for paying such
<PAGE>

     carrier. In the event Avici does not so specify the carrier, Nortel shall
     select a carrier and Deliver the Products as described above, in a
     reasonably economical manner, freight prepaid by Nortel and charged to
     Avici in the applicable invoice. If Products are designated for export,
     Avici is responsible for assuring compliance with applicable export laws,
     and Avici will provide Nortel with instructions for the handling of such
     export shipments and shall reimburse Nortel for all costs associated
     therewith.

6.2  Shipping

     Intentionally deleted.

6.3  Packing

     All products shipped hereunder shall be packed by Nortel, at no additional
     charge to Avici, in containers adequate to prevent damage during shipping,
     handling and storage.

6.4  Delivery in Installments

     Nortel may fill a Purchase Order in installments, but only in mutually
     agreeable partial quantities and at mutually agreeable intervals.  Nortel
     may not ship incomplete Products at any time, unless pre-approved by Avici.

6.5  Title

     Title to Products will pass to Avici upon Delivery. Avici grants to Nortel
     a first priority security interest in the Products. Nortel may perfect such
     interest, and Avici shall assist Nortel, as reasonably necessary, to do so.
     Nortel may retain such interest until Avici has paid Nortel in full for the
     Products. Prior to payment in full for such Products, Avici shall not cause
     or permit the Products, or any portion thereof, to be sold, leased or
     subjected to a lien or other encumbrance. Nothing contained in this Section
     6.5 shall be construed so as to vary the provisions contained in the
     Activity Description or Schedule C.00100 6, as applicable, related to
     ownership and licensing of, or other obligations related to, the
     intellectual property, and rights therein, incorporated into Products.

6.6  Late Delivery

     (a)  Nortel shall Deliver the Products and perform Services ordered by
          Avici by the Delivery Date mutually agreed to by the parties. All
          scheduled Delivery Dates of Products or performance of Services are
          firm, and time shall be of the essence.
<PAGE>

     (b)  Nortel's Delivery obligations pursuant to Section 6 are subject to the
          condition that the Delivery Dates specified in Purchase Orders shall
          comply with minimum forty-five (45) Days lead time, unless Nortel
          expressly agrees to shorter intervals.

     (c)  Unless otherwise instructed by Avici, Nortel shall for all Purchase
          Orders placed hereunder: (i) ship complete orders, (ii) ship to the
          location designated in the Purchase Order; (iii) ensure that all
          subordinate documents bear Avici's Purchase Order Number; (iv) enclose
          a packing memorandum; (v) mark Avici's Purchase Order number on all
          packages and shipping papers; and (vi) not Deliver earlier than five
          (5) Days before the Delivery Dates specified in the applicable
          Purchase Order unless otherwise mutually agreed.

     (d)  Nortel shall immediately notify Avici of any anticipated late
          Deliveries and any impending plant or facility shutdowns for any
          reason, including vacation, tool repair, labor difficulties or
          governmental order, which may adversely impact the scheduled Delivery
          Dates. In the event that Nortel is delinquent on delivering a Product
          to Avici for reasons other than those attributable to Avici or in
          accordance with Section 17.11, Nortel shall deliver such Product to
          Avici in the most expeditious manner possible and the payment of
          premium transportation cots associated with the shipment of the
          Product shall be at Nortel's expense.

     (e)  The rights and obligations of the parties under this Section 6.6 shall
          not apply to the extent that any delay in delivering a Product is
          caused by a relevant delay in performance by Avici of its obligations
          under this Agreement.

                              SECTION 7: QUALITY
7.1  Quality Assurance

     Prior to first production start, Nortel and Avici shall engage in good
     faith negotiations to develop a mutually satisfactory quality plan, which
     plan shall include failure root cause analysis and a corrective action plan
     which meets the requirements of ISO 9001 or 9002, whichever is applicable.
     This plan shall be set out in a separate document.

     Nortel agrees that all Deliveries of Products shall be verified for
     compliance with the Specifications for each Product(s).
<PAGE>

     Further, the parties agree that regular quality reviews will be held no
     less frequently than on a quarterly basis at such time and place as
     mutually agreed to by the parties.  Reasons for such meetings may include,
     but shall not be limited to:

     (a)  Review of quality acceptance criteria;

     (b)  Quality performance and receiving inspection results;

     (c)  Corrective action results/change control; and

     (d)  Field problem reviews and regulatory impacts.

     In addition, Nortel will:

     (a)  Respond in a timely manner to Avici's quality related corrective
          action requests as a result of non-conformance to the quality plan;

     (b)  Allow inspections of Nortel Product manufacturing facilities and
          periodic quality audits by Avici to determine Product conformance to
          quality criteria described in the Specifications; and

     (c)  Manufacture Products in compliance with applicable Specifications.

7.2  Inspection and Acceptance

     Avici shall notify Nortel in writing of particular deficiencies in Products
     that do not conform to the Specifications that Avici has knowledge of, from
     time to time.  Products will be deemed accepted by Avici if a notice of
     deficiency is not received by Nortel via facsimile (and confirmed by
     telephone conversation) to the address and addressee of Nortel set forth in
     Section 17.6 within ten (10) days after Delivery of the Products.  Such
     unaccepted non-conforming Products shall be returned to Nortel at Nortel's
     expense for repair or replacement, at Nortel's option and expense, as soon
     as commercially possible but no later than thirty (30) Days after receipt
     of such non-conforming Product.  Nortel's responsibility for deficiencies
     discovered after the close of the 10-day inspection period, but prior to
     the close of the warranty period as set out in Section 11, shall be as
     provided for under the warranty provisions of this Agreement.

7.3  Manufacturing Plant Inspection

     Nortel will allow Avici into its facility manufacturing Products pursuant
     to this Agreement, at which any of the Products may be inspected upon
     reasonable prior written notice as long as any such inspection will not
     unduly interfere with Nortel's operations.
<PAGE>

     Avici and its employees shall comply with all Nortel rules and procedures
     when in or on Nortel's premises.

                                  SECTION 8:

     Intentionally deleted.

                    SECTION 9: QUARTERLY OPERATIONS REVIEWS

9.1  Reviews

     Avici and Nortel will review quarterly the performance of each party
     hereunder.  Such review shall include items such as Product Delivery,
     Product forecasts, Product performance, quality and cost.

                      SECTION 10: Intentionally deleted.

                             SECTION 11: WARRANTY

11.1 Nortel's Warranty

     Nortel warrants that the Products manufactured hereunder, under normal use
     and service, will be free from defects in material and workmanship, and
     will perform substantially in accordance with the applicable
     Specifications, for a period of fifteen (15) months from Delivery (the
     "Warranty Period"); provided, however, that Nortel shall have no liability
     for any defects as a result of design or Specification flaws.  This
     warranty shall not apply to items normally consumed in operation, such as
     lamps and fuses.  Nortel's sole obligation and Avici's exclusive remedy
     under this warranty is limited to the replacement or repair, at Nortel's
     option and expense, of the defective Products.  Replacement Products may be
     new or reconditioned to perform as new at Nortel's option.  The foregoing
     warranty does not apply:  (i) if the defect arises from mishandling; abuse;
     improper storage; improper performance of installation, other service or
     maintenance other than by Nortel; misuse (including, without limitation,
     any use of the Product beyond the environmental parameters set forth in the
     applicable Specifications); damage by fire, explosion, power failure, power
     surge or other power irregularity (beyond such parameters which are set
     forth in the applicable Specifications); or (ii) if any repair or
<PAGE>

     modification (or attempted repair or modification) of the Product is made
     other than by Nortel unless that repair or modification (or attempted
     repair or modification) of the Product made by any party other than Nortel
     has been specifically authorized in writing by Nortel.  In the event a
     repair is required as a result of (i) or (ii) above, Nortel will repair the
     Product and Avici will pay to Nortel expenses incurred by Nortel in
     connection therewith, in accordance with Nortel's then current standard
     rates therefor.  Turnaround time for warranty repair or replacement shall
     be no greater than thirty (30) Days.  Repair or replacement Products
     furnished by Nortel during the Warranty Period shall be warranted for a
     period of ninety (90) Days or the remainder of the original Warranty
     Period, whichever is longer.  The aforementioned warranties shall inure to
     Avici, its successors and assigns.  Nortel warrants that the Products
     delivered to Avici are free and clear of all liens and encumbrances.
     Notwithstanding the foregoing, the warranty applicable to components
     supplied to Nortel by a third party and forming a part of a Product shall
     be the warranty provided by such third party supplier.

11.2 Y2K Warranties

     Nortel warrants that any software or systems of Nortel used by Nortel in
     the supply of Products shall:  (i) process date and time related data
     without causing processing interruptions, abnormal terminations, or changes
     in performance characteristics; and (ii) shall process and manipulate all
     date and time related functions correctly.

11.3 Nortel's Duties

     Nortel shall maintain such inspection logs for Products Delivered as Nortel
     would create in the normal course, for a period of twenty-four (24) months
     after such inspection and shall make such information available to Avici on
     request.  In the event Avici root cause analysis of field failures of its
     Terabit Router reasonably indicate that non-conformance of Products to the
     Specifications and/or defects in material and workmanship are the cause of
     the failures, Nortel shall provide reasonable assistance to Avici in
     performing root cause analysis of such Products and make such information
     available to Avici on request.

11.4 Conforming Products

     For Products that are returned to Nortel by Avici for repair or replacement
     pursuant to Section 11.1 and are found by Nortel to conform to the
     applicable Specifications, Avici
<PAGE>

     shall pay Nortel for all costs it has incurred in connection with the
     handling and testing of the Products as well as shipping charges and
     duties.

11.5 DISCLAIMER

     THE FOREGOING WARRANTIES AND REMEDIES CONSTITUTE THE ONLY WARRANTIES,
     GUARANTEES OR CONDITIONS WITH RESPECT TO PRODUCTS AND SERVICES AND ARE
     AVICI'S EXCLUSIVE REMEDIES IN THE EVENT SUCH WARRANTIES ARE BREACHED.  SUCH
     WARRANTIES ARE IN LIEU OF ALL OTHER WARRANTIES, GUARANTEES OR CONDITIONS,
     WRITTEN OR ORAL, STATUTORY, EXPRESS OR IMPLIED, INCLUDING WITHOUT
     LIMITATION, ANY WARRANTY WITH RESPECT TO ANY OTHER SERVICES PROVIDED BY
     NORTEL HEREUNDER OR OTHERWISE, AND ANY WARRANTY OF MERCHANTABILITY, FITNESS
     FOR A PARTICULAR PURPOSE OR NON-INFRINGEMENT.  NORTEL SHALL NOT BE
     RESOPNSIBILE FOR ANY WARRANTY OFFERED BY AVICI TO ANY CUSTOMER(S) OF AVICI.
     IN NO EVENT SHAL NORTEL BE LIABLE FOR ANY INCIDENTAL, INDIRECT, SPECIAL OR
     CONSEQUENTIAL DAMAGES RELATING TO BREACH OF WARRANTY.

                             SECTION 12:  REPAIRS

12.1 Nortel agrees to provide repair Services during the period described in
     Section 12.4 for the Products it manufactures.  Repair Services for items
     supplied to Nortel by third parties will be subject to any agreement
     between Nortel and such third party.

12.2 Repairs under Warranty

     Nortel is responsible for the cost of repairs, including return shipment
     costs from Nortel to Avici, in respect of Product repair pursuant to
     Section 11.1.  Avici shall be responsible for shipment costs to Nortel from
     Avici for such Products.

12.3 Repairs out of Warranty

     The Price to Avici for out-of-warranty repairs shall be at Nortel's
     standard rate therefor at such time.  Turnaround time for such repairs
     shall be forty-five (45) Days.  Invoices for out-of-warranty repairs shall
     be paid by Avici within thirty (30) Days of the date of invoice for the
     cost of such repairs.

12.4 Time Limitations
<PAGE>

     Nortel must retain repair capabilities for each Product for a period of
     five (5) years from the date such Product was last manufactured by Nortel,
     provided, in the event Avici transfers the manufacture of such Product to a
     third party, to the extent permitted in Schedule C.00100 6, the obligation
     imposed upon Nortel in this Section shall terminate as of such date.

12.5 Out-of-Warranty Replacements

     During the period described in Section 12.4, in the event that any Product
     is beyond repair, it shall, at Avici's option, be returned to Avici as is
     at Avici's expense.  If, during the period described in Section 12.4, the
     Warranty Period for such Product has expired and, in such case, should
     Avici request a replacement Product, the applicable price for such
     replacement will be the full cost of the Product, plus all transportation
     costs, at such time.

12.6 Product Returns

     Avici shall be responsible for the return of the Products to Nortel,
     subject to Section 12.2, replaced under Section 12.5.  In the event that
     Nortel ships a replacement Product pursuant to Section 12.5 prior to
     receiving the Product being returned, Nortel must receive the returned
     Product within thirty (30) Days of shipping the replacement.  If Nortel has
     not received the returned Product within such thirty-(30) Days, Nortel
     shall be entitled to invoice Avici for the returned Product.

                     SECTION 13:  LIMITATION OF LIABILITY

13.1 Exclusion of Certain Damages

     WITH THE EXCEPTION OF VIOLATIONS OF SECTION 14 BELOW, IN NO EVENT SHALL
     EITHER PARTY BE LIABLE FOR INDIRECT, SPECIAL, INCIDENTAL, OR CONSEQUENTIAL
     DAMAGES, LOSS OF PROFITS, LOSS OF USE, OR DATA OR INTERRUPTION OF BUSINSES,
     WHETHER SUCH ALLEGED DAMAGES ARE LABELED IN TORT, CONTRACT, OR INDEMNITY,
     EVEN IF SUCH PARTY HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES.
     WITH THE EXCEPTION OF VIOLATIONS OF SECTION 14 BELOW, IN NO EVENT SHAL
     NORTEL BE LIABLE FOR DAMAGES FOR ANY CAUSE WHATSOEVER, INCLUDING BUT NOT
     LIMITED TO BREACH OF CONTRACT (INCLUDING FUNDAMENTAL BREACH), TORT
     (INCLUDING NEGLIGENCE),
<PAGE>

     INDEMNITY OR OTHERWISE, IN AN AMOUNT IN EXCESS OF, IN THE AGGREGATE, THE
     PAYMENTS RECEIVED BY NORTEL FROM AVICI PURSUANT TO THIS AGREEMENT TO THE
     DATE OF SUCH LIABILITY, OR ONE HUNDRED THOUSAND DOLLARS (US $100,000.00),
     WHICHEVER IS GREATER.

     WITH THE EXCEPTION OF VIOLATIONS OF SECTION 14 BELOW, IN NO EVENT SHALL
     AVICI BE LIABLE FOR DAMAGES FOR ANY CAUSE WHATSOEVER, INCLUDING BUT NOT
     LIMITED TO BREACH OF CONTRACT (INCLUDING FUNDAMENTAL BREACH), TORT
     (INCLUDING NEGLIGENCE), INDEMNITY OR OTHERWISE, IN AN AMOUNT IN EXCESS OF,
     IN THE AGGREGATE, THE PAYMENTS OWED TO NORTEL BY AVICI PURSUANT TO THIS
     AGREEMENT TO THE DATE OF SUCH LIABILITY, OR ONE HUNDRED THOUSAND DOLLARS
     (US $100,000.00), WHICHEVER IS GREATER.

                      SECTION 14:  INTELLECTUAL PROPERTY
                     RIGHTS AND CONFIDENTIALITY PROVISIONS

14.1 The rights and obligations of Nortel and Avici related to the Products and
     Services shall be subject to Schedule C.00100 6, Section 6, Grant B and C,
     as applicable.

14.2 All technical information, specifications, drawings, documentation and
     "know-how" of every kind and description whatsoever disclosed in writing
     and identified as confidential by either party to the other under this
     Agreement (the "Information"), except insofar as it may be in the public
     domain or be established to have been independently developed and so
     documented by the other party or obtained by any person not in breach of
     any confidentiality obligations to the disclosing party, is the exclusive
     property of the disclosing party.  The recipient party, except as
     specifically authorized in writing by the disclosing party, or as permitted
     hereunder, shall treat and protect the Information as confidential, shall
     not reproduce the Information except to the extent reasonably required for
     the performance of this Agreement, shall not divulge the Information in
     whole or in part to any third parties (except for, in the case of Nortel,
     Nortel Affiliates, subcontractors
<PAGE>

     and suppliers), and shall use the Information only for purposes necessary
     for the performance of this Agreement or as may be required for the use of
     the Products and/or Services provided hereunder. This obligation shall
     survive the termination of this Agreement for a period of three (3) years.
     Each party shall disclose the Information only to those of its employees or
     agents (including, in the case of Nortel, those of its Affiliates,
     subcontractors and suppliers) who shall have a "need-to-know" the
     Information for the purposes described herein after first making such
     employees or agents aware of the confidentiality obligations set forth
     above.

                       SECTION 15:  TERM AND TERMINATION

15.1 Term

     This Agreement shall become effective on the Effective Date and shall
     remain in effect for a period of eighteen (18) months, at the conclusion of
     which, at Avici's option, subject to agreement by the parties with regard
     to second term pricing and provided Avici does not exercise buy-out options
     pursuant to Schedule C.00100 6, the Agreement may be renewed for a second
     18-month term.  Subject to Section 15.2, the Agreement shall be self-
     renewing thereafter for successive one (1) year renewal periods unless
     either party notifies the other in writing of its intent to not renew the
     Agreement and such notice is received at least ninety (90) Days prior to
     the end of the then current term, all such period(s) being referred to
     herein as "term," unless and until terminated in accordance with this
     Agreement.

15.2 Termination of Agreement

     (a)  This Agreement may not be terminated by either party earlier than
          eighteen (18) months after the Effective Date, other than for material
          breach as set out in (b) below.

     (b)  This Agreement may be terminated at any time upon the occurrence of
          any one or more of the following events of default:

          (i)  By either party if the other party defaults in the performance of
               any material requirement or obligation under this Agreement, and
               such default is not cured within (a) in the case of an issue
               requiring initiation of a new production cycle to cure such
               default, forty-five (45) Days after written
<PAGE>
                    notice of such default is sent to such party or (b) in the
                    case of any other issue, thirty (30) Days after written
                    notice of such default is sent to such party (in either (a)
                    or (b), the "Cure Period"). This Agreement shall not,
                    however, terminate if the other party has cured the breach
                    prior to the expiration of the Cure Period or, if such
                    breach cannot be cured within such Cure Period, the other
                    party has initiated actions to cure such breach within such
                    Cure Period, and thereafter cures such breach as soon as
                    reasonably practicable;

          (ii)      By either party if the other party defaults in the
                    performance of any material requirement or obligation under
                    Schedule C.00100 6, and such default is not cured within
                    forty-five (45) days after written notice of such default is
                    sent to such party;

          (iii)     By Nortel if Avici fails to make (in full) any payment
                    required by this Agreement to Nortel on the date due, and
                    fails to cure such default within forty-five (45) Days after
                    written notice of such default is sent to Avici; or

          (iv)      By either party if the other party ceases to do business,
                    makes a composition or assignment for the benefit of its
                    creditors, makes a general arrangement with its creditors
                    concerning any extension or forgiveness of any of its
                    secured debt, becomes bankrupt or insolvent, suffers or
                    seeks the appointment of a receiver to the whole or any
                    material part of its business, takes any action to liquidate
                    or wind up the whole or any material part of its business,
                    is found subject to any provisions of any bankruptcy code
                    concerning involuntary bankruptcy or similar proceeding, or
                    suffers a material adverse change in its financial position
                    such that payments hereunder may be affected or delayed by a
                    creditor or administrator of the business of the other
                    party.

     (c)  Either party may terminate this Agreement for convenience on a ninety
          (90)-Day prior written notice to the other party.  In the event Avici
          so terminates for convenience, Avici shall reimburse Nortel for the
          actual costs incurred in connection with the Agreement work to the
          date of such termination.  The amount of such actual costs shall be
          comprised of the cost of Products already
<PAGE>

          manufactured but not yet delivered, plus charges for a maximum of six
          (6) weeks actual raw materials and work-in-process (material, labor
          and overhead), plus costs of commitments to third parties, to the
          extent such costs cannot be limited through termination.

     (d)  Termination for convenience by Avici, or termination by Nortel
          pursuant to (b) above, during the first term is subject to
          reimbursement by Avici of Nortel's $300,000 unrecovered sunk costs in
          respect of the Activity Description less $150 per circuit pack EMC
          enclosure piece part set Delivered to date. Termination for
          convenience by Avici, or termination by Nortel pursuant to (b) above
          during the second term is subject to reimbursement by Avici of
          Nortel's $115,000 unrecovered sunk costs in respect of the Activity
          Description less $150 per circuit pack EMC enclosure piece part set
          Delivered to date during such second term.

     (e)  Termination for convenience by Nortel during the first term will
          result in Nortel's forfeiture of any remaining portion of such
          $300,000 sunk costs. Termination for convenience by Nortel during the
          second term will result in Nortel's forfeiture of any remaining
          portion of such $115,000 sunk costs.

     (f)  In the event of failure to reach agreement after good faith
          negotiations with regard to subsequent-term pricing at the conclusion
          of a given term, the Agreement terminates as of the end of the then-
          current term.

     (g)  In addition, in the event Nortel terminates for convenience, Avici
          shall have the right within ninety (90) Days of receipt of such notice
          to

          (i)    place a Purchase Order(s) for Products which Avici shall deem
                 necessary for support of its own products for three (3) months.
                 The number of units ordered under this subsection shall not be
                 greater than the monthly average of units ordered during the
                 six (6) months prior to Avici's receipt of notice of
                 termination. The Delivery of such Products shall be in
                 accordance with Section 4.1 above, but no later than ninety
                 (90) Days of the date of such termination; and

          (ii)   at Nortel's discretion, Nortel will I) provide on-going supply
                 of re-used parts or make available information necessary for
                 Avici to permit the
<PAGE>

                fabrication of the tools to fabricate the necessary part or II)
                Avici shall have access to the Escrowed Materials in accordance
                with Section 16.

     (h)    In the event the Agreement is not renewed for a second eighteen (18)
            month term for any reason (other than termination of convenience by
            Nortel), Avici shall pay Nortel $115,000 in respect of Nortel's
            unrecovered sunk costs and (g)(ii) shall apply.

15.3 Payment Obligations

     No termination or expiry of this Agreement shall release Avici from any
     obligation to pay Nortel any amount that has accrued or become payable at
     or prior to the date of termination or expiry.

                 SECTION 16:  ESCROW and MANUFACTURING RIGHTS

16.1 Escrow

     Nortel shall deposit the Escrow Materials for the Products with an escrow
     agent to be mutually agreed upon by the parties.  The Escrow Materials
     shall be in machine-readable or hard copy form, as appropriate, suitable
     for reproduction and use by Avici.  During this term of this Agreement,
     Nortel shall keep the Escrow Materials current by promptly depositing
     updates that correspond to any Escrow Materials.

16.2 Events of Release

     Events of Release are as follows:

     (a)  A material breach of this Agreement by Nortel, including, without
          limitation, a consistent and material failure or refusal, or an
          intentional refusal at any time when Avici is not in material breach
          of this Agreement, to provide Products as required pursuant to this
          Agreement for any reasons within control of Nortel, where such failure
          or refusal has been the subject of a notice in writing to Nortel that
          its continued failure or refusal would cause Avici to invoke its
          rights under this Section 16 forty-five (45) Days after the receipt by
          Nortel of such notice;

     (b)  An intentional refusal to accept a conforming Purchase Order from
          Avici, where such refusal has been the subject of a notice in writing
          to Nortel that its continued
<PAGE>

             refusal would cause Avici to invoke its rights under this Section
             16 forty-five (45) Days after the recipient by Nortel of such
             notice of breach under Section 15.2(i)(a), or thirty (30) Days
             after the receipt by Nortel of such notice of breach under Section
             15.2(i)(b);

        (c)  Nortel makes an assignment, or enters into an arrangement with or
             for the general benefit of its creditors, or files a notice of
             intention to make a proposal under any applicable bankruptcy or
             other similar laws, is subject to the appointment of a trustee,
             custodian, receiver, or receiver manager of itself or of any
             substantial part of its assets, or otherwise ceases to carry on
             normal business operation.

16.3    Release

16.3.1  If Avici reasonably believes that an Event of Release has occurred, and
        wishes to have the Escrow Materials released, it shall provide written
        notice of the occurrence of an Event of Release to the escrow agent.
        Upon receipt of such notice, the escrow agent shall release the Escrow
        Materials to Avici, and provide notice of such release to Nortel. If
        Nortel wishes to dispute the occurrence of an Event of Release, it shall
        provide written notice of its objection to Avici within thirty (30) Days
        of the date or receipt of the escrow agent's notice.

16.4    License

        (a)  The use of Escrow Materials shall be subject to Schedule C.00100 6,
             Section 6, Grant C.

16.5    Liquidated Damages

        In the event Avici obtains release of the Escrow Materials and it is
        subsequently proven by Nortel that an Event of Release did not occur:
        (I) Avici shall pay to Nortel an amount equal to $100,000 (and an
        additional amount for Nortel's reasonable attorney's fees), which amount
        represents Nortel's liquidated damages resulting from such action by
        Avici; (II) Avici shall forthwith return all Escrow Materials to the
        escrow agent, or destroy all such Escrow Materials and certify to Nortel
        that all such Escrow Materials
<PAGE>

        have been destroyed; and (III) the license granted by Nortel to Avici
        pursuant to Section 16.4 shall terminate immediately.

                             SECTION 17:  GENERAL

17.1    Severability

        In the event that any provision of this Agreement is found to be
        invalid, voidable or unenforceable, the parties agree that unless such
        provision materially affects the entire intent and purpose of this
        Agreement, such invalidity, voidability or unenforceability shall affect
        neither the validity of this Agreement nor the remaining portion herein,
        and that the provision in question shall be deemed to be replaced with a
        valid and enforceable provision most closely reflecting the intent and
        purpose of the original provision.

17.2    Survival

        Notwithstanding any termination or expiry of this Agreement, the
        provisions of Sections 1 (Definitions). 3 (Pricing and Payment Terms), 5
        (Purchase Order Rescheduling/Cancellation), 6.5 (Title), 11 (Warranty),
        12 (Repairs), 13 (Limitation of Liability), 14 (Intellectual Property
        Rights and Confidentiality Provisions), 15 (Term and Termination) and
        all consequent rights, obligations and liabilities shall survive the
        termination or the expiry of this Agreement.

17.3    Assignment

        Neither party shall assign its rights or delegates its duties under this
        Agreement without the prior written consent of the other, provided that
        Avici may assign all of its rights hereunder as part of a sale of
        substantially all of the assets of Avici and Nortel may assign all of
        its obligations hereunder as part of a sale of substantially all of the
        assets of Nortel or its Affiliates used in fulfilling such obligations,
        subject to the terms hereof. Notwithstanding the foregoing, Nortel shall
        have the right to delegate or assign this Agreement to any Affiliate
        subject to the consent of Avici, which consent shall not be unreasonably
        withheld. Nortel may subcontract any of its obligations hereunder
        without Avici's consent.
<PAGE>

17.4   Waiver

       The failure of either party to enforce at any time or for any period of
       time any of the provisions of this Agreement shall not constitute a
       waiver of such provisions or the right of either party to enforce each
       and every provision.

17.5   Governing Law

       The rights and obligations arising under the Agreement shall be governed
       by and construed in accordance with the laws of the Commonwealth of
       Massachusetts and the federal laws of the United States applicable
       therein, without regard to its conflicts of law rules.

17.6   Notices

       (a)  Any and all notices or other information required to be given by one
            of the parties to the other shall be deemed sufficiently given when
            forwarded by prepaid registered mail, overnight delivery service,
            cable, telegrams, facsimile, telex or hand-delivery to the other
            party at the following address:

       AVICI
       -----
       Avici Systems, Inc.
       101 Billerica Ave., Building 6
       North Billerica, MA
       01862
       Attention:  President and Chief Executive Officer

       NORTEL
       ------
       Northern Telecom Limited
       NSPaN Marketing Operations
       10 Brewer Hunt Way
       Kanata, Ontario, Canada
       K2K 2B5
       Attn:  Marketing Operations Manager
       P: 613-765-5989
       F: 613-763-9431

       With a copy of all legal notices to:
       Northern Telecom Limited
       8200 Dixie Road, Suite 100
<PAGE>

       Brampton, Ontario
       L6T 5P6
       Attention:  Secretary
       Copy to:  Law Department

       and such notices shall be deemed to have been received five (5) business
       Days after mailing if forwarded by mail, and the following business Day
       if forwarded by telegram, telex, overnight service, facsimile or hand-
       delivery.

      (b)  The aforementioned address of either party may be changed at any time
      by giving fifteen (15) business Days prior notice to the other party in
      accordance with the foregoing.

      (c)  In the event of a generally prevailing labor dispute or other
      situation which will delay or impede the giving of notice by any such
      means, the notice shall be given by such specified mode as will be most
      reliable and expeditious and least affected by such dispute or situation.

17.7  Export Compliance

      The rights and obligations of the parties may be subject to United States
      and Canadian laws and regulations governing the license and delivery of
      technology abroad by persons subject to the jurisdiction of the United
      States and Canada, including the Export Administration Act of 1979, as
      amended, and the Export Administration regulations issued by the U.S.
      Department of Commerce, International Trade Administration, Office of
      Export Administration.  Each party shall not, directly or indirectly,
      export, reexport, or transmit technology, software, components, or
      products, in such manner as to violate such laws and regulations in effect
      from time to time to the extent that such laws are applicable to a party.

17.8  NAFTA

      17.8.1  Both parties shall perform all administrative actions required to
      qualify each Product sold under this Agreement for preferential treatment
      under the rules of any
<PAGE>

      applicable trade treaty, including, without limitation, the North American
      Free Trade Agreement ("NAFTA"). If a Product qualifies under NAFTA, the
      parties shall prepare and distribute a NAFTA Certificate of Origin, and
      any other documents required. The parties shall respond to requests from
      the other party for information regarding any NAFTA Certificates of Origin
      and assist each other in resolving any eligibility issues.

      17.8.2 If a NAFTA Certificate of Origin is prepared for each shipment,
      each party shall: (a) retain the original NAFTA Certificates of Origin
      with appropriate backup documentation, (b) attach a copy of the NAFTA
      Certificate of Origin to the customs/shipping documents for the qualifying
      component or Product, and (c) mark the customs/shipping documents with the
      legend: "Copy of NAFTA Certificate of Origin attached." If a blanket NAFTA
      Certificate of Origin is prepared, the parties shall: (a) retain the
      original NAFTA Certificate of Origin with appropriate backup
      documentation, (b) mark the customs/shipping documents for the qualifying
      component or Product with the legend: "Copy of blanket NAFTA Certificate
      of Origin on file at Nortel's customs office in Milton, Ontario, Canada."
      and (c) mail copies of the NAFTA Certificate of Origin to the other party.

17.9. U.N. Convention Contracts

      The parties agree that the U.N. Convention on Contracts for the
      International Sale of Goods (Vienna, 1980) and the 1974 Convention on the
      Limitation Period in the International Sale of Goods (the "1974
      Convention") and the Protocol amending the 1974 Convention, done at Vienna
      April 11, 1980, shall not apply to this Agreement nor to any dispute or
      transaction arising out of this Agreement.

17.10 Publicity

      Prior to the publication or use by a party hereto of any advertising, sale
      promotions, press releases or other publicity matters relating to the
      Products or this Agreement in which the names or logo of other party is
      mentioned or can be reasonably inferred, the party shall obtain the prior
      written consent of the other party. Such consent shall not be unreasonably
      withheld.  Terms, conditions, and general terms of this Agreement shall be
<PAGE>

       held in confidence by both parties and only disclosed as may be agreed to
       by both parties or as may be required to meet securities disclosure or
       export permit requirements or as may be otherwise required by applicable
       law. Neither party shall make public statements or issue publicity or
       media releases with regard to this Agreement or the relationship between
       the parties without the prior written approval of the other party, except
       as may be otherwise required by law or stock exchange regulations.
       Nothing herein shall prevent a party from disclosing the terms of this
       Agreement to potential investors (other than to any of the entities
       listed in Schedule C by Avici, except as necessary pursuant to a bona
       fide offer by such a party to purchase all or substantially all of the
       assets or shares of Avici) as reasonably required by such potential
       investors to evaluate a potential investment in, or purchase of assets
       of, such party, provided that such potential investor agrees in writing
       to keep such information in confidence and to use such information solely
       for purposes of evaluating the business and financial condition of such
       party.

17.11  Force Majeure

       Nortel shall not be responsible or liable to Avici for any delay or
       failure to perform hereunder if such delay or failure results from fire,
       explosion, labor dispute, earthquake, casualty or accident, lack or
       failure of transportation facilities, epidemic, flood, drought, or by
       reason of war, declared or undeclared, revolution, civil commotion, the
       act of a public enemy, blockade or embargo, act of God, any inability to
       obtain any requisite license, permit or authorization, or by reason of
       law, proclamation, regulation, ordinance, demand, or requirement of any
       government or by reason of any other cause whatsoever, whether similar or
       dissimilar to those enumerated, beyond the reasonable control of Nortel.
       With respect to labor disputes as described above, Nortel shall not be
       obligated to accede to any demands being made by employees or other
       personnel. All such causes will delay Nortel's performance hereunder for
       a period equal to the delay resulting from any such causes and such
       additional period as may be reasonably necessary to allow Nortel to
       resume its obligations.

17.12  Entire Agreement
<PAGE>

       This Agreement and Schedules thereto set forth the entire agreement and
       understanding between the parties and supersede and cancel all previous
       negotiations, agreements, commitments and writings in respect of the
       subject matter hereof (except for the Activity Description, Schedule
       C.00100 6 and Avici Purchase Order No. 981492, dated April 1, 1999) and
       there are no understandings representations, conditions, warranties,
       express or implied, statutory or otherwise made or assumed by the
       parties, other than those expressly contained in this Agreement. Neither
       party shall be bound by any term, clause, provision or conditions save as
       expressly provided herein or as duly set forth on or subsequent to the
       date of this Agreement in writing signed by duly authorized officers of
       the parties.

       IN WITNESS WHEREOF, the parties hereto have executed this Agreement
attested by the hands of their duly authorized representative on dates indicated
below.

AVICI SYSTEMS INC.                   NORTEL NETWORKS INC.

By: /s/ [Authorized Officer]         By:/s/Naser Partovi
    ------------------------            ---------------------------------------

                                     Naser Partovi
____________________________         ------------------------------------------
Name (Print or Type)                 Name (Print or Type)

Title: _____________________         Title: V.P. Emerging Markets & Technologies
                                            ------------------------------------

Date: ______________________         Date: ____________________________________
<PAGE>

                                  SCHEDULE A

                                SPECIFICATIONS

         See Avici Module and Shelf File description attached hereto.
<PAGE>

                                  SCHEDULE A

Avici Module and Shelf File Definition
--------------------------------------

The stocklists below define the Nortel drawing numbers, with their vintage
control Stream and Issue, for the Avici TSR Module and Shelf design.

AVICI MODULE

EC Number:  102-
13021
CIL: 01
NOTE: "----"items are re-use items. Therefore use the latest available in
DDME.

<TABLE>
<CAPTION>
               ASSEMBLIES/PIECEPARTS                          NORTEL P/N          AVICI P/N        STR       ISS
               ----------------------                         ----------          ---------        ---       ---
<S>                                                           <C>                  <C>             <C>       <C>
QTY PER MODULE ASSEMBLY A                                     NTSU07BA              01151-00        O2        O1
  1 TOP VENT PANEL                                            P0902902              01152-00        O2        O1
  1 BOTTOM VENT PANEL                                         P0902903              01153-00        O2        O1
  2 CONNECTOR TAB                                             P0902907              01164-00        O2        O2
  1 LEFT SIDE PANEL PAA                                       P0902904              01154-00        O2        O1
     LEFT SIDE PANEL                                          P0902904-02           01276-00        O2        O1
     CUSTOM PEM STANDOFF                                      P0902904-01           01156-00        O2        O1
  1 RIGHT SIDE PANEL                                          P0902905              01155-00        O2        O1
  4 ENCLOSURE GASKET                                          P0902908              01165-00        O2        O1
  2 M3 HEX STANDOFF, 26MM LONG                                P0902912              01157-00        O2        O1
  16 PAN PHILLIPS HEAD, M3X6                                  P0600015                             ---       ---
  38 CSK PHILLIPS HEAD M3X5                                   P0601899                             ---       ---
  4 CSK PHILLIPS HEAD M3X12                                   P0600184                             ---       ---
  1 NYLON PHILLIPS HEAD M2X6                                  P0600986                             ---       ---
  1 FACEPLATE ASSEMBLY                                        NTSU0705              01158-00        O2        O1
     1 FRONT CASTING                                          P0902913              01159-00        O2        O1
     2 LATCH ASSEMBLY                                         NTSU0710              01160-00        O2        O1
       1 LATCH LEVER                                          P0902918              01161-00        O1        O4
       1 LATCH SLIDER                                         P0902919              01162-00        O1        O3
       1 EXTENSION SPRING                                     P0832826              01167-00       ---       ---
     2 COMPRESSION SPRING                                     P0904674              01168-00       ---       ---
     2 SHOULDER PIN                                           P0902920              01169-00        O2        O1
     2 PLUNGE R                                               P0805045              01170-00       ---       ---
     2 RETAINING RING                                         P049C820              01171-00       ---       ---
  1 CARRIER ASSEMBLY                                          NTSU0715               0127-00        O2        O1
     1 RIGHT FIBER CARRIER                                    PO887619              01172-00       ---       ---
     1 CENTER FIBER CARRIER                                   P0902921              01272-00        O2        O1
     1 LEFT RJ-45 CARRIER                                     P0902922              01173-00        O2        O3
     3 LINKAGE OUTER                                          P0887595              01174-00       ---       ---
     3 LINKAGE INNER                                          P0887596              01175-00       ---       ---
     9 LINKAGE PIN THIN                                       P0888030              01176-00       ---       ---
     6 LINKAGE PIN FAT                                        P0888031              01177-00       ---       ---
     3 FIBER CARRIER LATCH                                    P0887601              01178-00       ---       ---
     3 CARRIER LATCH PIN                                      P0890377              01273-00       ---       ---
     1 EMC PLATE                                              P0902911              01179-00        O2        O1
</TABLE>
<PAGE>

<TABLE>
<S>                                                           <C>                  <C>             <C>       <C>
     1 EMC PLATE GASKET                                       P0902909              01180-00        O2        O1
     1 FIBER CARRIER ID LABELS                                P0887602              01182-00       ---       ---
     1 FIBER PORT ID LABELS                                   P0887605              01183-00       ---       ---
     1 AUX/LED LABEL                                          P0902927              01184-00        O2        O1
  2 SIX FINGER GASKET                                         P0846518              01181-01       ---       ---
  8 NINE FINGER GASKET                                        P0902910              01181-02        O2        O1
  2 EIGHTEEN FINGER GASKET                                    P0846519              01181-03       ---       ---
  2 CABLE TIE                                                 P0617129              01166-00        O2        O1
  1 LED COVER PLATE                                           P0904678              01280-00        O2        O1
  1 FIBER KEY                                                 P0905137              01281-00        O2        O1
  1 RJ45 ADAPTOR                                              P0902923              01278-00        O1        O1

VENT PANEL EXTRUSION  Note:  Used for top and                 P0902906              01277-00        O2        O1
bottom vent panels

MODULE ASSEMBLY B  Note:  Uses all of the above               NTSU07BB
parts in a different configuration
</TABLE>

Avici Shelf
-----------

<TABLE>
<CAPTION>
       Description                 Nortel Part Number       Avici #      Stream     Issue     Cil
       -----------                 ------------------       -------      ------     -----     ---
<S>                                <C>                       <C>          <C>       <C>       <C>
Narrow Shelf Assm                  NTSU07AA                 01186-00      03         01       1
Support plate rib                  P0902890                 01196-00      03         01       1
Narrow right sidepanel             P0920892                 01188-00      03         01       1
Narrow left sidepanel              P0902891                 01189-00      03         01       1
Narrow lower support plate         P0902887                 01262-00      03         01       1
Narrow upper support plate         P0902886                 01187-00      03         01       1
Divider                            P0902895                 01193-00      03         01       1
Upper latch feature                P0902897                 01198-00      03         01       1
Lower Latch Feature                P0902896                 01197-00      03         01       1
Caddy Assembly                     NTSU07AB                 01263-00      03         01       1
Caddy bar                          P0902901                 01199-00      02         01       1
Left caddy bracket                 P0902898                 01194-00      02         01       1
Right caddy bracket                P0902900                 01195-00      02         01       1
Wide shelf assembly                NTSU07CC                 01185-00      03         01       1
Wide left sidepanel                P0902893                 01192-00      03         01       1
Wide right sidepanel               P0902894                 01191-00      03         01       1
Wide upper support plate           P0902888                 01190-00      03         01       1
Wide lower support plate           P0902889                 01261-00      03         01       1
Narrow profile gasket              P0905953                 01200-00      03         01       1
EMI backplane gasket               P0905954                 01201-00      01         01       1
</TABLE>
<PAGE>

                                   SCHEDULE B
                                     PRICES

<TABLE>
<CAPTION>
Product                                                          Price Per Product
<S>                                                              <C>
1.     Circuit Pack EMC Enclosure Piece Part Set                 $715

2.     Assembly of Face Plate Portion of Circuit Pack EMC        a maximum of $90 for the
       Enclosure Piece Part Set                                  first 1,000 units***; a
                                                                 maximum of $180
                                                                 thereafter****

3.     EMC Enclosure Shelf Assemblies(2 types)*                  $678

4.     Backplane EMC Gasket Hardware Kit**                       $ 50
</TABLE>

*Must be ordered in lots of 10 units

**Must be ordered in lots of 1,000 units

***Such 1,000 units does not include the units ordered under Avici Purchase
Order No. 981492, dated April 1, 1999, for which Avici shall pay the charges set
out in such purchase order

****Avici shall be charged, via the applicable invoice, half of the costs
incurred by Nortel in such assembly up to such maximums
<PAGE>

                                   SCHEDULE C

1.   Lucent Technologies Inc.

2.   DSC Communications Corporation

3.   Fujitsu Limited

4.   Cisco Systems, Inc.

5.   Alcatel Alsthom Cie.

6.   Telefonaktiebolaget LM Ericsson

7.   Siemens AG

8.   Ascend Communications, Inc.

9.   Newbridge Networks Corporation

10.  NEC Corporation

11.  Subsidiaries and affiliates (including parent corporations) of the
     foregoing<PAGE>

                                                                   EXHIBIT 10.29

                            TIER TECHNOLOGIES, INC.

                   EMPLOYEE STOCK PURCHASE PLAN, AS AMENDED
                   ----------------------------------------

          AMENDED BY THE BOARD OF DIRECTORS ON NOVEMBER 23, 1999 AND
               APPROVED BY THE SHAREHOLDERS ON JANUARY 11, 2000

     I.   PURPOSE OF THE PLAN

          This Employee Stock Purchase Plan is intended to promote the interests
of Tier Technologies, Inc. by providing eligible employees with the opportunity
to acquire a proprietary interest in the Corporation through participation in a
payroll-deduction based employee stock purchase plan.

          Capitalized terms herein shall have the meanings assigned to such
terms in the attached Appendix.

     II.  ADMINISTRATION OF THE PLAN

          The Plan Administrator shall have full authority to interpret and
construe any provision of the Plan and to adopt such rules and regulations for
administering the Plan as it may deem necessary in order to comply with the
requirements of Code Section 423.  Decisions of the Plan Administrator shall be
final and binding on all parties having an interest in the Plan.

     III. STOCK SUBJECT TO PLAN

          A.   The stock purchasable under the Plan shall be shares of
authorized but unissued or reacquired Class B Common Stock, including shares of
Class B Common Stock purchased on the open market. The maximum number of shares
of Class B Common Stock which may be issued over the term of the Plan shall not
exceed 300,000 shares.

          B.   Should any change be made to the Class B Common Stock by reason
of any stock split, stock dividend, recapitalization, combination of shares,
exchange of shares or other change affecting the outstanding Class B Common
Stock as a class without the Corporation's receipt of consideration, appropriate
adjustments shall be made to (i) the maximum number and class of securities
issuable under the Plan, (ii) the maximum number and class of securities
purchasable per Participant on any one Purchase Date and (iii) the number and
class of securities and the price per share in effect under each outstanding
purchase right in order to prevent the dilution or enlargement of benefits
thereunder.

     IV.  PURCHASE PERIODS

          A.   Shares of Class B Common Stock shall be offered for purchase
under the Plan through a series of successive Purchase Periods until such time
as (i) the maximum number
<PAGE>

of shares of Class B Common Stock available for issuance under the Plan shall
have been purchased or (ii) the Plan shall have been sooner terminated.

          B.   Each Purchase Period shall be six (6) months in duration, unless
otherwise determined by the Plan Administrator prior to the start date of the
Purchase Period, and provided that the initial Purchase Period shall commence at
the Effective Time and shall terminate on the last business day in May 1998.
The next Purchase Period shall commence on the first business day in June 1998
and shall terminate on the last business day in November 1998; subsequent
Purchase Periods shall commence every six (6) months thereafter on the first
business day in December and June each year, unless otherwise designated by the
Plan Administrator.  The Plan Administrator shall have complete discretion to
change the start date and the duration of a Purchase Period, provided Eligible
Employees are notified prior to the start date of any Purchase Period for which
such change is to be effective and provided, further, that no Purchase Period
shall have a duration exceeding twenty-seven (27) months.

     V.   ELIGIBILITY

          A.   Each Eligible Employee of a Participating Corporation shall be
eligible to participate in the Plan in accordance with the following provisions:

               (i)    An individual who is an Eligible Employee on the start
date of any Purchase Period under the Plan shall be eligible to commence
participation in that Purchase Period on such start date.

               (ii)   An individual who first becomes an Eligible Employee after
the start date of any Purchase Period will not be eligible to commence
participation under the Plan until the start date of the next Purchase Period on
which he/she remains an Eligible Employee.

          B.   To participate in the Plan for a particular Purchase Period, the
Eligible Employee must complete the enrollment forms prescribed by the Plan
Administrator (which may include a stock purchase agreement and a payroll
deduction authorization form) and file such forms with the Plan Administrator
(or its designate) on or before the start date for the Purchase Period.

     VI.  PAYROLL DEDUCTIONS

          A.   The payroll deduction authorized by the Participant for purposes
of acquiring shares of Class B Common Stock under the Plan may be any multiple
of one percent (1%) of the Cash Compensation paid to the Participant during that
Purchase Period, up to a maximum of ten percent (10%).  The deduction rate so
authorized shall continue in effect for the remainder of the Purchase Period,
except to the extent such rate is changed in accordance with the following
guidelines:

               (i)  The Participant may, at any time during the Purchase Period,
reduce his or her rate of payroll deduction to become effective as soon as
possible after filing the

                                       2
<PAGE>

appropriate form with the Plan Administrator. The Participant may not, however,
effect more than one (1) such reduction per Purchase Period.

               (ii) The Participant may, prior to the commencement of any new
Purchase Period, increase the rate of his or her payroll deduction by filing the
appropriate form with the Plan Administrator. The new rate (which may not exceed
the ten percent (10%) maximum) shall become effective as of the start date of
the Purchase Period following the filing of such form.

          B.   Payroll deductions shall begin on the first pay day following the
start date for the Purchase Period and shall (unless sooner terminated by the
Participant) continue through the pay day ending with or immediately prior to
the last day of that Purchase Period. The amounts so collected shall be credited
to the Participant's book account under the Plan, but no interest shall be paid
on the balance from time to time outstanding in such account. The amounts
collected from the Participant shall not be held in any segregated account or
trust fund and may be commingled with the general assets of the Corporation and
used for general corporate purposes.

          C.   Payroll deductions shall automatically cease upon the termination
of the Participant's purchase right in accordance with the provisions of the
Plan.

          D.   The Participant's acquisition of Class B Common Stock under the
Plan on any Purchase Date shall neither limit nor require the Participant's
acquisition of Class B Common Stock on any subsequent Purchase Date.

     VII. PURCHASE RIGHTS

          A.   GRANT OF PURCHASE RIGHT.  A Participant shall be granted a
               -----------------------
separate purchase right for each Purchase Period in which he or she
participates. The purchase right shall be granted on the start date of the
Purchase Period and shall provide the Participant with the right to purchase
shares of Class B Common Stock, upon the terms set forth below.   The purchase
right shall continue until the end of the Purchase Period, and shall be
automatically exercised on the last business day of the respective Purchase
Period each year (the last business day of May and the last business day of
November) or such other date as may be selected by the Plan Administrator as the
ending date for the Purchase Period).  The Participant shall execute a stock
purchase agreement embodying such terms and such other provisions (not
inconsistent with the Plan) as the Plan Administrator may deem advisable.

          Under no circumstances shall purchase rights be granted under the Plan
to any Eligible Employee if such individual would, immediately after the grant,
own (within the meaning of Code Section 424(d)), or hold outstanding options or
other rights to purchase, stock possessing five percent (5%) or more of the
total combined voting power or value of all classes of stock of the Corporation
or any Corporate Affiliate.

          B.   EXERCISE OF THE PURCHASE RIGHT.  Each purchase right shall be
               ------------------------------
automatically exercised on the respective Purchase Date , and shares of Class B
Common Stock shall accordingly be purchased on behalf of each Participant (other
than any Participant whose

                                       3
<PAGE>

payroll deductions have previously been refunded in accordance with the
Termination of Purchase Right provisions below) on each such Purchase Date. The
purchase shall be effected by applying the Participant's payroll deductions for
the Purchase Period ending on such Purchase Date (together with any carryover
deductions from the preceding Purchase Period) to the purchase of whole shares
of Class B Common Stock (subject to the limitation on the maximum number of
shares purchasable per Participant on any one Purchase Date) at the purchase
price in effect for the Participant for that Purchase Date.

          C.   PURCHASE PRICE.  The purchase price per share at which Class B
               --------------
Common Stock will be purchased on the Participant's behalf on each Purchase Date
shall be equal to eighty-five percent (85%) of the lower of (i) the Fair Market
Value per share of Class B Common Stock on the start date for that Purchase
Period or (ii) the Fair Market Value per share of Class B Common Stock on that
Purchase Date.

          D.   NUMBER OF PURCHASABLE SHARES.  The number of shares of Class B
               ----------------------------
Common Stock purchasable by a Participant on each Purchase Date shall be the
number of whole shares obtained by dividing the amount collected from the
Participant through payroll deductions during the Purchase Period ending with
that Purchase Date (together with any carryover deductions from the preceding
Purchase Period) by the purchase price in effect for the Participant for that
Purchase Date.  However, the maximum number of shares of Class B Common Stock
purchasable per Participant on any Purchase Date shall not exceed five hundred
(500) shares, subject to periodic adjustments in the event of certain changes in
the Corporation's capitalization.

          E.   EXCESS PAYROLL DEDUCTIONS.  Any payroll deductions not applied to
               -------------------------
the purchase of shares of Class B Common Stock on any Purchase Date because they
are not sufficient to purchase a whole share of Class B Common Stock shall be
held for the purchase of Class B Common Stock on the next Purchase Date, or at
the option of the Plan Administrator, may be used to buy fractional shares.
However, any payroll deductions not applied to the purchase of Class B Common
Stock by reason of the limitation on the maximum number of shares purchasable by
the Participant on the Purchase Date shall be promptly refunded, without
interest.

          F.   TERMINATION OF PURCHASE RIGHT.  The following provisions shall
               -----------------------------
govern the termination of outstanding purchase rights:

               (i) A Participant may, at any time prior to the next Purchase
Date, terminate his or her outstanding purchase right by filing the appropriate
form with the Plan Administrator (or its designate), and no further payroll
deductions shall be collected from the Participant with respect to the
terminated purchase right. Any payroll deductions collected during the Purchase
Period in which such termination occurs shall, at the Participant's election, be
immediately refunded, without interest, or held for the purchase of shares on
the next Purchase Date. If no such election is made at the time such purchase
right is terminated, then the payroll deductions collected with respect to the
terminated right shall be refunded as soon as possible, without interest.

                                       4
<PAGE>

               (ii) The termination of such purchase right shall be irrevocable,
and the Participant may not subsequently rejoin the Purchase Period for which
the terminated purchase right was granted. In order to resume participation in
any subsequent Purchase Period, such individual must re-enroll in the Plan (by
making a timely filing of the prescribed enrollment forms) on or before the
start date for that Purchase Period.

               (iii) Should the Participant cease to remain an Eligible Employee
for any reason (including death, disability or change in status) while his or
her purchase right remains outstanding, then that purchase right shall
immediately terminate, and all of the Participant's payroll deductions for the
Purchase Period in which the purchase right so terminates shall be immediately
refunded. However, should the Participant cease to remain in active service by
reason of an approved unpaid leave of absence, then the Participant shall have
the election, exercisable up until the last business day of the Purchase Period
in which such leave commences, to (a) withdraw all the funds in the
Participant's payroll account at the time of the commencement of such leave or
(b) have such funds held for the purchase of shares at the end of such Purchase
Period. In no event, however, shall any further payroll deductions be added to
the Participant's account during such leave. Upon the Participant's return to
active service, his or her payroll deductions under the Plan shall automatically
resume at the rate in effect at the time the leave began, provided the
Participant returns to service prior to the expiration date of the Purchase
Period in which such leave began.

          G.   CORPORATE TRANSACTION.  Each outstanding purchase right shall
               ---------------------
automatically be exercised, immediately prior to the effective date of any
Corporate Transaction, by applying the payroll deductions of each Participant
for the Purchase Period in which such Corporate Transaction occurs to the
purchase of whole shares of Class B Common Stock at a purchase price per share
equal to eighty-five percent (85%) of the lower of (i) the Fair Market Value per
share of Class B Common Stock on the start date for the Purchase Period in which
such Corporate Transaction occurs or (ii) the Fair Market Value per share of
Class B Common Stock immediately prior to the effective date of such Corporate
Transaction.  However, the applicable limitation on the number of shares of
Class B Common Stock purchasable per Participant shall continue to apply to any
such purchase.

          The Corporation shall use its best efforts to provide at least ten
(10) days prior written notice of the occurrence of any Corporate Transaction,
and Participants shall, following the receipt of such notice, have the right to
terminate their outstanding purchase rights prior to the effective date of the
Corporate Transaction.

          H.   PRORATION OF PURCHASE RIGHTS.  Should the total number of shares
               ----------------------------
of Class B Common Stock which are to be purchased pursuant to outstanding
purchase rights on any particular date exceed the number of shares then
available for issuance under the Plan, the Plan Administrator shall either (i)
make a pro-rata allocation of the available shares on a uniform and
nondiscriminatory basis, in which case the payroll deductions of each
Participant, to the extent in excess of the aggregate purchase price payable for
the Class B Common Stock pro-rated to such individual, shall be refunded,
without interest, or (ii) increase the number of shares then available for
issuance under the Plan, subject to shareholder approval, by an amount

                                       5
<PAGE>

at least sufficient to permit the purchase of all shares which are to be
purchased pursuant to outstanding purchase rights on such date

           I.  ASSIGNABILITY.  During the Participant's lifetime, the purchase
               -------------
right shall be exercisable only by the Participant and shall not be assignable
or transferable by the Participant.

           J.  SHAREHOLDER RIGHTS.  A Participant shall have no shareholder
               ------------------
rights with respect to the shares subject to his or her outstanding purchase
right until the shares are purchased on the Participant's behalf in accordance
with the provisions of the Plan and the Participant has become a holder of
record of the purchased shares.

     VIII. ACCRUAL LIMITATIONS

           A.  No Participant shall be entitled to accrue rights to acquire
Class B Common Stock pursuant to any purchase right outstanding under this Plan
if and to the extent such accrual, when aggregated with (i) rights to purchase
Class B Common Stock accrued under any other purchase right granted under this
Plan and (ii) similar rights accrued under other employee stock purchase plans
(within the meaning of Code Section 423) of the Corporation or any Corporate
Affiliate, would otherwise permit such Participant to purchase more than twenty-
five thousand dollars ($25,000) worth of stock of the Corporation or any
Corporate Affiliate (determined on the basis of the Fair Market Value of such
stock on the date or dates such rights are granted) for each calendar year such
rights are at any time outstanding.

           B.  For purposes of applying such accrual limitations, the following
provisions shall be in effect:

               (i)  The right to acquire Class B Common Stock under each
outstanding purchase right shall accrue on each successive Purchase Date.

               (ii) No right to acquire Class B Common Stock under any
outstanding purchase right shall accrue to the extent the Participant has
already accrued in the same calendar year the right to acquire Class B Common
Stock under one or more other purchase rights in an amount equal to twenty-five
thousand dollars ($25,000) worth of Class B Common Stock (determined on the
basis of the Fair Market Value of such stock on the date or dates of grant) for
each calendar year such rights were at any time outstanding.

           C.  If by reason of such accrual limitations, any purchase right of a
Participant does not accrue for a particular Purchase Period, then the payroll
deductions which the Participant made during that Purchase Period with respect
to such purchase right shall be promptly refunded, without interest.

           D.  In the event there is any conflict between the provisions of this
Article and one or more provisions of the Plan or any instrument issued
thereunder, the provisions of this Article shall be controlling.

                                       6
<PAGE>

     IX.  EFFECTIVE DATE AND TERM OF THE PLAN

          A.   The Plan was adopted by the Board as of October 1, 1997, and
approved by the shareholders as of December 3, 1997.  It shall become effective
at the Effective Time, provided no purchase rights granted under the Plan shall
                       --------
be exercised, and no shares of Class B Common Stock shall be issued hereunder,
until the Corporation shall have complied with all applicable requirements of
the 1933 Act (including the registration of the shares of Class B Common Stock
issuable under the Plan on a Form S-8 registration statement filed with the
Securities and Exchange Commission), all applicable listing requirements of any
stock exchange (or the Nasdaq National Market, if applicable) on which the Class
B Common Stock is listed for trading and all other applicable requirements
established by law or regulation. In the event such shareholder approval is not
obtained, or such compliance is not effected, within twelve (12) months after
the date on which the Plan is adopted by the Board, the Plan shall terminate and
have no further force or effect and all sums collected from Participants during
the initial offering period hereunder shall be refunded.

          B.   Unless sooner terminated by the Board, the Plan shall terminate
upon the earliest of (i) the last business day in September 2007, (ii) the date
on which all shares available for issuance under the Plan shall have been sold
pursuant to purchase rights exercised under the Plan or (iii) the date on which
all purchase rights are exercised in connection with a Corporate Transaction. No
further purchase rights shall be granted or exercised, and no further payroll
deductions shall be collected, under the Plan following its termination.

     X.   AMENDMENT OF THE PLAN

          The Board may alter, amend, suspend or discontinue the Plan at any
time, to become effective immediately following the close of any Purchase
Period. However, the Board may not, without the approval of the Corporation's
shareholders, (i) materially increase the number of shares of Class B Common
Stock issuable under the Plan or the maximum number of shares purchasable per
Participant on any one Purchase Date, except for permissible adjustments in the
event of certain changes in the Corporation's capitalization as provided in
Section III.B hereof, (ii) alter the purchase price formula so as to reduce the
purchase price payable for the shares of Class B Common Stock purchasable under
the Plan, or (iii) materially modify the requirements for eligibility to
participate in the Plan.

     XI.  GENERAL PROVISIONS

          A.   All costs and expenses incurred in the administration of the Plan
shall be paid by the Corporation.

          B.   Nothing in the Plan shall confer upon the Participant any right
to continue in the employ of the Corporation or any Corporate Affiliate for any
period of specific duration or interfere with or otherwise restrict in any way
the rights of the Corporation (or any Corporate Affiliate employing such person)
or of the Participant, which rights are hereby expressly reserved by each, to
terminate such person's employment at any time for any reason, with or without
cause.

                                       7
<PAGE>

          C.   The provisions of the Plan shall be governed by the laws of the
State of California without resort to that State's conflict-of-laws rules.

          D.   The Plan is designed to qualify under Section 423 of the Code.
Payroll deductions will be made on an after-tax basis.

                                       8
<PAGE>

                                  SCHEDULE A
                                  ----------

                         CORPORATIONS PARTICIPATING IN

                         EMPLOYEE STOCK PURCHASE PLAN

                           AS OF THE EFFECTIVE TIME
                           ------------------------

                            Tier Technologies, Inc.

                         Tier Technologies (UK), Inc.
<PAGE>

                                   APPENDIX
                                   --------

          The following definitions shall be in effect under the Plan:

          A.   BOARD shall mean the Corporation's Board of Directors.
               -----

          B.   CASH COMPENSATION shall mean the (i) regular base salary paid to
               -----------------
a Participant by one or more Participating Companies during such individual's
period of participation in the Plan, plus (ii) all of the following amounts to
the extent paid in cash: overtime payments, bonuses, commissions, profit-sharing
distributions and other incentive-type payments (including, in the case of any
amounts referred to in clause (i) or (ii), any pre-tax contributions made by the
Participant to any Code Section 401(k) salary deferral plan or any Code Section
125 cafeteria benefit program now or hereafter established by the Corporation or
any Corporate Affiliate). However, Eligible Earnings shall not include any
contributions (other than Code Section 401(k) or Code Section 125 contributions)
made on the Participant's behalf by the Corporation or any Corporate Affiliate
to any deferred compensation plan or welfare benefit program now or hereafter
established.

          C.   CLASS B COMMON STOCK shall mean the Corporation's Class B Common
               --------------------
Stock.

          D.   CODE shall mean the Internal Revenue Code of 1986, as amended.
               ----

          E.   CORPORATE AFFILIATE shall mean any parent or subsidiary
               -------------------
corporation of the Corporation (as determined in accordance with Code Section
424), whether now existing or subsequently established.

          F.   CORPORATE TRANSACTION shall mean either of the following
               ---------------------
shareholder-approved transactions to which the Corporation is a party:

               (i)  a merger or consolidation in which securities possessing
more than fifty percent (50%) of the total combined voting power of the
Corporation's outstanding securities are transferred to a person or persons
different from the persons holding those securities immediately prior to such
transaction, or

               (ii) the sale, transfer or other disposition of all or
substantially all of the assets of the Corporation in complete liquidation or
dissolution of the Corporation.

          G.   CORPORATION shall mean Tier Technologies, Inc., a California
               -----------
corporation, and any corporate successor to all or substantially all of the
assets or voting stock of Tier Technologies, Inc. which shall by appropriate
action adopt the Plan.

          H.   EFFECTIVE TIME shall mean the time at which the Underwriting
               --------------
Agreement is executed and finally priced.  Any Corporate Affiliate which becomes
a

                                      A-1
<PAGE>

Participating Corporation after such Effective Time shall designate a subsequent
Effective Time with respect to its employee-Participants.

          I.   ELIGIBLE EMPLOYEE shall mean any employee, except any person who
               -----------------
is engaged, on a regularly-scheduled basis for fewer than twenty (20) hours per
week or for fewer than five (5) months per calendar year, in the rendition of
personal services to any Participating Corporation as an employee for earnings
considered wages under Code Section 3401(a).

          J.   FAIR MARKET VALUE per share of Class B Common Stock on any
               -----------------
relevant date shall be determined in accordance with the following provisions:

               (i)   If the Class B Common Stock is at the time traded on the
Nasdaq National Market, then the Fair Market Value shall be the closing selling
price per share of Class B Common Stock on the date in question, as such price
is reported by the National Association of Securities Dealers on the Nasdaq
National Market or any successor system. If there is no closing selling price
for the Class B Common Stock on the date in question, then the Fair Market Value
shall be the closing selling price on the last preceding date for which such
quotation exists.

               (ii)  If the Class B Common Stock is at the time listed on any
Stock Exchange, then the Fair Market Value shall be the closing selling price
per share of Class B Common Stock on the date in question on the Stock Exchange
determined by the Plan Administrator to be the primary market for the Class B
Common Stock, as such price is officially quoted in the composite tape of
transactions on such exchange. If there is no closing selling price for the
Class B Common Stock on the date in question, then the Fair Market Value shall
be the closing selling price on the last preceding date for which such quotation
exists.

               (iii) For purposes of the initial offering period which begins at
the Effective Time, the Fair Market Value shall be deemed to be equal to the
price per share at which the Class B Common Stock is sold in the initial public
offering pursuant to the Underwriting Agreement.

          K.   1933 ACT shall mean the Securities Act of 1933, as amended.
               --------

          L.   PARTICIPANT shall mean any Eligible Employee of a Participating
               -----------
Corporation who is actively participating in the Plan.

          M.   PARTICIPATING CORPORATION shall mean the Corporation and such
               -------------------------
Corporate Affiliate or Affiliates as may be authorized from time to time by the
Board to extend the benefits of the Plan to their Eligible Employees.  The
Participating Corporations in the Plan as of the Effective Time are listed in
attached Schedule A.

          N.   PLAN shall mean the Corporation's Employee Stock Purchase Plan,
               ----
as set forth in this document.

                                      A-2
<PAGE>

          O.   PLAN ADMINISTRATOR shall mean the committee of two (2) or more
               ------------------
Board members appointed by the Board to administer the Plan.

          P.   PURCHASE DATE shall mean the last business day of each Purchase
               -------------
Period.  The initial Purchase Date shall be May 29, 1998.

          Q.   PURCHASE PERIOD shall mean each successive period at the end of
               ---------------
which there shall be purchased shares of Class B Common Stock on behalf of each
Participant.

          R.   STOCK EXCHANGE shall mean either the American Stock Exchange or
               --------------
the New York Stock Exchange.

          S.   UNDERWRITING AGREEMENT shall mean the agreement among the
               ----------------------
Corporation, the selling shareholders and the underwriters managing the initial
public offering of the Class B Common Stock.

                                      A-3

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