4Q06 Progress Report

On February 11th, 2006 Blade Network Technologies, Inc. (BLADE in short) came into being thanks to the efforts of Nortel and Garnett & Helfrich Capital, to serve the growing need for sophisticated network infrastructure for the rapidly growing Blade Server market.

October 31st, 2006 marked the end of our 2006 fiscal year (Nov 1 – Oct 31).

When we began our journey at 00:01 hrs on February 11th this year, there was a healthy dose of skepticism in the industry about BLADE and what might happen to this young company in the months immediately following our incorporation.

The task of building an infrastructure to serve the company’s only two customers - HP and IBM (the world’s top two Information Technology companies that collectively generate a staggering $200 Billion in annual sales), whilst being required to make our entire portfolio of products (comprising 12 discreet products) RoHS compliant, bringing 12 new products (3 hardware platforms and 9 new software releases) to market in record time, relocating 100 racks housing 300 Tons of equipment over a weekend from Nortel’s campus to BLADE’s new home, and most importantly swiftly correcting technical issues encountered with our products by end customers and thus ensuring “customer delight”, seemed like a lot to take on for a brand new company with measured resources.

A dear friend, close confidant, and fellow BLADER jokingly said to me as our American Airlines Flight from Dallas on February 11th, 2006 touched down at San Jose International - “What a fine mess you’ve gotten us all into”.

And a fine mess we would have found ourselves in, had it not been for the exceptional support, patience, and encouragement from our customers and business partners, the empathy and understanding of our suppliers, and the dedication and hard work of the employees of BLADE.

I want to thank our customers, business partners, suppliers, and employees of BLADE for helping us become not just a viable but a thriving business with growing credibility in the market place.

BLADE has come a long way since February 11th, 2006 and made considerable progress since I last wrote you on July 12th, 2006.

Below are some highlights:

- Shipments for our Fiscal Q3, 2006 (which began on May 1 and ended on July 31) were up 81% over the same period in the previous year. Shipments for our Fiscal Q4, 2006 (August 1 – October 31) were up 32% over the same period in 2005; and shipments for our Fiscal 2006 (Nov 1, 2005 – Oct 31, 2006) were up 36% over Fiscal 2005.

- As of October 31st, 2006, BLADE has over 88,000 blade server switches (representing over 1.9 million ports) in production deployment at over 1,700 major enterprises around the globe across 26 different industry segments. These switches provide network connectivity for over 400,000 server blades running mission critical applications.

- “Shipments” and “Cash” are important considerations for a young company our size. Here is how we performed against these two important metrics in our fiscal 2006:

o Shipments for fiscal 2006 were 133% of plan .

o Net cash balance on 10/31/06 was up 11% from our starting cash balance on 2/11/06 despite the fact that the company has more than doubled payroll during this period and has had to make significant one-time infrastructure investments in building infrastructure, equipment, and machinery.

We believe that strong financial discipline is key to being a viable, credible, and trustworthy supplier.

- In 2006, BLADE became the industry’s #1 supplier of blade server switches as measured by our share of the total blade server switch shipments. BLADE’s share of this market is 43% while our closest competitor is at 32%.

- We are credited with a number of other firsts by the industry, including:
• 1st to ship integrated Layer 2-3 switching for blade servers
• 1st to ship integrated Layer 2-7 switch for blade servers
• 1st to bring 10GE connectivity to blade server chassis
• Industry’s best price-performance for blade server switches
• Industry’s record holder for highest throughput and lowest latency blade server switch

- Our employee strength as of the date of this report is 88 (up from 42 on Feb 11, 2006). 47% of our employees are in the Engineering function (Hardware, Software, and Test), emphasizing our continued focus on innovation and building world-class networking solutions for the rapidly growing blade server market.

- Our Supply Chain Operation has been acknowledged by our customers as amongst the best in the business given how we’ve responded to upside demand and helped our customers make the RoHS transition while minimizing their exposure of excess and obsolete inventory.

- It has been 29 weeks since we first implemented “Kaizen” at BLADE and it continues to provide the foundation of every decision and every action at BLADE. This rigorous, but time-tested and proven methodology has been key to our strong results for our fiscal 2006 (ended October 31st, 2006). “Kaizen” is a permanent part of BLADE as we believe very strongly that it will help us achieve operational excellence. This time tested system is a key part of our efforts to become the industry’s most trusted supplier of network infrastructure for blade server systems.

- Our Marketing and Engineering teams have finalized their product roadmap for 2007 and beyond and I am pleased to report that the rich and innovative products and features planned over the coming 24 months will help accelerate the adoption of blade servers and address major customer pain points including – performance, throughput, latency, price-performance, manageability, rack-level aggregation, etc. In the month of November a few of us are spending considerable time on the road sharing this roadmap with end customers around the world.

- Our global team of Network Architects have worked tirelessly to help customers design and deploy the best blade server network topologies. In addition to providing highly valued technical pre-sales support to our server customers and their business partners, these road warriors have recently received a lot of accolades from many end customers who view them as “Trusted Advisors”.

Please visit our new on-line picture gallery at http://www.bladenetwork.net/pages/about_us_photos.html to see the progress we’re making at BLADE.

Thank you for your support in this very important year.