A network system comprising: an internet protocol over ethernet switch fabric comprising a plurality of switches interconnected to form a physical network, wherein the switches provide connectionless packet-based switching for packets through the switch fabric; a plurality of servers interconnected by the switch fabric, wherein each of the servers comprises an operating environment configured to execute one or more virtual machines in communication via one or more virtual networks, and a plurality of host network accelerators, each of the host network accelerators comprising a hardware-based virtual router configured to extend the one or more virtual networks to the operating environments of the virtual machines, wherein each of the host network accelerators comprises a respective flow control unit configured to insert the flow control information into outer headers of outbound tunnel packets constructed by the virtual router when encapsulating outbound packets from the virtual machines, wherein, for each pair of the host network accelerators in the network system, a first host network accelerator sends flow control information to a second host network accelerator, wherein schedulers of each of the host network accelerators are configured to control transmission of the outbound tunnel packets from the virtual router to other ones of the host network accelerators based on the respective flow control information received from each of other ones of the host network accelerators, and characterised in that the flow control information specifies: an amount of packet data for the tunnel packets that are pending in the outbound queues to be sent by the first host network accelerator to the second host network accelerator, a maximum rate at which the second host network accelerator is permitted to send tunnel packets to the first host network accelerator, and a timestamp specifying a time at which the first one of the host network accelerators sent flow control information. an internet protocol over ethernet switch fabric comprising a plurality of switches interconnected to form a physical network, wherein the switches provide connectionless packet-based switching for packets through the switch fabric; a plurality of servers interconnected by the switch fabric, wherein each of the servers comprises an operating environment configured to execute one or more virtual machines in communication via one or more virtual networks, and a plurality of host network accelerators, each of the host network accelerators comprising a hardware-based virtual router configured to extend the one or more virtual networks to the operating environments of the virtual machines, wherein each of the host network accelerators comprises a respective flow control unit configured to insert the flow control information into outer headers of outbound tunnel packets constructed by the virtual router when encapsulating outbound packets from the virtual machines, wherein, for each pair of the host network accelerators in the network system, a first host network accelerator sends flow control information to a second host network accelerator, wherein schedulers of each of the host network accelerators are configured to control transmission of the outbound tunnel packets from the virtual router to other ones of the host network accelerators based on the respective flow control information received from each of other ones of the host network accelerators, and characterised in that the flow control information specifies: an amount of packet data for the tunnel packets that are pending in the outbound queues to be sent by the first host network accelerator to the second host network accelerator, a maximum rate at which the second host network accelerator is permitted to send tunnel packets to the first host network accelerator, and a timestamp specifying a time at which the first one of the host network accelerators sent flow control information. an amount of packet data for the tunnel packets that are pending in the outbound queues to be sent by the first host network accelerator to the second host network accelerator, a maximum rate at which the second host network accelerator is permitted to send tunnel packets to the first host network accelerator, and a timestamp specifying a time at which the first one of the host network accelerators sent flow control information.