IP Tutorial Subnet Masks and Subnetting

Subnetting in Practice
Subnetting works by applying the concept of extended network addresses to individual computer (and other network device) addresses.

An extended network address includes both a network address and additional bits that represent the subnet number... (see below)

.. . Together, these two data elements support a two-level addressing scheme recognized by standard implementations of IP. The network address and subnet number, when combined with the host address, therefore support a three-level scheme.
Consider the following real-world example. A small business plans to use the 192.168.1.0 network for its internal (intranet) hosts. The human resources department wants their computers to be on a restricted part of this network because they store payroll information and other sensitive employee data. But because this is a Class C network, the default subnet mask of 255.255.255.0 allows all computers on the network to be peers (to send messages directly to each other) by default.
The first four bits of 192.168.1.0 -
1100
place this network in the Class C range and also fix the length of the network address at 24 bits. To subnet this network, more than 24 bits must be set to '1' on the left side of the subnet mask. For instance, the 25-bit mask 255.255.255.128 creates a two-subnet network as follows.

For every additional bit set to '1' in the mask, another bit becomes available in the subnet number to index additional subnets. A two-bit subnet number can support up to four subnets, a three-bit number supports up to eight subnets, and so on.
Private Networks and Subnets
As mentioned earlier in this tutorial, the governing bodies that administer Internet Protocol have reserved certain networks for internal uses. In general, intranets utilizing these networks gain more control over managing their IP configuration and Internet access. The default subnet masks associated with these private networks are listed below.

Consult RFC 1918 for more details about these special networks.
Subnetting Review
Subnetting allows network administrators some flexibility in defining relationships among network hosts. Hosts on different subnets can only "talk" to each other through specialized network gateway devices like routers. The ability to filter traffic between subnets can make more bandwidth available to applications and can limit access in desirable ways.

source :http://compnetworking.about.com