IP addresses: Networks and hosts (http://support.microsoft.com/kb/164015)
An IP address is a 32-bit number that uniquely identifies a host (computer or other device, such as a printer or router) on a TCP/IP network.

IP addresses are normally expressed in dotted-decimal format, with four numbers separated by periods, such as 192.168.123.132. To understand how subnet masks are used to distinguish between hosts, networks, and subnetworks, examine an IP address in binary notation.

For example, the dotted-decimal IP address 192.168.123.132 is (in binary notation) the 32 bit number 110000000101000111101110000100. This number may be hard to make sense of, so divide it into four parts of eight binary digits.

These eight bit sections are known as octets. The example IP address, then, becomes 11000000.10101000.01111011.10000100. This number only makes a little more sense, so for most uses, convert the binary address into dotted-decimal format (192.168.123.132). The decimal numbers separated by periods are the octets converted from binary to decimal notation.

For a TCP/IP wide area network (WAN) to work efficiently as a collection of networks, the routers that pass packets of data between networks do not know the exact location of a host for which a packet of information is destined. Routers only know what network the host is a member of and use information stored in their route table to determine how to get the packet to the destination host's network. After the packet is delivered to the destination's network, the packet is delivered to the appropriate host.

For this process to work, an IP address has two parts. The first part of an IP address is used as a network address, the last part as a host address. If you take the example 192.168.123.132 and divide it into these two parts you get the following: 192.168.123. Network .132 Host