By looking at the addressing structures, you can see that even with a Class C address, there are a large number of hosts per network. Such a structure is an inefficient use of addresses if each end of a routed link requires a different network number. It is unlikely that the smaller office LANs would have that many devices. You can resolve this problem by using a technique known as subnet addressing.
Subnet addressing allows us to split one IP network address into smaller multiple physical networks known as subnetworks. Some of the node numbers are used as a subnet number instead.
A Class B address gives us 16 bits of node numbers translating to 64,000 nodes. Most organizations do not use 64,000 nodes, so there are free bits that can be reassigned. Subnet addressing makes use of those bits that are free, as shown below.
A Class B address can be effectively translated into multiple Class C addresses. For example, the IP address of 172.16.0.0 is assigned, but node addresses are limited to 255 maximum, allowing eight extra bits to use as a subnet address. The IP address of 172.16.97.235 would be interpreted as IP network address 172.16, subnet number 97, and node number 235. In addition to extending the number of addresses available, subnet addressing provides other benefits. Subnet addressing allows a network manager to construct an address scheme for the network by using different subnets for other geographical locations in the network or for other departments in the organization.
Although the preceding example uses the entire third octet for a subnet address, note that you are not restricted to octet boundaries in subnetting. To create more network numbers, you need only shift some bits from the host address to the network address. For instance, to partition a Class C network number (192.68.135.0) into two, you shift one bit from the host address to the network address. The new netmask (or subnet mask) is 255.255.255.128. The first subnet has network number 192.68.135.0 with hosts 192.68.135.1 to 129.68.135.126, and the second subnet has network number 192.68.135.128 with hosts 192.68.135.129 to 192.68.135.254.
Note: The number 192.68.135.127 is not assigned because it is the broadcast address of the first subnet. The number 192.68.135.128 is not assigned because it is the network address of the second subnet.
Link to download this Doc
http://documentation.netgear.com/reference/enu/tcpip/pdfs/FullManual.pdf
