A logical grouping of computers. For example, all the machines with IP addresses in the range 192.0.2.0-192.0.2.255 are considered to be on the "192.0.2.*" subnet. This is similar to a telephone "exchange". All the phone numbers in the range 555-0000 to 555-9999 are considered to be part of the 555-**** exchange. Generally, all the phone numbers in the same exchange are in the same physical neighborhood. In much the same way, all the members of a subnet are in the same virtual neighborhood.
When Windows users open "Network Neighborhood", the machines they see are often located on the same subnet.
Subnets are useful because they allow a feature known as a "directed broadcast". A single IP packet can be sent to all members of the subnet at the same time. This is how Windows finds out all the people in the Network Neighborhood: it listens for these broadcasts sent by everyone else.
