Need help with network switch layout

Layer 2 switches work at the data link layer and only store MAC to IP information in what's known as an ARP (address resolution protocol) table. In a layer 2 switch, there is only a single subnet and that single subnet is a single broadcast domain. Ethernet is a contention based communications protocol, so everything on a single broadcast domain will listen to and talk to everything else on that subnet. Think of it as people being jammed into a single room and everyone's talking at the same time.

Layer 3 switches go one step further in that they can operate up to the Network Layer and act as routers through the use of VLANs' or virtual LAN's. A VLAN is basically a logical subnet in your physical LAN, so that you can have a single star topology and have multiple subnets that way (e.g. multiple rooms with people talking and nobody can hear people in the other rooms, as each VLAN is its own broadcast domain). With a layer 3 switch, each port can be assigned a VLAN ID, which in itself translates to a subnet and mask , and then there is a default gateway for each VLAN so that it knows how to talk to other VLANs'. A layer 3 switch is basically a switch that can route traffic internally to other VLANs', since each VLAN is it's own broadcast domain or isolated subnet.

You can't convert Layer 2 switches to Layer 3, as you'll need to buy completely new hardware to support Layer 3. Cisco 3750 switches and the larger enterprise Catalyst 6500 switch chassis support Layer 3 with the appropriate blades.