This diagram illustrates the Network layer (Layer 3) of the OSI model. The Network layer adds the concept of routing above the Data Link layer. As illustrated above, when data arrives at the Network layer, the source and destination addresses contained inside each frame are examine to determine if the data has reached its final destination. If the data has reached the final destination, the Network layer formats the data into packets delivered to the Transport layer. Otherwise, the Network layer updates the destination address and pushes the frame back down to the lower layers.
To support routing, the Network layer maintains logical addresses such as IP addresses for devices on the network. The Network layer also manages the mapping between these logical addresses and physical addresses. In IP networking, this mapping is accomplished through the Address Resolution Protocol (ARP).
Related References -
OSI Model Tutorial, ARP
OSI Model Application layer