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A layer 3 switch also makes packet switching (forwarding) decisions based on Layer 3 Addressing as well as layer 2 packet switching (forwarding) decisions. A very common mistake is the layer 3 switch's function is often compared with the functions of a router.

There are fundamental differences between a router and a layer 3 switch.

A layer 3 switch is not a multi-port router, however, a Cisco layer 3 switch like a Cisco Catalyst 3550 series switch and a Cisco Catalyst 3750 switch can be configured as a multi-port router, a pure layer 3 switch, or a hybrid router/layer 3 switch.

Firstly, a router only makes packet switching (forwarding) decisions at layer 3, whereas a layer 3 switch makes a packet switching (forwarding) decision at both layer 2 and layer 3.

A layer 3 switch supports VTP (vLAN Trunking Protocol), a router doesn't, even though it does support 802.1q and ISL vLAN Trunks, that is only done as an end point, (just like a NIC that also supports 802.1q or ISL).

A layer 3 switch routes packets between vLANs (and the vLANs are seen as router interfaces), the switchports are either 802.1q or ISL trunk ports, or belong to a particular vLAN (either statically assigned, or dynmically assigned using 802.1x). Interfaces on a router are seen as router interfaces, apart from creating bridge groups.

When you get in Cisco Catalst 4000 series and upwards, those switches are referred to as !Multi-Layer switches, as they traditionally have separate routing and switching processors. These days, we are looking at each line card having it's own switching processor which are the dCEF modules in the Cisco world. (aCEF modules uses the switching processor on the Supervisor card).