The layer that contains the network abstraction and functionality of source features for use in ArcGIS Network Analyst.
A Network Dataset is a special layer that contains the network abstraction of source features for use in ArcGIS Network Analyst. For example, a line shapefile or feature class can represent roads. When loaded into a Network Dataset the lines become edges of the network and the intersections of those lines become junctions. The Network Dataset contains information about network rules such as where junctions occur, how turns can be made at junctions, the way routes over the network are evaluated (impedance), etc. It is all the information about how the network operates as opposed to the geometry which is loaded from source features.
A Network Dataset and all of its contributing source feature classes must reside within a Feature Dataset inside a geodatabase.