What are the OSI and TCP/IP Network models?

To understand how firewalls work it helps to understand how the different layers of a network interact. Network architecture is designed around a seven layer model. Each layer has its own set of responsibilities, and handles them in a well-defined manner. This enables networks to mix and match network protocols and physical supports. In a given network, a single protocol can travel over more than one physical support (layer one) because the physical layer has been dissociated from the protocol layers (layers three to seven). Similarly, a single physical cable can carry more than one protocol. The TCP/IP model is older than the OSI industry standard model which is why it does not comply in every respect. The first four layers are so closely analogous to OSI layers however that interoperability is a day to day reality.
Firewalls operate at different layers to use different criteria to restrict traffic. The lowest layer at which a firewall can work is layer three. In the OSI model this is the network layer. In TCP/IP it is the Internet Protocol layer. This layer is concerned with routing packets to their destination. At this layer a firewall can determine whether a packet is from a trusted source, but cannot be concerned with what it contains or what other packets it is associated with. Firewalls that operate at the transport layer know a little more about a packet, and are able to grant or deny access depending on more sophisticated criteria. At the application level, firewalls know a great deal about what is going on and can be very selective in granting access.
Figure 4: The OSI and TCP/IP models

It would appear then, that firewalls functioning at a higher level in the stack must be superior in every respect. This is not necessarily the case. The lower in the stack the packet is intercepted, the more secure the firewall. If the intruder cannot get past level three, it is impossible to gain control of the operating system.
Figure 5: Professional Firewalls Have Their Own IP Layer

Professional firewall products catch each network packet before the operating system does, thus, there is no direct path from the Internet to the operating system's TCP/IP stack. It is therefore very difficult for an intruder to gain control of the firewall host computer then "open the doors" from the inside.

According To Byte Magazine*, traditional firewall technology is susceptible to misconfiguration on non-hardened OSes. More recently, however, "...firewalls have moved down the protocol stack so far that the OS doesn't have to do much more than act as a bootstrap loader, file system and GUI". The author goes on to state that newer firewall code bypasses the operating system's IP layer altogether, never permitting "potentially hostile traffic to make its way up the protocol stack to applications running on the system''.