As with each edition of Windows Server, the 2008 release also includes some new additions.  In order to take advantage of some of these new features you need to upgrade your Active Directory Forest and Domain functional levels.  You can read about the Windows 2000/2003 domain and forest functional levels as a refresher if you like, but here we'll cover the 2008 versions.

Windows 2008 Forest Functional Level

The Windows 2008 Forest functional level does not provide any additional features to your Active Directory forest.  It does require that all Domain Controllers in the forest are running Sever 2008.  You should only change this once you have upgraded all DCs in the forest to Server 2008.

Windows 2008 Domain Functional Level

The Windwos 2008 Domain functional level does provide quite a few useful new features to your Active Directory forest.  Some of these you've probably been asking for!  All Domain Controllers in the domain (but not forest) will need to be running Windows Server 2008.

• Fine grained password policies.  Finally you can have seperate password policies for different OUs aside from the domain level policy.
• Last Interactive Login information.  You can use this information to get details on the last time an account was used to login to the domain.
• Distributed File System updates.
• AES support for Kerberos

The process for upgrading your forest or domain are the same as they were in the past.