Explanation of Active Directory Domain Functional Level Features

Windows Server 2003 domain functional level features

- Domain rename capability
Windows Server 2003 functional level supports rename of Active Directory domain.

- Cross-forest transitive trusts
Windows Server 2003 functional level supports transitive trusts between two or more Active Directory forests.

- Universal group caching
Windows Server 2003 functional level supports Universal group caching which eliminate the need for local global catalog server

- Intersite topology generator (ISTG) improvements
More efficient ISTG algorithm allows support for extremely large numbers of sites.

- Multivalued attribute replication improvements
This allows incremental membership changes.

- Lingering objects (zombies) detection
Windows Server 2003 ability to detect zombies, or lingering objects.

- AD-integrated DNS zones in application partitions
This allows storing of DNS data in AD application partition for more efficient replication. 

Windows Server 2008 domain functional level features

- Fine-grained password policies
Allows multiple password polices to be applied to different users in the same domain.

- Read-Only Domain Controllers
Allows implementation of domain controllers that only host read-only copy of NTDS database.

- Granular auditing
Allows history of object changes in Active Directory.

- Distributed File System Replication (DFSR)
Allows SYSVOL to replicate using DFSR instead of older File Replication Service (FRS). It provides more robust and detailed replication of SYSVOL contents.