Understanding Domain and Forest Functionality
Windows Server 2008 R2 Active Directory uses a concept called domain and forest functionality. The functional level that you choose during the Active Directory installation determines which features your domain can use.
Windows Server 2003, 2008, and 2008 R2 include additional forest functionality compared to Windows 2000. Forest functionality applies to all of the domains in a forest.
About the Domain Functional Level
Windows Server 2008 R2 will support the following domain functional levels:
Which function level you use depends on the domain controllers you have installed on your network. This is an important fact to remember. ...