Group Policy is one of the most exciting -- and potentially complex -- mechanisms that the Active Directory enables. Group policy allows a bundle of system and user settings (called a "Group Policy Object" or GPO) to be created by an administrator of a domain or OU and have it automatically pushed down to designated systems.
Group Policy can control everything from user interface settings such as screen background images to deep control settings in the client such as its TCP/IP configuration and authentication settings. There are currently over 500 controllable settings. Microsoft has provided some templates as well to provide a starting point for creating policy objects.
A significant advantage of group policy over the old NT-style policies is that the changes they make are reversed when the policy no longer applies to a system. In NT 4, once a policy was applied to a system, removing that policy did not by itself roll back the settings that it imposed on the client. With Windows 2000, when a specified policy no longer applies to a system it will revert to its previous state without administrative interference.
Multiple policies from different sources can be applied to the same object. For example, a domain might have one or more domain-wide policies that apply to all systems in the domain. Below that, systems in an OU can also have policy objects applied to it, and the OU can even be further divided into sub-OU's with their own policies.
This can create a very complex web of settings so administrators must be very careful when creating these multiple layers of policy to make sure the end result -- which is the union of all of the applicable policies with the "closest" policy taking priority in most cases -- is correct for that system. In addition, because Group policy is checked and applied during the system boot process for machine settings and again during logon for user settings, it is recommended that GPO's be applied to a computer from no more than five "layers" in the AD to keep reboot and/or login times from becoming unacceptably long.