The DHCP server issues and leases dynamic IP addresses to clients on a network. It assigns IP addresses from a defined address pool for a predetermined lease duration, such as days for laptops and weeks for desktops. The DHCP server can reserve addresses for certain clients based on their MAC addresses or host names and restrict leases to clients with known MAC addresses for security. It is installed through the server management wizard and configured by specifying the address range, exclusions, lease duration, DNS settings, and reservations.