Dave.
Google will automatically put your ads on their on search trusting you to not abuse it. This is a great benefit over Overture. Your ads will be manually reviewed before they are put on partner sites and also after a certain number of impressions.
You want your keyword to appear (preferably in the title) of the ad, so in some cases dynamic insertion is the way togo for the keyword title while keeping the integrity of the rest of the ad.
One of the best ways for people with a lot of keywords to break them down into groups is to first think of several ads. Now which keywords fit better into that ad than another one?
I completely agree, and also suggest looking at it from the other way around as well. Rather than starting with keywords, consider starting with what you have to offer - your products or services.
I often suggest that advertisers get really old-school for awhile, and sit down with a piece of paper and a pencil (!) to map out all the distinct products or services that they have to offer. Each distinct product or service is a natural subject for an Ad Group.
Once you have your Ad Groups defined, then select keywords that specifically relate to the product or service offered in each Ad Group.
In this way, you can make sure you are using really targeted keywords, and showing a very targeted ad too. The usual result is a good CTR, and pre-qualified customers finding their way to your site.
AWA