Three Components of the GPS:
The space segment is the set of satellites providing known locations for resection, the ground segment is a set of ground control stations that communicate with the satellites and determine their locations, and the user segment is the recievers and people who use them.The segments work together; the control stations locate the satellites precisely in space, each satellite generates radio signals that allow a receiver (user) to estimate the satellite location and distance between the satellite and the receiver, and the receiver uses those measurements to calculate where on the Earth the user is located.

The space segment of the GPS system consists of a constellation of satellites in earth orbit, with at least four visible anywhere in the world at any time. While only twenty four satellites are needed to meet this requirement (four satellites in each of six orbital planes), several more are generally in service to provide backup. The satellites primarily consist of antennas, a transmitter, and atomic clocks. The transmitter sends a signal containing position information, a time stamp (from the atomic clock) and the psuedo-random code needed for distance determination.

The ground segment consists of a global network of monitoring stations and a master control station (MCS) in Colorado. Coordinates of the groudn stations are all precisely determined. The monitoring stations communicate with the satellite constellation, collecting location information about the satellites and sending it to the MCS. The MCS processes the information, modeling the location of the satellites as a function of time and then sending the information out for uplink to the satellites. Orbital information, atmospheric data, and other parameters are also monitored and maintained by the MCS.
The user segment consists of the person or system (car, airplane, etc) using a receiver to determine the position of an unknown location. Receivers contain an antenna that captures signals from visible satellites, a clock to internally generate signals to synchronize with the incoming satellite signal, and a hardware and software system to process signals and calculate position. Characteristics of receivers that can impact accuracy are single- versus dual-frequency receivers, the number of channels available to track satellites (i.e. how many satellites can be tracked simultaneously), whether they are differential-ready, and whether they use carrier signals in some fashion. Other characteristics of receivers that may be important include size, cost, battery life, and interoperability with other systems like personal computers.
Note that satellites contain an atomic clock; handheld receivers contain less accurate (and much less expensive) clocks. This results in errors when trying to synchronize the signal between receiver and satellite. To account for this error a fourth measurement is required for positioning. Given three satellites, we have an initial guess at our location. Theoretically, a fourth satellite distance would correspond to this location as well. However, if there is a clock error, it is geometrically impossible for it to match. Given that the error is constant between satellites (the satellites are all synchronized), the receiver can adjust the distances by a constant amount until they all intersect at a single point - the location of the receiver. This determination of the clock offset also provides a highly accurate time reading.
Positional accuracy is of fundamental concern to many people using GPS. Accuracy is based on the sophistication of the technology a receiver uses to determine location. Interacting with this technology (algorithms and hardware/software) are errors. Errors may arise from atmospheric conditions, placement of satellites relative to each other, orbital errors, signal multipath (signals bouncing off of objects), and other considerations.
Accuracy and error is a complex topic; see http://www.edu-observatory.org/gps/gps_accuracy.html for a discussion of the issues. Another recommended source is the Monographs of the Global Positioning System published by the Institute of Navigation (http://www.ion.org)