Hi Archie,
Word 2003 is using Office XML formats, which are XML-based document formats. Office XML formats includes Excel and Word formats.
Word 2007 is using Open XML formats, which compressed several XML-based parts of an Open XML document within a zip package.
There are many differences between the two, you may take a look at Office Open XML introduction and Office XML introduction, which are talking about file formats, limitations and differences as well as examples.
Hope it will help