Microsoft Word 2007 documents are saved with a ".docx" file extension. This file extension is different from previous versions of Word where a ".doc" file extension was used. In Word 2007, you can open documents created in older versions of Word, however, these documents will be opened in what is called "Compatibility Mode". While in compatibility mode, some features in Word 2007 are disabled. You can convert the document to Word 2007 document by clicking the Microsoft Office button and choosing Convert. However, if you will be sending the document to someone who has an older version of Word, you should leave Compatibility Mode on.
The reason you would want to save Word 2007 documents as an older version of word is because older Word versions need a little help when it comes to opening Word 2007 documents. Anyone with an older verion of Word will need to install the Microsoft Office Compatibility Pack for 2007 File Formats in order to open up a Word 2007 document. And since you won't always know whether or the not person you're working with has installed this program, you should save your Word 2007 document as an older version just to play it safe. In addition, even if the other person has installed this program, some of the elements of a Word 2007 document will be disabled when opened in an older version of Word.