Simply put - Office Viewers can be downloaded to open, view and print Office 2000/XP/2003 files. So if you are working on a document and decide to email a copy of it to someone who does not have Office at all? The answer for them is an Office Viewer.
But what if you are working in the latest Office 2007 release and decide to share your document with another colleague who hasn’t set up their box with the newest version yet? They are still working in an older release. What to do? Well, there are two options:
You can use Save As to save the document to a 97-2003 version. On first save, Compatibility Mode will alert you of any items that won’t render properly in earlier versions, if any, and block incompatible functions in the future.
You can have the person working in XP/2003 download the free Office Compatibility pack in order to open, edit and save the file.
Office Compatibility Mode automatically starts when you use Office 2007 and open a document created in a previous version of Office.
The Office Compatibility Pack contains viewers and converters so that people working in Office XP/2003 can open, edit and save files in the Office 2007 file formats.
For a detailed list of features impacted by compatibility mode, check out the following article: http://technet.microsoft.com/en-us/library/cc178998.aspx