I exchange word docs all the time with no problems in Pages '09, though they are all basic docs with no formatting. If you have anything fancy, don't expect perfect compatibility.
The one thing that must be considered when comparing iWork with Office (Mac) is that Office is pretty damn crippled with no Publisher (or Access). Pages is positively the BEST page layout/publisher program I have used.
I use iWork and OpenOffice; takes care of most eventualities. If I needed MS Office, I would run the Windows version with either Wine or Crossover.