Note: Updated 2.6.2011 - If you are still using software OLDER than office 2007, there are NO downsides to upgrading.  In Fact, you REALLY should be using office 2010 by now.  As far as compatability and features go - Office 2003 is a dinosaur, and will affect productivity in a big way.

Original Date - May 2008:

I never thought I would be commenting on Office 2007 - but here we are!

Features: there are tons of new features, a very different interface that puts most common things at your right-click menu.  This version is much more updated and robust.  You will probably be happy to see the differences in the formatting, and how easy it is now to make a whole document in beautiful color-coordinated styles.

Cost: this version of office is retailing around $400 for the standard version, which is fine for most people.

Compatibility: as you may have expected to find out, the document formats are all new!  I never like how microsoft likes to stay incompatible with the rest of the world but if you want to co-operate with the rest of the world you will need this upgrade.  They do put out a free reader for the new file formats if you want to get by for a while - but you should REALLY be checking out the new features and formats. 

Performance: I have heard from a few customers that they think this new version is slower on their computers.  I have also been running the suite on my computers and did not notice a difference.  The new outlook has a much nicer and more detailed interface which may cause a small difference, but i still think overall if you are okay with your system running office 2003, you will be okay with 2007.

With all of that great information in mind the recommendation is simple, as soon as your budget allows you should make the switch.  This package will probably be around for a few years to come and is fully backward-compatible.

I would love to hear if someone needs or wants help with the switch.