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If you save a file that was created in a previous version of Excel as an Excel 2007 file, the file can use all the new Excel features.
The Excel 2007 file format was changed to XML because:
New features could be added to Excel.
Files are safer.
Less risk of file corruption.
Reduced file size.
All of the above.
With the Microsoft Compatibility Pack installed, Excel 2007 files can be opened in these versions of Excel:
Excel 95 - Excel 2003.
Excel 97 - Excel 2003.
Excel 2000 - Excel 2003.
Someone sends you an Excel 2003 file, which you open in Excel 2007. When you're done working with it in 2007, the file will automatically be saved as Excel 2007, unless you change the option.