The compatibility of Google Docs works fine with basic formatting, but the fidelity drops off quickly if I try to use advanced formatting features. Bold, italics, and underlining get converted without a problem, but if I have a document with tables, footnotes, a table of contents, or other formatting included, those things don't seem to translate well into Google Docs.
This is more important to some than others. Someone who regularly deals with Microsoft Office files from clients or suppliers, or someone who relies on advanced formatting features may not appreciate Google Docs. For my purposes, though, virtually everything I type into Word is simply copied and pasted into the PCWorld content publishing tool. I don't generally use fancy formatting, so Google Docs can meet my needs.
Sharing and Collaboration
This is the area where Google Docs really shines. It is simple for me to share files with other people and work on them together in real-time online. Google recently expanded the sharing and collaboration features to include Presentations, in addition to Documents and Spreadsheets.
I don't really use file sharing or real-time collaboration that much, but I do use it occasionally. When I do, it is almost always through Google Docs.
Google Docs works fairly well on my iPhone and iPad. I was able to open a file from Google Docs and click Edit to modify the contents while in Mobile mode in the Safari browser on my iPad. Things did get wonky when I tried switching to Desktop mode using the link at the bottom of the page. I got error messages and it seemed to freak out every time I tried to type something.
Being a Google product, it makes sense that it works best with Android. My Google login is already associated with my Motorola Xoom tablet, and there is a native Google Docs app. When I open the app, it immediately displays my files. With Android, using Google Docs just works.
Overall, Google Docs seems to work for my purposes just fine. We'll see how Zoho and Microsoft stack up in the next couple days.