Frank,

You can work with either XML or their native XSN files. The XSN file is a compressed archive that holds any scripts, xml etc. And yes to fill out forms you will need the InfoPath client on your users machines, however, their are number of 3rd party components that enable you to read and display InfoPath xml.

InfoPath pre SP1 was lacking in several areas but it was still a much more precise way of gathering form based data than Word (IMHO) and you can use managed code to do your validation or write plugin components to extend InfoPath. Version 12 goes way beyond this.

Regards
Neil