It's better in Word 2007/2010, but still doesn't seem to be all the way there.
Even for math-free text, TeX does a better job of hyphenating and line-breaking. The TeX algorithm specifically tries have low variability in line-to-line fill density. Word does not care, which can result in a loose line between two tight lines, causing horizontal stripes in a block of text.
For much more, including ligatures, kerning, and transparency, see:
http://nitens.org/taraborelli/latex
My point above is his point #7.
It's just not on by default which is a shame.
I've heard that Word doesn't play as well with the text layout component as the component authors would prefer. It's possible that this will improve in the future.
As for TeX vs Word, that's a great question. I know that the authors of Word's text layout engine are familiar with Knuth's dead-tree works on typography, but beyond that, I don't know.