I recently learned about the basic structure of the .docx file (it\'s a specially structured zip archive). However, docx is not formated like a doc.
How does a doc file
The basic idea behind the MS Word DOC format is an OLE Compund Document which, as Kibbee has already written, is basically a memory dump. It's a very complex and convoluted way to store documents, but if you've ever really dug into the application Word you'll know how insanely many features it has, and if you have used it in a business setting you'll have a good feeling for how it integrates with other programs in the Office series.
In general, OLE Compund Documents are very extensible structures that allows you to stuff all kinds of data into one file and even to some degree handle data you don't have an application installed for. For example, if you insert an Equation object (from the MS Equation Editor) into a document it gets stored as a sub-object which is like a file inside the file, but this object doesn't just contain the data required for Equation Editor to edit and render it, it also has a generic bitmap (or metafile, maybe) representation stored so it can be displayed, though not edited, on a machine without Equation Editor installed.
This was the why, for the how you'll have to read the specifications other people have linked to already ;)
If you want the easy way out to work with the files though, make sure your software runs on a Windows machine with Word installed, then use COM/OLE Automation to open and manipulate the documents. You won't have to worry about file format then.