There shouldn`t be any problem with the external drive set up and Vista. I have an old IDE disc in a caddy formatted in FAT32 and it works fine with Vista.
The OS (Vista) won`t have any problems with MS Word files because they are just files. You will have to have a version of Office installed on the Vista machine to open Word documents and this might be a problem since there are known compatibility issues with Office pre Office 2003 and Vista, particularly with Outlook.
If you find the thought of buying Office 2003/2007 a bit of a financial problem try OpenOffice which is free to download from click here - I am pretty sure it will open your files and you can then set OpenOffice to save files in Word (.doc) format.