Exaggerating isn't bad, if you can actually walk the walk but never had the chance to officially go on record with it. Some people just never got a fair chance even though they are perfectly qualified, so bending the rules isn't always bad. In other words, don't write cheques your ass can't cash.
I'm not talking about faking a diploma or shit like that.
Pretty much it.. everyone is polishing their resume, i.e. highlighting your strengths and experiences and downplaying the not so good parts.
Experienced HR people often enough see through the bullshit and can judge if it's just harmless polishing or actual lying and if you even lie about your qualifications a simple work field related question might let you go up in flames.
If you're really unlucky and the field is small where you apply to chances are that companies talk and this spreads so you've effectively destroyed your career before it even has begun.