I wonder if this is related to a problem that drove me nuts with Word 98? In Word 98 (probably any version of Word on Windows - I know this problem is true through Office XP), the "open file of type" selector in the Open File dialog box is sticky - if you set it to 'Recover Text', it stays as 'Recover Text' until you change it.

I had a customer who complained that any time they opened a file, it lost all the formatting. I had to go watch - File, Open, double-click on file, no formatting. Find file in Windows Explorer, double-click on it - formatting! Huh? I had to poke at that system for 10 minutes or more before I figured out what was going on.

So, could it be something like this?