I think you should remove the * MERGEFORMAT switch. MERGEFORMAT preserves direct formatting that has been applied to the field result.
If text in the source document is formatted with a style, and if the master document has a style with the same name but a different definition, the included text will use the style from the master document. This is unavoidable, since there can't be two definitions of the same style in a document. The only workaround is to try to avoid this situation.
I haven't used Word 2003, but I have some observations as to what may be happening. Direct formatting should be brought over. However, bold, italic, etc. are toggle font properties & it's possible that they will come out opposite if the paragraph style has that property. Also, Includetext fields will bring over the text, but will not bring over the style. The style will be whatever the paragraph style in which you placed the Includetext field.
If the style definitions are identical in master & included files, & you insert the Includetext field into a paragraph that has the identical style as the master, then the formatting should be the same.
Hans -- right on again. I deleted "* MERGEFORMAT" from one of the more troublesome includetext fields, and now it comes into the master document correctly formatted. Now I'm going to apply this idea to the other includetext fields. Thanks for your help!
Phil -- thanks for the reply. It gave me some interesting things to think about.