Beginning with Word 2003 (I think it was), mark-ups are automatically
revealed despite the setting when the document was last saved. This is a
GOOD thing, since it prevents us from knowingly sending out or working on
documents that contain tracked changes.
My guess is that you're using Word 2002 or earlier, and your co-worker is
using a later version. Either that, or you're simply used to how a previous
version of Word worked.
If you don't want the tracked changes to show up, then you'll need to
accept/reject them. If you want to retain their marked-up status in what you
keep, but not show up in what you send the client, then you can either save
a "clean" (no tracked changes) copy and resend that to the clients, or you
can save in .pdf format and send that to the client. Unless my clients need
to edit what I send them, I always send in .pdf format, since I can
guarantee how it will display and print on their computer... I can't do that
with .doc files.
