Each dropped cap is a floating object with an anchor attached to a paragraph somewhere on that page. The position of the floating object is controlled by settings that Word hides from you (unlike other floating objects) but everything hinges off the floating object's 'anchor'. This anchor is actually independent of the placement of the floating object although they always appear on the same page as each other.

For the drop cap text wrapping to behave correctly, the object's anchor must sit in the drop cap's paragraph and not on a neighbouring paragraph. When you insert a new paragraph by putting your cursor at the start of that paragraph and pressing Enter then is it possible that the anchor is being moved into the new paragraph whilst the dropped cap itself still appears to sit in the correct position but now doesn't behave the same.

The good news is you can move the anchor without moving the drop cap. If you set your options to display object anchors then you can drag the anchor back to the correct paragraph. To see anchors in Word 2010 you go to File > Options > Display > Always show these formatting marks on the screen > Object Anchors.

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Andrew Lockton
Chrysalis Design, Melbourne Australia