Word is an incredibly complex program. I'm afraid that is being ramped up to
a new level with Word 2007. I just got my first good look at that yesterday.
Like all of us, I am resistant to change.

Anyway, in Word 2002, they came up with letting people apply the formatting
from a style to selected text rather than applying the style to the
paragraph that contains the selected text. Apparently some big corporate
client wanted that "feature." Yes, it is confusing. Generally the books
don't cover it. I just checked and my page
http://addbalance.com/usersguide/styles.htm did not. I've added that
information to my page.

It is covered in a sidebar on Shauna Kelly's site on the
http://www.shaunakelly.com/word/styles/ApplyAStyle.html page.

May I try to go back to square one here? I haven't been following this
thread very carefully, but I sense that there may be some fundamental
misunderstanding about how the whole process works.

Let us assume that what you want is a document that has (among other
things).

1. A table of contents (TOC) that lists each heading in the document, at
least down to a certain level. As a bonus, each entry in the TOC will be
hyperlinked to the section in question.

2. A series of headings, each followed by body text.

That is, you have this:

TOC
Heading 1
   Body Text
Heading 2
   Body Text
Heading 2
   Body Text
Heading 1
   And so on (with perhaps some Heading 3s, etc.)

The TOC is the *last* thing you worry about. The first thing you do is set
up your document so that it contains the necessary headings and body text.
Although you can build a TOC based on any styles you like, it is much
simpler if you use Word's built-in heading styles for your heading
paragraphs. The basic requirement, however, is that you use a different
style for each heading level. That is, you use Heading 1 (or your custom
top-level heading style) for the highest heading level in the document; this
might be a part or section title but is most often a chapter title. You use
Heading 2 (or custom equivalent) for the main subheads within the section
that starts with Heading 1, Heading 3 for subheads within Heading 2
sections, etc.

You must apply a heading style to the paragraphs that will appear in the
TOC. You must apply body text styles to text you do not want to appear in
the TOC. (And in most cases, these must be separate paragraphs; that is, the
heading will end with a paragraph mark, and the body text will start a new
paragraph.) Whether you use the built-in styles or your own custom ones, you
define or modify the style to have the font and paragraph formatting you
prefer; you do NOT apply any of this formatting as direct formatting (except
in special cases such as italics for titles within headings).

When all of this is set up properly, you use Insert | Reference | Index and
Tables to insert a TOC at the appropriate place. If you have used Word's
built-in heading styles, you can just select the desired number of levels
and other settings and click OK. If you've used custom styles (unless you've
assigned heading outline levels to them), you'll have to click Options and
type the appropriate numbers in the spaces for those styles.

If you want your TOC to have formatting other than the plain vanilla 12-pt
TNR with progressive indents, you'll also need to click Modify and modify
the TOC styles accordingly (you can also do this after inserting the TOC,
though it can be more involved).

If you have done all this correctly, you should have a TOC that includes all
your headings (and nothing more), the formatting of the TOC entries will
reflect the TOC styles and not your heading styles, and at least the page
number (and in some cases, depending on your settings, the entire TOC entry)
will be linked to the corresponding heading in the document.