I've been using this feature for years, and it's a good one---but two things are lacking.
You said, '...PowerPoint will only use text formatted with the default heading styles.' That's not completely correct. It's the outline level in the syles that matters. Any style that uses an outline level of 1 makes a new slide, outline level 2 a bullet, etc.
Second be sure to change the file type in the Open dialogue box in Word to 'all outline files' or PowerPoint won't see the Word doc
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This seems to be a sure-fire way to end up with slides that are far too wordy. When presenting from such slides the audience reads from the slide instead of paying attention to the presenter. It also facilitates using the slides as a crutch instead of preparing for the presentation. Inexperienced presenters often read straight from the slide instead of elaborating on what the slide offers. I prefer to keep the slides simple but prepare a detailed handout. One recent presentation that I delivered had only 8 slides but the attendees received a 34-page handout. I like for the attention to be on me when I present, not on overly wordy slides.
I mentioned that problem -- you have to work with a copy of the original and reduce the content -- no doubt about it!
You don't have to apply styles to do this, you can use tab stops in a Word document or even a text file and then use the Insert Slides from Outline feature in PowerPoint (this can also be used to add extra slides from a Word or text file outline to an existing presentation).
I could not get this to work, I'm using office 2007 does this only work in office 2010? Do I have to save the word file as anything other than a word file?
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