When you say the reference wouldn't update - did you try going to a cross-reference in the document, and saying
"update field"? I just did a test using Word 2007's cross-reference system, using Heading references. I gave the first line below a Heading format (e.g. Heading 1), then did a cross-reference to it below.
Refrence 1
Using Refrence 1 in a sentence.
When I altered (misspelled) the Heading, the cross-reference didn't update instantly, but it did when I went to it and said "update fields". There is an "update fields before printing" option, then all you do is Print Preview to have it update everything. Not sure about Word 2002 - been too long. But if you're expecting cross-references to update instantly, that could be why you think they don't work.