Yes, it is possible to do this. What I'm not entirely sure about is how to
do this in Word 2000. In Word 2003, when you use Insert | Picture, you can
click the arrow beside the Insert button and choose Link to File. The
picture is then inserted only as a link (field code) and not embedded in the
document (you can also choose Insert and Link, which does both).
I'm not sure whether this is the same in Word 2000 or not; in Word 97, I
believe there was a separate "Link to File" button in the Insert Picture
dialog; unfortunately, although I archived screen shots of most dialogs in
Word 97, I don't seem to have that one.
In any case, when you have linked to an external file, if you change the
external picture, then when you update the link field code, the picture will
be updated. Note two caveats about linked graphics:
1. If you move the linked graphic (change the path), you will get a red X in
your document instead of the picture. You can correct this by viewing the
field code and editing the path.
2. Only inline graphics (those with In Line With Text wrapping) will display
an INSERTPICTURE field code when you toggle field codes. Wrapped graphics
must be temporarily changed to inline before you can edit the field code to
modify the path.
