In my experience the Update Now button does nothing and never has.
It appears to be a permanent bug. For the most part DL's are so
dysfunctional that most users just abandon them eventually and look for
other ways to group recipients.

WE FOUND THE SOLUTION!
When the contact on the distribution list has a picture of a head (as
opposed to the blank card), it's a 'new contact.'  If you carried over
distribution lists from an older version of Outlook, it won't work.
We had distribution lists that we carried over from our "Office XP" Outlook,
and all the contacts had the "Rolodex" / Blank Card picture next to them.  
When we added someone else to the list while using the Outlook 2007 program,
their entry came up with a picture of a head next to it, as opposed to the
Rolodex-like image.  We then went into the Contacts folder, changed this
person's e-mail address, and went back into the distribution list.  We then
hit "Update List" and the e-mail address of the contact actually updated.
So what you have to do is remove each of the contacts, and re-add them.
What we did was remove the first one (don't hit delete on the top - it
deletes the entire list!  hit 'delete' on the keyboard), and then we went to
"select members" on the top, and selected that contact.  When you do this,
the contact then updates automatically from now on.
Hope this was helpful...let us know if you have any more questions.
Peace!
-Chris & Margie