One of our users had a problem opening an excel document in Excel 2007/ When she clicked on ‘Open in Excel’ followed by ‘Edit and Checkout, using local drafts folder’, excel would open the document but she would not be able to check it back in. Excel would prompt her that a local copy is already checked out. If she continued, she would be prompted to save a copy of the file in a temp folder.
Forcing SharePoint not to use the local drafts folder resulted in an error – unable to convert file.
In the end, what I ended up doing was running a repair on her Office installation.
Open Excel -> Excel Options -> Resources -> Diagnose
Restart IE and excel once you have run the diagnostic wizard and everything should go back to normal.