The procedure is just a little different and makes sense after it is
explained.

When you check  the document out in Office 2007 it puts a copy of the
document in you're my documents/SharePoint Drafts folder. You can then
open the document from either location.

When you edit and save the document it saves the document back to your
draft folder. You should then get a little dialog box reminding you
that others won't see the changes until its checked in and would you
like to check it in now. It's supposed to save back to the draft
location because you might be offline at the time. As I said if you are
online it should prompt you with the option to check the file  in when
you save it.

Assuming you leave it checked out, the right procedure for checking the
file back in is to do it from word, not from SharePoint. If you look on
the Word main menu at the bottom you will see a server menu when you
have the file open and are also connected to the sharepoint  server.
Select CheckIn from that menu and you will be prompted to save and
Checkin the file. If you go directly to SharePoint and try to check the
file in SharePoint can't guarantee that it has the most recent copy.
That's why it complained when you tried to check it back in from the
document library.

Hope that explanation helps. Its all a matter of which application had
control of the most recent version. Since it was checked out that
application was Word. As an alternative you could also discard the
checkout in SharePoint and then upload the file from the Drafts folder
where you saved it. That will add it to the library as a new version of
the original file that you checked out. But you have to discard the
checkout first or it won't allow you to upload the new version.

It looks like the file  WAS checked back
in properly, even though I got the error saying it couldn't.

Seems that the 'easy' answer is to just tell people that unless they
need to go off-line, just click the document to open it directly
which, in turn, will check  it out for you at the same time.

The key will to just get people to remember about that SERVER menu
under the 'orb of mystery' in Word.