Excel and Word docs open as [read only] in terminal server 2003

My company sells an Intranet product that's similar in nature to sharepoint.
One of my customers is having problems editing word and excel documents that
are hosted in virtual directories that we've created in IIs (6.0). When a
user browses to an excel spread sheet, that spreadsheet is displayed in IE as
expected. To edit the document, they click on a button that we've added to
IE through an explorer bar. In response to the button click, we launch excel
and provide it with the url to the spreadsheet
(http://fs01/sites/site1/somefile.xls). The expected behavior is that excel
should load the spreadsheet and allow the user to make changes. When excel
closes, the updated .xls file should be placed back on the webserver. In
fact, this works correctly if the user is not using terminal services. That
is, the user is logged into the domain and has a copy of office (office xp)
on their local pc.

However, if that same user connects to the company's terminal server and
uses IE to do the exact same thing, excel will launch, load the spreadsheet
from IIs, but in this case, the spreadsheet (or word doc) will be read only.
Office xp is installed on the terminal server. The terminal server is
win2003. IIs is on a different machine and it is also win2003. Both
machines are in the same domain.

At first I thought it was a security setting, so I gave everyone full
control to the NTSF folder that containes the document on the IIs server and
I verified that the virtual directory was configured with write permission in
IIs. We've also turned off anonymous access and use Windows Integrated
Authentication on everything in the web server.

I checked to see if there were any group policy settings that may be
affecting office, but there we none. We've have other customers who are
updating office documents stored on IIs through terminal services and they
have no problems.

The office documents themselves are not saved with the readonly option.

I am out of ideas and hope someone out there can help - any clues would be
appreciated.

Thanks,
rah