I see now. 2007 puts your balls in a vice and tries to force you to never embed any data connection information.
Here's a way around it: Create the connection file and save it like you normally would. Then, click "connections", highlight the connection you created and click "properties.
Switch over to the "definition" tab. Save the connection string in notepad or something, then type some random text into the connection string box and click "ok".
It will yell at you that the connection string is no longer identical to the file and will be stored in the spreadsheet. Obviously this is acceptable. This will clear the connection file association and you are then free to paste in the correct connection string again.
what a POS.