To make some Microsoft Excel templates easily available to all users, I saved the templates as .xlt files and stored them in an Exchange Server public folder. However, when users open a template and save changes back to the folder, the actual .xlt file changes. I expected Excel to create a new .xls file when a user launches a template. How can I make these .xlt files function like normal templates?

Your files are actually acting quite normally. When you open an attachment from a public folder, Outlook first saves the file locally, then opens the file for editing. When you later close the file and answer Yes to the prompt to save changes, Outlook copies the changes back into the file in the folder.

If you don't enable Edit access to the folder (except for a few users who need to edit .xlt files), you'll see slightly different behavior. For most users, the files will open as read-only, so the users need to use File, Save As to save their changes to a local file location.

Instead of wrestling with these templates in an Exchange folder, consider placing them in a shared network folder. With this approach, you can even use a policy or logon script to update users' Workgroup Templates location in Excel to point to that shared folder.