Just some additional information (taken from the TDM documentation on VM):
How VM handles files:
Check Out - Selected version will be loaded from a server to your local file where it is editable. On the server, the version will be locked automatically and is read-only for others.
Check In - When you check in the version, it will be saved to your local disc where it will be locked and become read-only. On the server, the version will be automatically unlocked and possible changes will be applied on the server. The version will become accessible for others then.
Generally, Server Projects.xml is updated after each Check In.
(Note: The Check In doesn’t mean you always have to save the changes to new versions/revisions. In TDM3, you can work on the same version for a long time and save the changes continuously. - See the Check In dialog, Overwrite Current Version option and the Finish Work on Model checkbox clear.)
.TXV files - They are stored in the path you define in the Settings | Options | Version Manager.
E.g. my path is:
C:\Documents and Settings\vnitrova\Application Data\Quest Software\Toad Data Modeler\VersionManager\Local\Download\TestProject1.
Hope this info helps.