In Cognos 8 when you choose to save report output XLS in Cognos Connection, it is in fact MHT format
  
With an a Advanced Setting at BOTH Dispatcher and Report Service Level you can solve this.
Steps:
In Server Administration, add "RSVP.FILE.EXTENSION.XLS" parameter to both Dispatcher and ReportService/BatchReportService.

Steps:

Open Cognos Connection.
Click Tools menu in the portal and select Cognos Server Administration
Click on Configuration
Click on 'Dispatchers and Services'
Click on Properties 'Configuration' toolbar button
Click on Settings
Click on Environment Advanced Settings - Edit link
In the first empty set of boxes, type in the parameter name RSVP.FILE.EXTENSION.XLS and set the value to TRUE
Press OK.
Drill down on 'Dispatchers and Services' to the Batch/Report Services
Click on Properties - Settings - Environment Advanced Settings - Edit
In the first empty set of boxes, type in the parameter name RSVP.FILE.EXTENSION.XLS and set the value to TRUE
Press OK.

Restart the service.  Now it works. If you have a multi server environment, repeat these steps on every dispatcher/report server!