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This can happen when diagram is created in a version and that version is no more existing in the system. if that happens you need to reset the data source using schematic edit project. There will be an option.
Depending on what version of ArcGIS you are using changes what you need to do a bit as well. In version 10, open the diagram and then right-click on the layer in the TOC and you will see a Change Diagram Version option. Just change it to an appropriate version (assuming the one it originated from no longer exists). Prior to version 10, you need to use the configuration tool (Designer) and change the data source information. When you open the list of data sources, you will see which ones are no longer valid. There is good information in the desktop help system for this.
Thanks Rick, yes we're pre-10.0! hopefully not for too long. Works a treat.