I had the same issue with Excel 2007, and it drove me nuts. I was using data pulled in from another application, and formatted it specifically as TEXT to try to help avoid any interpretations by Excel of the text as numeric or date data (some of the text was Spanish, some contained time-stamps, curly brackets, etc.).
Even manually resizing the row height and adding hard carriage returns (Alt+Enter) didn't help. On most of the long lines all I got was the infuriating "##########".
Purely by accident, I reset one of the rows to GENERAL formatting rather than TEXT. Guess what? Normal word wrap ensued.
So it seems Excel 2007 won't always let you text-wrap text.

Check the cell formatting and see if changing it to GENERAL does the trick.