That's the way excel works.

Jim Rech wrote a macro called AutoFitMergedCellRowHeight that you may like:
http://groups.google.com/groups?thre...%40tkmsftngp05

If you're new to macros, you may want to read David McRitchie's intro at:
http://www.mvps.org/dmcritchie/excel/getstarted.htm

RT wrote:

When I merge two cells in excel 2003 and format to word wrap, the row height
is not adjusting to show wraped text. I am forced to manually adjust row
height

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Dave Peterson