I had posted this same question on microsoft.public.excel a while ago
but didn't get any response so I thought I'd try here. No response
here either. However, I found a work-around to my problem which then
led to the solution. I'm posting it in case anyone else ever happens
to run into this problem.

In the code that generates the XML file, I put a specific string in
place of the line feeds (NEWLINE worked for me). Then, I opened the
file in Excel and did a search and replace to replace all occurrences
of the word NEWLINE with a char(10) character.

Note that this didn't work for me at first. You cannot, for instance,
simply replace the string NEWLINE with the string CHAR(10). If you do
(well, duh), you get the string CHAR(10) in your text, not the LF
character.

Likewise, if you type Alt-10 in the "replace with" field, you get a
small black square with a circle in it. A search implied that this
character shows up if you don't have wrap turned on for the cell but I
DID have wrap turned on and it was still showing up. That's not it.

The solution for search and replace, it seems, is to replace NEWLINE
with Alt-010 (that is, hold down the Alt key and type zero, one, zero
on the keypad). That for some reason, worked, while Alt-10 did not.
Not sure why the leading zero is important but it is (and I'm sure
it's a good reason).

After making that substitution, I looked at the updated file in a
plain-text editor and behold, the Unicode character reference for
linefeed -- -- everywhere I put the Alt-010 character. So, back
to my script and insert the string everywhere I want a new line
(instead of the string NEWLINE) and presto. So simple, really and
since this is XML, using Unicode character reference for linefeed
makes perfect sense.