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You can do this through the layer properties dialog.
Open up Layer Properties > click the Symbology tab > click the Description... button
and add your text.
The trick seems to be that you have to hold the place your cursor at the end of the text where you want it to break and then hold the control key down at the same time that you press the enter key. This should allow you to show multiple lines in the legend for you layer.
You will also have to to into your legend properties > select the Items tab > and then click the layer, Selected item(s), that you want multiple lines of text for > click the Style... button > and choose one of the option that includes "Description".
That solution needs to be modified if you are working with a choropleth map because the Description option is only available for Single Symbol. I used the concept presented here
and used a polygon data layer (it would work with point or line too) and displayed the symbology as a Features (single symbol) and then used the Description box. I set up the symbology to be no fill and no line. I hope this helps someone. BrianK
what if the layer you are trying to show is a raster? i have a couple of rasters that i need to have in the legend and i cant seem to figure out how to wrap their text.
Has anybody written an update to this script that works in ArcGIS Desktop v. 10? I have a polygon layer that I want to symbolize by feature, but the main title is too long, and the "description" work around won't work for the main title of the layer when you symbolize by feature.
You can try the "Multiline Legend Text" extension in ArcScripts - http://arcscripts.esri.com/details.asp?dbid=12550
It is an old script - but it works in ArcView 9.3.1