This is because Office 2007 uses new proofing tools and OE can't use them because it's designed to use the older tools.It's easy to fix: install just the proofing tools from your previous version of Office (using the custom install option). You can get them from any older Office suite or application - including FrontPage, Publisher or standalone versions of Word, Excel, or Outlook.
To install just the proofing tools from Office 2003, run Office setup and choose the custom option. Uncheck all programs in the list and add a check to choose the options at the bottom of the programs list. On the next screen, set each top level item to be Not Available (red X icon). Expand the Office Shared Features branch and locate Proofing tools in the list. Expand proofing tools and choose English, setting it to Run from my computer. Finish the installation.
Once installed, restart OE - go to Tools, Options and verify Spelling is configured to use the correct English dictionary.