How to get Average for time in Excel 2007?

If you just want to do this quickly, select Time as the option from the drop down box and it should work as expected:

I have tried and cannot replicate your results, I think that you are messing up hours/minutes/seconds, Time fields are usually stored as hh:mm:ss, and then just displayed how you want. I recommend you try just using the built in Time field (as above) then try changing it later to hh:mm / mm:ss / hh:mm:ss, I think what is happening is you are storing as mm:ss, and displaying the average as hh:mm, or similar which is why you are getting weird results.