http://www.1stholistic.com/Nutrition/hol_nutr_does-excess-protein-turn-to-fat.htm
What happens to the protein:

It is broken down into building blocks known as peptides.

Then, it is further broken down and it becomes amino acids.

The amino acids are absorbed through the small intestine's lining and enter the blood stream.

From here, some of the amino acids build the body's protein stores.

Excess amino acids are converted to fats and sugars and follow the paths described above.

This is such a simple concept, but many people still believe that consuming lots and lots of protein will put muscle on their bones. Don't be fooled by this notion! Even excess protein turns to fat.

http://en.wikipedia.org/wiki/Protein_in_nutrition
Because the body is unable to store it, excess protein is broken down and converted into sugars or fatty acids.

http://www.umass.edu/diningservices/nutrition/protein_for_athlete.html
Excess protein not used for muscle building is either burned for energy or stored as fat.