First off, the error occurs on page that do not have any Flash on them at all... but just for the heck of it, I tried what you suggested and removed the Flash object from the home page. It didn't make any difference. I then changed the wmode to transparent, and again, that didn't make any difference.
I checked all of these in crossbrowsertesting.com and using IE Tester using IE7 on WinXP SP2 and Vista machines.
I've also received more emails today from people complaining that the dropdowns disappear for them... so now I'm getting nervous!
One person emailed me something interesting... they found that if the moused over a menu item and waited for the dropdown to appear, then RIGHT clicked (the cursor changes to a circle with a slash symbol) and moved the mouse down over the dropdown menu items, they could then release the right mouse button, and were able to left click to select the item.
I tried this, and it does work, but I also noticed something interesting... If you did this, you had to end up DIRECTLY on the TEXT of the menu item. If you let go of the right mouse button, or if you moved the regular cursor even slightly off of the TEXT, the menu disappears. So, at least this tells me that it's not just a 'border' issue. The problem is that IE7 (at least for me and an increasing number of others) isn't 'seeing' the background behind the dropdown menu items.
My next course of action (unless someone has a better suggestion), is to remove the background 'image' for the menu items that I'm using, and just use a solid color.
I'll post my results as soon as I am able... although it may not be until tomorrow night...
In the meantime, if anyone has ANY other suggestions, I'm all ears!!