Whenever I have trouble with things overlapping wrong I mess with the "z-index" option. That might be something to try. So basically you want the "z-index" of your dropdown menu to be higher than anything else that is supposed to be under it.
Update: I have the same issue and have discovered the issue ONLY exists in IE7 and works in IE8, FF, Chrome, and Safari. Go figure ;)
I researched a soltion and discovered that IE incorrectly renders z-index.
The solution is to set the z-index of the next higher parent container to (like) 3000 and then set the z-index of the contianer having the issue to (like) 1000.