From everything that I can gather, having posted to various forums within MSDN and Microsoft, the z-index "issue" was one that was "...going to be addressed..." after the initial beta versions of IE7. However, from what I've seen and read, the issue is hot enough that you can NOT find any information relating to how IE 7 now renders/uses the z-index. Even contacting Microsoft to find out "if" there is a solution in the works is impossible.
This leads me to the fact that IE 7 does "NOT" currently recognize the z-index attribute. If you use that attribute in your CSS, only "other" browsers will render the menu (or on whatever you've used the z-index) as intended.
The best "hack" I've found is using a 100% CSS menu, if you are attempting to use a menu with z-index, and nesting the ensuing/subsequent/sub menus along side of the previous menu window. Overlapping is simply impossible if you wish to use pure CSS. I have, actually, prepared a working drop-down "or" flyout-to-the-side" menu with 100% CSS that works in Opera, FireFox, IE6 and IE7. It uses two additional CSS scripts to your overall site CSS and works great. It's based upon the Stu Nicholls script, although his won't work in a site using overall CSS as he has written the scripts.
If you do "not" use pure CSS (and choose to implement other scripts to make what you have work as intended) you are simply hacking your way backwards with coding issues. I found it best to move forward, not backward, by implementing pure CSS that is compliant in all browsers and operating systems.