I observed that in IE7, the select box’s drop down looks incomplete (see image 1).
But when you hover it, the drop down box show-up completely (see image 2).

How can i make it look like image 2 as default. Also, if i increase the size of select box (height: 25px) and the text size is only 9px, how can i ensure that the text is in the middle? I’ve tried adjusting the padding and margin of the select box with no avail.
Thank you.
That’s what drop-down boxes look like when you have the Windows Aero theme enabled. It’s totally normal and standard. In fact, it’s what Windows users expect to see. I don’t recommend changing it just because you think it looks weird. Your users won’t think so. All the other webpages they look at, as well as all of the apps on their computer, work exactly the same way.
And no, you can’t trivially change the appearance. You’ll have to write custom styling for the entire drop-down box control. And that’s pretty difficult to do in Internet Explorer compared to other browsers, if it’s even possible to get it to work correctly at all.
As for your second question: why would you be increasing the height of the drop-down box? The default height is the one you want. It automatically sizes itself to fit the size of the text it displays. It doesn’t need to be any bigger than that, and if you force it to be bigger, it’ll look ugly like you said.