I’m not sure that this will be easy to explain without just showing you so here is an example –
When viewed in FF, Chrome, and IE8/9 the example works as expected. When viewed in IE7 the nested UL is rendered inside of the parent despite both being positioned absolutely. Things like z-index make no difference and the only fix was to remove the filter: line from the shadow class.
I suppose it would be fine to just render a regular border or something in IE7 but it would be awesome if anyone had any insight!
It looks like the filter cuts off all content that falls outside the filtered box. If you remove the submenu from the hierarchy of the main menu, it does work. See: http://jsfiddle.net/wyDTQ/
Of course, I don’t know how you’re constructing your menu, so that might not be what you want. It does fix your issue, though.