In this particular case it was only appearing below list elements in an ul where the li contained an image.
Caused the problem:
<ul>
<li><img src="submenu.gif" /></li>
<li>Contact Us</li>
</ul>
Fixed the problem:
<ul>
<li><img src="submenu.gif" />& nbsp;</li>
<li>Contact Us</li>
</ul>
To fix the issue I ended up manually adding a space with the html code & nbsp;
I recall this issue occuring with some floated divs in IE6 as well, though this time I was having the issue with IE7.
It's a really odd fix to a bug in IE7, but it does seem to work and doesn't seem to cause adverse affects in other browsers.
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