Basically, if you have too many sketches in one folder or libraries, the lower parts of the dropdown lists in the IDE menus get cut off if they hit your screen limits.
Really, the dropdowns should wrap around the screen (like WinXP All Programs in the Start menu), or scroll.
For the sketchbook, this shouldn't happen if you keep it organized into folders. While you can do this for libraries, it is not an optimal solution.
I'm running WinXP SP3, on a laptop. I tested the problem in IDE versions 1.0, 0023 and 1.0 modified for Teensy. Java version is what comes with the downloads: 6.0.160.1.