I added the local dev server to the trusted sites in IE7 and enabled basically all JavaScript settings for trusted sites. Then I went on to disable all installed add-ons, to no avail.
So I reset IE7 (Tools > Ineternet Options > Advanced > Reset > Reset), then reinstalled the ActiveX Flash player (version 10 from the Flex's Players folder) and that fixed the problem. Must've been some messed up configuration or add-on, or a broken/missing component somewhere.
