I can't say this is certain but it may be that the default view on the source list is a view that includes folders. I seem to recall running into this myself. When the function runs to populate the child dropdown, I believe it performs a GetListItems operation based on the default view of that source list. What I did to overcome that was to create a flat view of my source list with the option "Show all items without folders." I made that the default view for the source list.
Geoff
