I see same effect .. because <embed> tag is not used in IE.
I can suggest a cross browser solution ..
(a) Download SWFObject.js (http://blog.deconcept.com/swfobject/) and place it in same location as index.html.
(b) Change your index.html to this below (you can probably shorten the src to the swf file, but I used the long src path to test the code).
<!DOCTYPE html PUBLIC "-//W3C//DTD HTML 4.01 Transitional//EN" "http://www.w3.org/TR/html4/loose.dtd">
<html>
<head>
<title>Chatterbox!</title>
<!-- adding javascript SWFObject for embedding flash in div containers -->
<script type="text/javascript" src="swfobject.js" ></script>
</head>
<body>
<div id="swfobject" align="center"></div>
<script type="text/javascript">
var so = new SWFObject("http://chatterbox.hobby-site.com:8080/lps-3.3.3/my-apps/chatterbox/index.lzx?lzt=swf&lzr=swf7&debug=false", "lzapp", "100%", "100%", "7", "#ffffff");
so.addParam("quality", "high");
so.addParam("scale", "noscale");
so.addParam("salign", "LT");
so.addParam("menu", "false");
so.addParam("name", "lzapp");
so.addParam("allowScriptAccess", "always");
so.write("swfobject");
</script>
</body>
</html>
You might wish to add a CSS stylesheet to div id="swfobject" .. or in body .. to remove the white margins.