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Has anyone seen this before this update?
I'd seen this (indexing text in form drop down option tags), actually, in Jan 2002. I forget how I first noticed it, but I wasn't happy about it. I was dealing with a page with a drop down list and was concerned that the list would distort the keyword density on the page itself.
...I had a drop down list of the 50 U.S. states and Google indexed it. Caused me problems with keyword density. I never noticed if it was constantly on or just something that they have been testing a few times.
Coincidentally, this is exactly my situation... and it's very possible they may have turned it off. But the states that came up were only in the drop down list, and I know no one was linking with those state names to the site.
jake - You may be crazy anyway. I don't know you that well. ;)