Ok, for some reason $user[U_FlatPosts] is getting set to 0 even though it should default to the $theme['flatposts'] setting in theme.inc.php. What do you have for this setting? If you have a positive value then it should be working, but you can try adding this bit of code and it should tell you what it is being set to:
Line 817 of postlist.php you can put this:
echo "user[U_FlatPosts] is $user[U_FlatPosts']";
This should print out that value after the subject. If it is coming up blank or 0 then somehow we have to get it to force a positive value in there because the checks that are supposed to do this are failing.
