Well, if there is a str8 flush possible then you have to go based on your read. In this case, the player has an 85% vpip and is just crazy enough to:
a) see a flop with a hand containing both a 7 and 9
b) chase a one outer
Against a super solid player I could see laying it down in PL, but that is about as rare an occurrence as you're going to find at any limit below $200 I'd say.
If I didn't hold the K of diamonds as well, I'd probably reraise it, but with the board the way it was I could see him holding the 7 and 9. I'm still not laying it down in this case for one more bet, however. Against someone I knew that was solid (ojingo, teknipper) I might lay it down in PL if it's another half pot back at me. I'd say you have to eat it against most everyone at these limits tho. Guys will reraise a 2nd nut flush all the time.
Interestingly enough, ever since this hand I have been on a horrible run of similar hands and decided to cash out most of my roll from UB. Not that I'm saying it's rigged or any bs like that, I just feel there's bad karma on there and will put my money to a better use (namely, buying my wife the anniversary ring that I know she wants and doesn't expect me to get for her).