i've never had a problem using divs with z-indexing to display flash.
Were you able to see the problem with your computer? I still see the issue come up on IE on the PC and with Opera and Netscape on the mac. I have tried many variations and still no progress. All the files are uploaded and available for you to see. Please visit this link : Test Site and let me know if you can see the nav bar on the left side. Also, the hover state on the menu pokes through when you mouse over it so pass over the left third of the screen and let me know what you see.
Thanks, and don't forget to include your operating system and browser (s)
it appears the flash stage is is below (y value) the header in both ff (3.0.10) and ie (8) and the stage extends to the top (y) of the menu at browser-bottom and covers that bottom menu (a little with ff and about 1/3 of the menu's height with ie).
with ie i see the rollover menu appear above (z-index) the swf and in ff i see no menu on rollover.