In IE, flash runs on a separate layer entirely that resides above all others. The flash will alway be on top. Turn on background transparency in the paramaters of the swf and you will have better luck. see below:
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Issue
A Flash movie contained in a DHTML page containing several layers always displays atop all the layers, regardless of the stacking order, or z-index, of those layers.
Reason
Most browsers place embedded plug-in content, such as a Flash movie or Java applet, on the topmost layer. Therefore, any attempt to place a DHTML layer on top of a Flash layer will fail.
Solution
A workaround is to make the Flash movie's background transparent using the WMODE tag. This will allow the DHTML layer underneath the Flash movie or layer to appear.
Currently, the WMODE tag only works on Windows versions of Internet Explorer using the Flash Player ActiveX control. For details on creating a movie with a transparent background refer to How to make a Flash movie with a transparent background (TechNote 14201).
http://www.macromedia.com/support/flash/ts/documents/wmode.htm