IE6 and IE7 both have a quirky z-index bug, as documented on quirksmode.
You can find a solution for it here: http://brenelz.com/blog/squish-the-internet-explorer-z-index-bug/
The solution is to actually give the parent element a higher z-index value, as he shows in the link:
<div style="position: relative; z-index: 3000">
<div style="position:absolute;z-index:1000;">
<a href="#">Page</a>
...
</div>
</div>
<img style="position:absolute" src="myimage.png" />
edit
Since asker mentioned that his issue was not exactly what was described in the link, the problem might be one of stacking context as discussed by the accepted answer in this question: IE7 Z-Index Layering Issues