Hmm..tricky one.
If I remember rightly, Lavalamp sticks another <li> in at the end of your menu, which will of course be higher up the document stack. Are you targeting this extra <li> in your stylesheets? I think it’s already absolutely positioned, so stick a z-index on it if you haven’t already.
I’ve got a feeling that z-index won’t be much help here, there’s always problems when Flash is involved.
Are you sure you need SIFR? I’m not a huge fan of SIFR (this guy breaks it down very well - http://virtuelvis.com/archives/2005/04/i-hate-sifr) and unless your menu is going to change regularly I think it’s a case of overkill. If it’s not changing much, just do the old text-indent image replace thing on your links.
EDIT: typeface looks nice though..