It seems you have reset your header items to position:static. For z-index to work on an element, that element must have relative, absolute, or fixed position.
Hope that helps.
--UPDATE.. Paul just beat me, (as I was sifting through your style sheets) I would try his answer first... as he is far wiser than I. I would also consider what he is saying about how the logo will block access to PART of your nav.
A suggestion: Use the logo, additionally, as a bg image for the UL , and use background-position to move it up so that it matches with the missing part from your actual logo.