Not really familiar with embed but I highly believe using object with <param name="wmode" value="transparent"></param> can solve the problem.

I don't have the time to go through the javascript process that occur at the page (firebug not that powerful) but it might have to do with event handler process which might create a conflict with the flash.

What I can think at the moment (based on my experience), is to create an invisible layer (use background:transparent) just directly covering the flash (use position:absolute,top,left,width,height).

I believe the flash.js only useful when you want to force IE to play Flash without prompting yellow alert.

Silverhawk, I know it hard for you to share with us the source code of your working project but how about a simple POC (Prove of Concept) files that we can download and debug. A dummy navigation and a dummy flash would do fine with javascript file used for both action.

I found out something interesting, apparently the script failed in IE not because of Flash but use of padding, margin and border in your css. IE assume your move out of navigation even if you mouse in the padding area or border area.

http://www.chronosight.net/temp/test.html

Try sticking at the hyperlink text and you can hover over flash.

I create a invisible layer above billboard div.
http://www.chronosight.net/temp/nav.js

Remove padding and border.
http://www.chronosight.net/temp/test.css