diff --git a/src/components/panel/demoBasicUsage/script.js b/src/components/panel/demoBasicUsage/script.js
index 97c93829c77..6298923ca90 100644
--- a/src/components/panel/demoBasicUsage/script.js
+++ b/src/components/panel/demoBasicUsage/script.js
@@ -78,7 +78,8 @@ BasicDemoCtrl.prototype.showMenu = function(ev) {
     openFrom: ev,
     clickOutsideToClose: true,
     escapeToClose: true,
-    focusOnOpen: false
+    focusOnOpen: false,
+    zIndex: 2
   };
 
   this._mdPanel.open(config);
diff --git a/src/components/panel/panel.js b/src/components/panel/panel.js
index 2ee6673f8d1..86079551c32 100644
--- a/src/components/panel/panel.js
+++ b/src/components/panel/panel.js
@@ -766,6 +766,12 @@ function MdPanelRef(config, $injector) {
   /** @private @const {!angular.$log} */
   this._$log = $injector.get('$log');
 
+  /** @private @const {!angular.$window} */
+  this._$window = $injector.get('$window');
+
+  /** @private @const {!Function} */
+  this._$$rAF = $injector.get('$$rAF');
+
   // Public variables.
   /**
    * Unique id for the panelRef.
@@ -1148,22 +1154,32 @@ MdPanelRef.prototype._addStyles = function() {
     // correctly. This is necessary so that the panel will have a defined height
     // and width.
     self._$rootScope['$$postDigest'](function() {
-      positionConfig._calculatePanelPosition(self._panelEl);
-      self._panelEl.css('top', positionConfig.getTop());
-      self._panelEl.css('bottom', positionConfig.getBottom());
-      self._panelEl.css('left', positionConfig.getLeft());
-      self._panelEl.css('right', positionConfig.getRight());
-
-      // Use the vendor prefixed version of transform.
-      var prefixedTransform = self._$mdConstant.CSS.TRANSFORM;
-      self._panelEl.css(prefixedTransform, positionConfig.getTransform());
-
+      self._updatePosition();
       resolve(self);
     });
   });
 };
 
 
+/**
+ * Calculates and updates the position of the panel.
+ * @private
+ */
+MdPanelRef.prototype._updatePosition = function() {
+  var positionConfig = this._config['position'];
+
+  positionConfig._calculatePanelPosition(this._panelEl);
+  this._panelEl.css('top', positionConfig.getTop());
+  this._panelEl.css('bottom', positionConfig.getBottom());
+  this._panelEl.css('left', positionConfig.getLeft());
+  this._panelEl.css('right', positionConfig.getRight());
+
+  // Use the vendor prefixed version of transform.
+  var prefixedTransform = this._$mdConstant.CSS.TRANSFORM;
+  this._panelEl.css(prefixedTransform, positionConfig.getTransform());
+};
+
+
 /**
  * Focuses on the panel or the first focus target.
  * @private
@@ -1221,6 +1237,7 @@ MdPanelRef.prototype._createBackdrop = function() {
 MdPanelRef.prototype._addEventListeners = function() {
   this._configureEscapeToClose();
   this._configureClickOutsideToClose();
+  this._configureScrollListener();
 };
 
 
@@ -1310,6 +1327,31 @@ MdPanelRef.prototype._configureClickOutsideToClose = function() {
 };
 
 
+/**
+ * Configures the listeners for updating the panel position on scroll.
+ * @private
+*/
+MdPanelRef.prototype._configureScrollListener = function() {
+  var updatePosition = angular.bind(this, this._updatePosition);
+  var debouncedUpdatePosition = this._$$rAF.throttle(updatePosition);
+  var self = this;
+
+  var onScroll = function() {
+    if (!self._config['disableParentScroll']) {
+      debouncedUpdatePosition();
+    }
+  };
+
+  // Add listeners.
+  this._$window.addEventListener('scroll', onScroll, true);
+
+  // Queue remove listeners function.
+  this._removeListeners.push(function() {
+    self._$window.removeEventListener('scroll', onScroll, true);
+  });
+};
+
+
 /**
  * Setup the focus traps. These traps will wrap focus when tabbing past the
  * panel. When shift-tabbing, the focus will stick in place.
@@ -1460,8 +1502,8 @@ function MdPanelPosition() {
   /** @private {boolean} */
   this._absolute = false;
 
-  /** @private {!DOMRect} */
-  this._relativeToRect;
+  /** @private {!angular.JQLite} */
+  this._relativeToEl;
 
   /** @private {string} */
   this._top = '';
@@ -1619,7 +1661,7 @@ MdPanelPosition.prototype.center = function() {
  */
 MdPanelPosition.prototype.relativeTo = function(element) {
   this._absolute = false;
-  this._relativeToRect = getElement(element)[0].getBoundingClientRect();
+  this._relativeToEl = getElement(element);
   return this;
 };
 
@@ -1631,7 +1673,7 @@ MdPanelPosition.prototype.relativeTo = function(element) {
  * @returns {MdPanelPosition}
  */
 MdPanelPosition.prototype.addPanelPosition = function(xPosition, yPosition) {
-  if (!this._relativeToRect) {
+  if (!this._relativeToEl) {
     throw new Error('addPanelPosition can only be used with relative ' +
         'positioning. Set relativeTo first.');
   }
@@ -1810,14 +1852,13 @@ MdPanelPosition.prototype._calculatePanelPosition = function(panelEl) {
     return;
   }
 
-  // TODO(ErinCoughlan): Update position on scroll.
   // TODO(ErinCoughlan): Position panel intelligently to keep it on screen.
 
   var panelBounds = panelEl[0].getBoundingClientRect();
   var panelWidth = panelBounds.width;
   var panelHeight = panelBounds.height;
 
-  var targetBounds = this._relativeToRect;
+  var targetBounds = this._relativeToEl[0].getBoundingClientRect();
 
   var targetLeft = targetBounds.left;
   var targetRight = targetBounds.right;
diff --git a/src/components/panel/panel.spec.js b/src/components/panel/panel.spec.js
index 91557d56cb5..7d9357f2f40 100644
--- a/src/components/panel/panel.spec.js
+++ b/src/components/panel/panel.spec.js
@@ -1,6 +1,6 @@
 describe('$mdPanel', function() {
   var $mdPanel, $rootScope, $rootEl, $templateCache, $q, $material, $mdConstant,
-      $mdUtil, $animate;
+      $mdUtil, $animate, $$rAF, $window;
   var panelRef;
   var attachedElements = [];
   var PANEL_WRAPPER_CLASS = '.md-panel-outer-wrapper';
@@ -28,6 +28,8 @@ describe('$mdPanel', function() {
     $mdConstant = $injector.get('$mdConstant');
     $mdUtil = $injector.get('$mdUtil');
     $animate = $injector.get('$animate');
+    $window = $injector.get('$window');
+    $$rAF = $injector.get('$$rAF');
   };
 
   beforeEach(function() {
@@ -1426,7 +1428,7 @@ describe('$mdPanel', function() {
             .relativeTo(myButton)
             .addPanelPosition(xPosition.ALIGN_START, yPosition.ALIGN_TOPS)
             .addPanelPosition(xPosition.ALIGN_END, yPosition.ALIGN_BOTTOMS)
-            .addPanelPosition(xPosition.ALIGN_OFFSET_END, yPosition.BELOW);
+            .addPanelPosition(xPosition.OFFSET_END, yPosition.BELOW);
 
         config['position'] = position;
 
@@ -1590,34 +1592,26 @@ describe('$mdPanel', function() {
           expect(panelRect.left).toBeApproximately(myButtonRect.right);
         });
       });
-    });
 
-    it('should throw if xPosition is not valid', function() {
-      var myButton = '<button>myButton</button>';
-      attachToBody(myButton);
-      myButton = angular.element(document.querySelector('button'));
-
-      var expression = function() {
-        mdPanelPosition
-            .relativeTo(myButton)
-            .addPanelPosition('fake-x-position', null);
-      };
-
-      expect(expression).toThrow();
-    });
+      it('should throw if xPosition is not valid', function() {
+        var expression = function() {
+          mdPanelPosition
+              .relativeTo(myButton)
+              .addPanelPosition('fake-x-position', null);
+        };
 
-    it('should throw if yPosition is not valid', function() {
-      var myButton = '<button>myButton</button>';
-      attachToBody(myButton);
-      myButton = angular.element(document.querySelector('button'));
+        expect(expression).toThrow();
+      });
 
-      var expression = function() {
-        mdPanelPosition
-            .relativeTo(myButton)
-            .withPanelYPosition('fake-y-position');
-      };
+      it('should throw if yPosition is not valid', function() {
+        var expression = function() {
+          mdPanelPosition
+              .relativeTo(myButton)
+              .addPanelPosition(null, 'fake-y-position');
+        };
 
-      expect(expression).toThrow();
+        expect(expression).toThrow();
+      });
     });
   });