Headest: replace bearings or entire headset
You may not be able to see it, but it's pretty likely the races are damaged at this point. 

One trick I've had luck with over the years is to replace the caged bearings with loose bearings. If that doesn't work, you can try using the next size up bearing. Both these tricks move the bearing contacts to different spots and can help a lot with indexing. 

See Sheldon's page for more headset maintenance tricks

http://sheldonbrown.com/headsets.html

Loose bearings are pretty cheap and a whole lot easier than replacing the headset. 
You can get a bag of 25 bearings for $5. Worth trying IMHO.