[MReilly] "my video won't play as a background"
You must render motion menus before they preview (File>Render>Motion Menus). Your test disc should play OK because the menus will get rendered when the project is built.
Your existing export settings should be OK.
[MReilly] "if i try to rearrange the thumbnails the pickwhip gets crazy and tries to super connect everything"
Press the M key or click on the Move tool in the toolbar.
[MReilly] "can only the video/audio assets be transcoded at a high setting? or can i set the entire disk? or the menus?"
Menu transcoding is fixed. You can change the transcode settings for audio and video assets. If you create a slideshow (Encore 2.0), then Encore will transcode the still images as single I-frames instead of MPEG video. Transitions between slides and slides with pan and/or zoom will be transcoded as MPEG video.
-Jeff
The Focal Easy Guide to Adobe Encore DVD 2.0 
