Actually neither of the two is a problem from a usability point of view, but you shouldn't let yourself be fooled by the myth of "seamless" menues. There is no such thing (though there is a so-called "seamless" mode for DVD authoring), it's inherent in the way the MPEG streams are handled. 1) is probably more convenient and easier to pull off because it usually only involves activating the menu subpicture at a later point than the menu entry, but it doesn't really involve a true still menue. Even if the background movie comes to a halt, it is still a movie clip. The problem with 2) is that you're always having to at least use 2 separate clips - one in the menu and one in the timeline the menu button transitions into. Now DVD-players and -drives have become faster and faster over the last years, but it still takes some time for the optics to re-calibrate and read the new stream, causing an ever so slight delay, no matter how perfect you want it to be. So the trick here is to find edit points, where this delay/ lag is least noticeable.
I appreciate the real-world reality check on this. It's a very alluring idea but the caution is well heeded.
It brings to mind one motion menu that seemed to be outstandingly cool: on the DVD for a feature documentary about a family accused of child abuse, which was based largely on home movies, there was an image of an 8mm projector, with a flickering, grainy home movie playing in the background. The clunkiness of the home movie and the relative clunkiness of the way DVD shows motion menus sort of went well together.