You are experiencing what is essentially - dropped frames on playback. although not really dropped frames as in the editing process; the frames are not being reconstructed properly upon playback.
I would generally say that you encoded the video at too high a bit rate, but the 2 pass 3.4 - 5.9 and AC3 audio seems very reasonable.
Are you using DVD Studio Pro to burn a DVD or some other way? Your description seems to imply that the first 1/4 of the DVD playout is working but after that it pixelates. You are watching this on a set top DVD player - are you not?