For help with menu styling, you should take a look at "new" version of the DotNetNuke Skinning Guide
. In particular, if you look at pages 14 and 15 you will find a discussion of the various classes that are available. In particular, I think that you will want to take a look at the mi[x][-x] class. mi2-0 should be the first element of the third level menu.
For more discussion, there is a thread in the DotNetNuke forums dedicated to the NAV menu. You will find it here
. I have found it to be quite useful from time to time.
As for the image background, make sure that the path to the image is specified correctly. That is the usual problem. You CSS example should be correct if the path does correctly point to the image file.