ARGH. I had just finished typing up a response when some flash object on the page took my browser down. Third time that’s happened to me on these forums.
Anyway, the short version:
xref isn’t a file format, it’s a method of using other cad files as external references in the one you’re working on. This is a fundamental concept in AutoCAD, which I would suggest looking into more, though if you can’t get cad files from the consultants you’re working with it won’t do you any good.
Freezing a layer hides everything on it, including attached xrefs or images. Andrew’s suggestion was to trace the linework you need from the other plan (building outline, walks, whatever) and then turn the image off. But if you’re doing irrigation design, tracing a planting plan isn’t going to be very efficient if even feasible. I think your current approach is the best one.
A 20MB image file shouldn’t impact working in cad (or even plotting) that much – I routinely deal with 50-100MB aerials, and have hit things as high as half a gig. You may want to consider a hardware upgrade, though without knowing your current specs I couldn’t say if that’s an issue or not. It appears you’re using ACAD2008 from the image you attached, and that should have no problem attaching other image formats besides .bmp or .tif, including .jpgs.
For the most part your process looks fine. If the issue is only in creating a pdf, I would say the problem is somewhere in those settings and would suggest looking through the settings/options for anything that might stand out. Which method do you use – print to pdf writer, export/save as pdf, or a button on the Acrobat toolbar? I only use the printing method, as everything else always causes me one problem or another. Are you using Adobe software or some other pdf writer? Does it happen every time? Only with certain files? Without a couple of files to look at that have the problem, I’m not sure there’s much more I could suggest.