Just wondering if the player plays WMA's why doesnt it play when the files are encoded with the lossless setting?

The lossless codec is newer than the code used to decode WMAs. That is, WMA-Lossless is completely different than WMA-Lossy.

You can reencode your WMA-Lossless files to FLAC (in v3) or WAV and play them on the empeg with no loss in quality.

Also, please note that it only plays WMA files of 160kbps or less. This is microsoft's own supplied binary, the empeg guys didn't write that part.

Forgive my ignorance but what is FLAC? Also if I were to convert everything to WAV wouldnt that take up alot of room compared to WMA or MP3?

FLAC is another lossless codec that the empeg supports (but only in v3 software). Its compression is probably in the same ballpark as WMA-Lossless. Yes, WAV would take up a lot more room, as well as some other things. Go for v3 and FLAC if you can. Otherwise, just transcode your WMAs to MP3s and go with that.

Also remember that lossless codecs like FLAC or WAV mean that the car player has to keep its disk drives spun-up all the time in order to keep up with the data rate. You're much better off using a compressed format for car usage.