Per the DVD spec (and not just Encore), a button highlight is a 2-bit, 4-color graphic. You can’t use a normal image as a highlight.
To get what you want, you need to fool the audience. Set up a series of duplicate menus and use the Auto-activate property of the buttons.
The first menu would have the baseball graphic showing next to the first button. Link that to whatever asset or chapter is appropriate.
The next button (as determined by the button routing setup) should link to a second menu that is a duplicate of the first menu. When the audience navigates to the next button using the arrow keys on the DVD player remote control, the auto-activate feature takes them to the duplicate menu, where the baseball is now shown next to the second button. On this menu, the second button now links to whatever asset or chapter is appropriate.
And so on. Make sure you use a hand-drawn flowchart to help you set up this complicated navigation scheme, or you will easily get lost.
Caveat: although this technique works on hardware DVD players, it won’t work on software DVD players when the mouse is used to navigate instead of the cursor on the remote control.
-Jeff
The Focal Easy Guide to Adobe Encore DVD 2.0