DVD subpictures can only have 4 colors times 4 opacity, one per state. There is no way to have soft shadows in the button highlights themselves. They need to be part of the background image and only your triangle can be colored.
Moving this discussion to the Encore forum. Stephen for future inquires regarding Encore please post to the Encore forum.
So you can only have shapes and no images? How do you change the color so it is something other than grey? or if you can have images then how do you do it?
You cannot have images. The workaround is to use autoactivate (on a button) to go to a different menu that changes the image in the background for that button. You create multiple menus, with an ordinary state for all buttons in all menus, except for the "highlight" different for the "selected" button. Mouseover won't autoactivate, so this doesn't work on a computer the way you'd like.
You change color by use colors sets. Auto is usually on by default and this is picking up color from the PSD.