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Have u tried checking the source code of the site whose link u've given for reference?
Layer is definitely a very good option but if u want to produce a similar effect like the one in the website, u'll need gif images with transparent background and gif can't give smooth edges wen maded transparent.
The best way is the method adopted in the site u've given as example. Place all the images by slicing them first. Now wen u hover your mouse on one particular button, not just the image on which u hover has to change, but also all other adjacent images which needs to be changes must also change. Now the source code as to how to achieve that can be easily seen from the site u've referred to.
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