The common cause of this issue is still image files where the pixel size is too large.
http://helpx.adobe.com/encore/kb/error-software-used-decode-media.html
And in this example where it was not an image issue, the user fixed the problem by re-encoding the problem file.
http://forums.adobe.com/message/6004428#6004428
Create a new Encore project. Import ONLY ONE of your images that is 720x480 and that is RGB.
Do you get the error?