[Andreas]

Can this Add-On solve the problem of overlapping nav link menu of Forum tab with iTrader tab for vBulletin 4.2.0?

That sounds like this Add-on is not compatible with vBulletin 4.2, eg. does not use the Navigation Manager.
Solution:
Wait for an update or disable the affected Plug-in and re-create the navigation in Navigation Manager.

Created a tab called "Arcade", pointed it to Arcade.php, but when I click on it, it goes to the page, but does not highlight the tab.

This is the expected behaviour.

The system does not know that it should highlight the tab when the link is accessed.

There are several ways to achieve what you want

• Set Append Tab id = Yes
  This changes to link to arcade.php?tabid=<X>.
  When the link is clicked the tabid is recoginzed and the tab does get highlighted
  Pro: Very easy
  Con: You are affectivtely creating duplicated content and it will only work for the tab link itself, if there are links within the tab and the user clicks it the tab will not active
• Set the script id for the tab
  Pro: No duplicate content, the tab also becomes active if a user accesses arcade.php another way
  Con: You have to find out the THIS_SCRIPT constant for arcade.php it will only work for the tab link itself, if there are links within the tab and the user clicks it the tab will not active
• Add some Plug-ins to handle tab activation
  Pro: This is the best solution and will also work for links within the tab if coded accordingly
  Con: You will need programming knowledge